A testamentary trust is simply a trust established in a will. Such a trust can offer strong protection for your beneficiaries’ inheritance, but how much protection it provides depends on how the trust is structured. A testamentary trust only comes into effect after your death. Because the assets are placed under the control of a trustee rather than being gifted outright to your named beneficiaries it can shield those assets from several potential risks.
Firstly, a testamentary trust can protect against overspending or financial immaturity. If your beneficiaries for example your children are young or not yet financially responsible, an independent trustee can manage and distribute funds according to certain guidelines specified in the will or any separate letter of wishes, ensuring that the inheritance is preserved and lasts as long as intended. A testamentary trust can also offer protection from creditors or lawsuits involving your children. Since the assets belong to the trust and not directly to your child, creditors generally cannot easily access them.
A testamentary trust may also provide a buffer in the event of a child’s divorce or a relationship breakdown potentially preventing the inheritance from becoming part of the matrimonial property available for division between spouse by the relevant courts. Additionally, if your child has a disability and is not able to appropriately manage their own financial affairs, a properly drafted protective testamentary trust can preserve eligibility for certain social security benefits.
However it is important to appreciate that a testamentary trust does not protect assets from your own creditors during your lifetime. Whilst it may protect your intended beneficiaries the assets of a testamentary trust established in your will are limited to your personal estate assets owned by you at your death. If you have significant assets at your death (apart from say life insurance or superannuation death benefits) then your asset protection during your lifetime may be somewhat compromised. Whether that is suitable depends on your risk profile including your occupation. Many people take steps during their lifetime not to own any assets in their own name for asset protection reasons. A further issue is that because a testamentary trust is established in your will it can still be challenged by certain eligible persons on your death like any will.
With careful planning, a testamentary trust can be an effective way to safeguard your beneficiaries’ inheritance. Don’t forget to protect your assets during your lifetime though.
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