Would you like to rule from the Grave? Simple Will v Testamentary Trust
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What is a ‘Simple’ Will?
There is a greater degree of certainty with a ‘simple’ Will as to what will happen with the estate than with a testamentary trust. That is because with a simple Will, all or part of the assets in the estate are held on trust, but the beneficiaries are limited in nature and number and each of the beneficiaries has a fixed or ‘absolute’ interest in the trust and its assets.
In the usual case, assuming children are the beneficiaries of a simple Will, they would share equally in the estate – for example, if there are 2 children, they would each have a 50% interest in the estate. The estate would be divided between them either when, for example, each of them reaches 25 years of age or when the youngest surviving child reaches 25 years of age.
If either or both children do not reach 25 years of age leaving their own children, then the usual position is for those children to step into their deceased parent’s shoes to receive their deceased parent’s share of the residue of the estate equally.
The advantages of a ‘simple’ Will are just that – it is simple and each child knows what their proportion of the estate will be.
Because the number and nature of the beneficiaries is known and there is no discretion granted to the executor to benefit persons other than the beneficiaries, the beneficiaries’ interests are clearly established.
On the other hand, disadvantages of a ‘simple’” Will are that there are no asset preservation benefits (bankruptcy/family law), nor is there the possibility of income splitting between beneficiaries to take advantage of the adult marginal rates of taxation that would not otherwise be afforded to beneficiaries under 18 years of age.
What is a testamentary trust?
The alternative to a ‘simple’ Will is for a testamentary trust to be established in the Will to hold the estate (or part of the estate).
Whether it is worthwhile establishing a testamentary trust depends on a number of factors, such as the potential size of the estate (a rule of thumb would be that the assets to go into the trust be valued at more than $1 million), the Will maker’s (and perhaps their beneficiaries’) desire to have testamentary trusts and whether there are any tax or asset preservation advantages (or both).
The initial trustee of the trust is usually the executor or executors. The usual position is for the children to be the primary beneficiaries of the trust, but they would not be the only beneficiaries. The trust would also have a ‘general’ class of beneficiaries who, generally, would consist of the primary beneficiaries’ spouses, their children, grandchildren, perhaps even their great grandchildren and potentially other related parties, eg companies and trusts and charities. The beneficiaries could extend to nieces and nephews and other such persons as well.
Unlike a ‘simple’ Will, none of the beneficiaries (including the primary beneficiaries) would have a fixed interest in the trust (or in its assets). In other words, they would not have any actual entitlement to receive a proportion of capital or income, except at the vesting date (ie when the trust terminates). Entitlements to capital or income would depend upon the discretion of the trustee during the course of the administration of the trust.
To ensure there is some oversight of the trustee’s action, the primary beneficiaries could be granted a power of veto which would enable them to “hire and fire” the trustee.
There are other features of a testamentary trust which are different from a ‘simple’ Will.
A terminating date or vesting date must be included in a testamentary trust. That date is usually the day which is 80 years after your death. Because of the potential 80-year duration of the trust, it is usual to include an early vesting provision which allows the trustee to terminate the trust before the 80 years have passed.
One advantage of a testamentary trust is that it can be used to preserve assets from claims by third parties. A trustee in bankruptcy of one of the primary beneficiaries would struggle to lay claim to the assets remaining in the testamentary trust.
In addition, there are some potential (albeit now heavily qualified) family law advantages where a primary beneficiary, for example, is having problems with a relationship. Although there are some asset preservation advantages, a Family Court Judge does have the power to look behind a testamentary trust and to determine who actually controls the trust, who has received (and who is receiving) a benefit from the trust and to make orders against trustees of a testamentary trust, even though those trustees might not be parties to the marriage in question. Having said that, it is possible to say that a testamentary trust does have advantages in the family law context over a ‘simple’ Will.
One other primary advantage of a testamentary trust is the sheer level of flexibility granted to the trustee, particularly with respect to splitting income between beneficiaries (even beneficiaries under 18 years of age) to take advantage of the adult marginal rates of taxation.
However, that advantage of flexibility might also prove to be a disadvantage, particularly in circumstances where there might be less oversight of the trustee’s actions than there otherwise would or should be.
A way of resolving concerns about oversight of a trustee’s actions might be to appoint joint executors and trustees – perhaps 3 of them. The disadvantage is that this may prove to have some practical difficulties insofar as all 3 executors/trustees would need to ‘sign off’ in respect of any decisions taken for the trust, but it would provide the necessary oversight and the necessary ‘checks and balances’ to allay any concerns that would otherwise be the case had only one executor and trustee been appointed (whoever that person might have been).
Some people regard testamentary trusts as a way of ruling from the grave. Potentially, that is true. Although testamentary trusts can be very handy, they are not for everyone and they can sometimes be used to overcomplicate what is really quite a simple matter. On the other hand, simple Wills are not for everyone either and do not always address legitimate concerns for the family. To find out what is best for you, please contact Kimi Shah at Ryan & Co Solicitors on 08 6166 9000.