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Testamentary Trust

What is a testamentary trust?

A testamentary trust is set up in a person’s will and starts upon their death. It holds and protects all, or some, of the person’s assets such as property and investments. The trust looks after the assets for the beneficiaries. Beneficiaries are the people or organisations that will benefit from the trust.

A trustee is named in a will to manage the assets in the trust. The trustee is responsible for distributing the assets to the beneficiaries, following the instructions in the will.

What assets can be part of the trust?

There are many types of assets that can be held in a trust, including:

  • investments
  • land or property
  • cash
  • other valuable belongings such as paintings, furniture, or jewelry.

The money and investments held in trust are also called trust capital. This capital can produce income, such as interest from bank accounts or dividends on shares. Assets can also go up in value. This can mean the trust gets capital gains.

Can you set up a life-interest benefit through a testamentary trust?

When creating your trust, you may want to think about setting up a life-interest benefit for your beneficiaries. A life-interest benefit means a person will benefit from an asset for the rest of their life. But they won’t actually inherit it.

For example, a trust may allow a beneficiary for the rest of their life:

  • to live in a property
  • earn interest on invested money
  • receive rental income from a property.

After their death, the assets then pass on to other family members, charities or whatever you included in your will.

Who can be trustee?

A trustee can be a family member or a friend who is over 18 years of age and is an Australian resident. You can also appoint a trustee company like State Trustees, or a legal, accounting or financial planning organisation.

The trustee is the legal owner of the assets in the trust. They have to manage these assets in the best interests of the beneficiaries.

When can the trust assets be distributed?

The trustee follows the instructions in the will about when and who to distribute assets to. They can distribute money or interest to any beneficiary at any time in line with these instructions. Sometimes the will leaves it up to the trustee to decide when and how to use and distribute the assets. They can then meet the needs and best interests of the beneficiaries.

A testamentary trust gives you control over when and how your beneficiaries get their inheritance.

Are there any tax advantages to a testamentary trust?

Following the instructions in your will, taxable income that the trust makes can be given to the beneficiaries in the most tax-effective way.

How long can the trust run?

The trust will end at a time, or when an event happens, that you choose in your will. This could be when your beneficiaries reach a particular age or finish their education.

The trust may also end when a life interest beneficiary dies. Then the other beneficiaries, called the remainder beneficiaries, inherit the assets.

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