Testamentary trusts are created in a person’s will and only come into effect upon the death of that person. The will then operates as the trust deed spelling out the terms of the trust. The terms would state for whom and under what circumstances beneficiaries are to benefit and when the trust is to terminate.
There are various reasons and circumstances to consider when deciding whether to create a testamentary trust, some relating to family issues and others to monetary and tax considerations.
As a preliminary caution, JUST MEDIATE recommend that the trust structure is not used to allow the deceased ‘to rule from the grave’ or too restrictive in respect of its control mechanisms.
JUST MEDIATE recommend a flexible structure that is adaptable to circumstances which the testator might not know about at the time of their death.
Circumstances where a testamentary trust would make sense are:
MINORITY OR YOUTHFULNESS
At the time of the testator’s death, their beneficiaries are minors (under the age of 18) or are of age but lack the necessary maturity or experience to take full responsibility of a sizeable inheritance. (This would often be the case where children or grandchildren inherit instead of their predeceased parents.)
This type of trust usually terminates when individuals reach a certain age. Depending on the size of the inheritance, the individuals may have access to capital and the termination may be staggered.
DISABILITY
A testator may wish to or have an obligation to provide for a beneficiary who has a physical or mental impediment which renders the beneficiary unable to manage his or her own affairs. A Trust is then set up to provide either partially or fully for the individual’s maintenance and other requirements for the duration of their life or the impediment.
SKIPPING A GENERATION
A trust can be created to benefit grandchildren or a subsequent generation as the ultimate beneficiaries.
This allows the generations in between to have limited access to the trust funds and avoids unnecessary estate duty.
Obviously, factors such as the age of the next generation and their current financial standing and means will be important in the decision to create an intervening trust.