Trusts are powerful tools in estate planning, allowing individuals to safeguard assets and control their distribution even after their death. Among the various types of trusts, two common structures are family trusts and testamentary trusts. While both serve similar purposes, they differ significantly in their formation, administration, and legal implications.
Formation and Timing:
The primary distinction between a family trust and a testamentary trust lies in their formation and timing. A family trust, also known as a living trust or inter vivos trust, is established during the lifetime of the settlor (the person who establishes the trust). Conversely, a testamentary trust comes into existence upon the death of the willmaker or testator, as specified in their will.
Purpose and Usage:
Family trusts are often utilized for estate planning purposes to manage assets, manage taxes, and provide for certain beneficiaries during the settlor’s lifetime and after their death. They offer flexibility and control over asset distribution, allowing the settlor to designate specific beneficiaries and outline instructions for asset management.
On the other hand, testamentary trusts are primarily designed to address concerns regarding the distribution of assets after the willmaker’s death. They are commonly employed to protect beneficiaries who may be minors, financially irresponsible, or suffering from some lack of capacity. They can also be useful for asset protection in the case of certain adverse events affecting beneficiaries such as marital breakdown or bankruptcy. Testamentary trusts enable the willmaker to stipulate conditions for asset distribution and appoint a trustee to oversee the management of assets on behalf of the beneficiaries.
Legal Implications:
Family trusts and testamentary trusts may also differ in the way they are regulated. Family trusts are established and governed by trust agreements created during the settlor’s lifetime. Most family trusts are established by way of a trust deed. These deeds dictate the terms and conditions of the trust, including asset management, distribution instructions, the powers granted to the trustees (as well as any restrictions) and the appointment of trustees. The administration of family trusts typically falls under state laws and regulations governing trusts. In South Australia the laws relating to trusts are set out in the Trustee Act 1936. The regulation of a family trust is subject to the terms of the trust deed itself which may be inconsistent with the provisions in the Trustee Act.
Conversely, testamentary trusts are established through the willmaker’s will. The will is typically required to be admitted to probate on the willmaker’s death. The assets of the trust are comprised by all or part of the willmaker’s personal estate. That might include property, life insurance and superannuation death benefit proceeds. The will dictates the terms of the trust, including asset distribution, trustee appointment, and beneficiary nominations. Testamentary trusts are also governed by the relevant Trustee Acts but are also subject to the laws relating to succession including the ability of an eligible person to contest the provisions of the will pursuant to the applicable laws relating to family provision.
Flexibility and Control:
Family trusts may offer greater taxation flexibility and control over asset management, asset protection and distribution when compared to testamentary trusts. Since they are established during the settlor’s lifetime, family trusts allow for immediate implementation of asset protection strategies and taxation management. The trustee retains control over the trust assets and subject to the terms of the trust and applicable laws relating to trusts can amend or revoke the trust as desired.
In contrast, testamentary trusts are subject to the terms specified in the willmaker’s will, limiting the willmaker’s ability to make changes to its terms once the will is executed. While testamentary trusts provide a structured framework for asset distribution, they offer deferred benefits as compared to family trusts. That is the trust will not be established until the event of death. In the meantime certain benefits relating to trusts may not apply.
Conclusion:
In summary, family trusts and testamentary trusts serve distinct purposes in estate planning and asset protection and management. Family trusts are established during the settlor’s lifetime and offer flexibility, control, and immediate implementation of asset management and protection strategies. Testamentary trusts, on the other hand, come into existence upon the willmaker’s death and are primarily designed to address concerns regarding asset distribution and beneficiary protection outlined in the willmaker’s will. Understanding the differences between these two trust structures is crucial for individuals seeking to effectively manage their assets and provide for their loved ones both during their lifetime and after their passing.
There may be good reasons to consider implementing both structures, as it is not usually necessary to choose one or the other. Family trusts are often implemented to protect assets during a settlor’s lifetime. Testamentary trusts are often established to protect assets personally owned by a willmaker not otherwise already in an existing trust. That often includes life insurance and superannuation death benefit proceeds.
If you would like to discuss how these structures might apply to you then feel free to contact our office to discuss with one of our experienced lawyers.