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Testamentary Trusts (Qld)

A will reflects a testator’s wishes for their deceased estate after they die. Typically, assets are bequeathed directly to chosen beneficiaries in a will without condition or obligation. When a testator wants to exert greater control over a bequest, they can choose to create a testamentary trust instead of making an absolute gift. This type of legal instrument also provides potential tax advantages and asset protection, but it can also be used to make ongoing provision for someone who cannot manage their own financial affairs. This article explores the role of testamentary trusts in estate planning in Queensland.

What Is The Purpose Of A Testamentary Trust?

A testamentary trust is a kind of trust that is created in a will to take effect after the testator’s death. It allows a testator to make provision for a beneficiary without allowing them direct access to the bequest. There is no maximum number of trusts that a testator can establish in a will. It can be preferable for each beneficiary to have a separate trust, rather than be subject to the terms of a general trust.

There are two main varieties of testamentary trusts: discretionary, where the beneficiary has some form of control over how the trust is managed and distributed; and protective, where someone else controls the trust to the benefit of the beneficiary.

Beneficiaries of a protective trust have no authority over the appointment of trustees and cannot alter the distribution of funds within the trust. This type of trust is designed to protect vulnerable beneficiaries, who are not able to manage a bequest as an absolute gift because of cognitive disability or other reasons. It is also relatively common for a testator to establish a protective trust for a minor child. In the case of a child, the trust usually provides for his or her financial needs until such time as the child gains access to the capital at a pre-determined age (usually 18 or 21, but sometimes at an older age, as determined by the testator).

A testator must think carefully before selecting any trustee, but this is a particularly important selection in the case of a protective trust. The trustee will have an ongoing responsibility for administering the trust in the best interests of the beneficiary, potentially for a considerable period of time. A testator can choose a trusted solicitor, friend or family member to carry out this duty or appoint an organisation, such as the Public Trustee of Queensland.

Why Should A Testator Create A Testamentary Trust?

There are distinct benefits to choosing a testamentary trust over an absolute gift. Depending on the type of testamentary trust, a beneficiary will have asset protection during any future property settlement or civil litigation, as a creditor cannot access funds in a beneficiary’s trust without a relevant court order.  A trustee can distribute funds from a discretionary trust in the most tax-efficient manner, including through income splitting. For instance, a parent could divert income from the trust to pay for their child’s school fees and these funds would attract a lower tax rate than would usually apply to trust funds.

As discussed above, a testator may choose to create a protective testamentary trust in order to provide for someone who has shown that they are not capable of managing the responsibility of an absolute bequest. This applies to young children but may equally apply to an adult who has a history of criminal behaviour or substance abuse. A protective trust can also provide for the long-term care of a beneficiary who has a disability, mental illness or psychological disorder.

Additionally, a testator can use a protective trust to direct funds towards a specific purpose. For instance, a testator can establish a protective trust and stipulate that the funds are only distributed to pay for a grandchild to receive a specific type of education. The protective trust would ensure that this intention was implemented with certainty into the future.

Can Someone Contest A Testamentary Trust?

In Queensland, the Succession Act 1981 allows certain people to file a Family Provision Application if they were not adequately provided for in a will. The Supreme Court is able to requisition assets that have been allocated to a testamentary trust in order to benefit a successful claimant. The court is likely to look favourably on a claim where the testator deliberately created a trust in an effort to forestall a valid claim against the deceased estate. For instance, in the example given above of an education fund, the court may determine that a beneficiary’s need for food and housing exceeds their need for a specific type of education, and may overrule the terms of the protective trust.

One of the experienced wills and estates solicitors from Armstrong Legal can help you create or contest a testamentary trust. Please telephone 1300 038 223 or contact our friendly team without delay to discuss your legal needs.

Dr Nicola Bowes

This article was written by Dr Nicola Bowes

Dr Nicola Bowes holds a Bachelor of Arts with first class honours from the University of Tasmania, a Bachelor of Laws with first class honours from the Queensland University of Technology, and a PhD from The University of Queensland. After a decade working in higher education, Nicola joined Armstrong Legal in 2020.

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