Including Testamentary Trusts in your Estate Planning

Estate planning is a necessary means of ensuring that your loved ones are taken care of following your death. Trusts can work together with a Last Will and Testament to ensure that your assets are distributed according to your wishes and to assist in avoiding unnecessary tax. Testamentary Trusts are often used as a means to reduce estate duty liabilities as well as to ensure professional management of your assets.

What is a Testamentary Trust?

A Testamentary Trust differs from an inter-vivos (or living) Trust, in that it is formed after death and uses the contents of the Last Will and Testament instead of a Trust Deed to determine the powers, responsibilities and beneficiaries of the Trust.

A Testamentary Trust can be especially useful for those who have young children or grandchildren and ensures them being taken care of whilst they are still minors, and also sets up financial resources for tertiary education and other unexpected contingencies.

A Trust consists of three parties: the Testator, who is the person setting up the Trust in their Will, the Trustees, who manage the Trust, and the Beneficiaries, who benefit from the Trust. It is good practice to appoint at least two Trustees, one being an independent person who regularly handles Trusts in their ordinary course of business, and the other, someone who knows the beneficiaries and has their best interests at heart. A beneficiary’s guardian does not necessarily have to be Trustee.

Advantages and Disadvantages of Testamentary Trusts

In the absence of a Testamentary Trust, if someone, with a minor child, passes away the law states that any monetary amounts bequeathed to a child, are to be placed into the Guardian’s Fund and managed by the Master’s Office until the minor child reaches the age of eighteen, where it is paid out with interest accrued. Any physical assets bequeathed to the child are to be handled and given to the Child’s guardian for safekeeping. Any cash withdrawals needed for the child for education or maintenance must be justified and approved by the Master’s Office.

Generally, money invested into the Guardian’s Fund is utilised very conservatively, which can negatively affect the value of your children’s inheritance. It also carries a very large administrative burden on the Estate and does limit what can be done with that money until the child reaches the age of eighteen years.

The major benefit of a Testamentary Trust is that it gives you control over when and how your assets are to be disbursed. This allows assets to be protected until your beneficiaries are old enough to be financially responsible. It allows you to appoint your Trustees ahead of time, and to lay out clearly what they are allowed and not allowed to do with the assets placed into the Trust.

Another advantage of a Testamentary Trust is that your Trustees can make necessary payments for educational expenses, living expenses and to pay for the normal maintenance of your beneficiaries, even after they reach the age of majority. Many Trusts specify that it is to dissolve once the children reach the age of 23 to 25 years of age, to allow the beneficiaries time to become more financially responsible before receiving their inheritance.

Testamentary Trusts can also be modified many times whilst the person is still alive, as the Trust has not come into existence yet, and can be adapted as your family needs shift and change with time. Often parents of young children might not have substantial financial assets, and so can create a Testamentary Trust in their Will which will only come into effect when they pass away, and govern all future assets accumulated in the interim.

Having a Trust form after death also delays many of the costs associated with the Trusts. All costs will then come out of the deceased’s estate and can be funded with life insurance proceeds after death. Issues can, however, form when there is confusion or a lack of clarity within the Will regarding instructions relating to the Trust, and for that reason, it is strongly recommended that your Will be drafted by a professional, especially if you want to establish a Trust post death.

Should proper estate planning be done early enough, adding a Testamentary Trust to your Will means having the peace of mind knowing that your assets will be properly managed and invested, so that they are not only available if needed for your minor children as they grow, but also ensures your assets are properly invested so that they grow in value over time and do not shrink with inflation. It allows for your children to pursue tertiary education and have their basic needs taken care of, without handing them full financial control over their inheritance at the young age of eighteen when they might not yet be financially responsible. As such, it is something to consider when drawing up your Will.

By Stacy Rouchos

Trust and Estates Officer, Bannister Trust