What to consider when establishing a testamentary trust

For individuals beginning their estate planning, establishing a trust is among the most important issues to consider. In many cases, people starting this process will be advised to include a testamentary trust in their will, which may assist in protecting their legacy over the long-term.

There are two different types of testamentary trust that an individual can create. These are:

  • Discretionary testamentary trusts – these involve granting the beneficiary control of the trust. The beneficiary may be able to decide whether or not to establish a trust arrangement in the first place and may have the power to appoint new trustees.
  • Protective testamentary trusts – on the other hand, a protective testamentary trust doesn’t allow the beneficiary to have any direct control over the trust. Instead, the trustees will be appointed in your will and cannot be removed by the beneficiary.

Both of these different options have their own benefits, which will largely depend on your own situation.

Why do individuals establish testamentary trusts?

There are a number of different reasons for an individual to establish a testamentary trust. Among the most common is the need to protect existing assets for future generations, especially when there are concerns about what would happen to these assets if they were given directly to an individual.

A trust arrangement may also help to protect assets in the event of divorce or other significant changes in the financial position of your beneficiaries.

Secondly there are taxation benefits available where assets are held within a testamentary trust particularly as minor beneficiaries are considered as ‘ordinary taxpayers’.

Finally, trusts are commonly created for children and grandchildren to preserve assets until they reach a set age. This will usually be once they become adults, it is possible to choose however to set a later age qualification.

If you want to include a testamentary trust as part of your estate planning processes, it is important to consult with a wills and estates lawyer in order to begin this process on the right track.