Any document which is a Will, or forms part of a Will, is a testamentary document. A testamentary trust is a trust created by a Will and does not come into effect until after death of the person who made the Will.

Tax Advantages of Testamentary Trusts

Generally, income that a minor (person under the age of 18 years) receives (other than through the minor’s own exertion), is taxed at penalty rates under the Tax Act. However, if a minor receives income from a testamentary trust, then the normal adult rates of tax apply.

A testamentary trust can result in considerable tax savings, particularly where income can be taxed at a lower marginal rate in the hands of a minor, rather than it being added to the income of an adult who is already in a high tax bracket. Between adult beneficiaries, often tax savings can be achieved by income “splitting.”

Asset Protection Advantages of Testamentary Trusts

A testamentary trust can be a discretionary trust. A discretionary trust is where the trustee has the discretion to allocate income and capital amongst a range of beneficiaries. The beneficiaries of a

discretionary trust generally do not have any legal interest in the assets of the trust and therefore the trust’s assets would not be lost to the beneficiary’s creditors if the beneficiary goes bankrupt.

A testamentary trust can be of assistance where one of the beneficiaries is in a high-risk profession or business where negligence claims are likely. The testamentary trust can also be used to protect assets for a financially irresponsible or a disabled child and (to some extent) to protect against Family Law claims.

Disadvantages of a Testamentary Trust

The main disadvantages of a testamentary trust are:

• The cost of administering the trust, including legal and accounting fees.

• The beneficiary’s interest in a testamentary trust is not a legal or proprietary interest and therefore, cannot be dealt with by the beneficiary (including by Will) in the same way that an asset owned by the beneficiary can be dealt with.

• Often to achieve the desired asset protection, the beneficiary can be left with little control and will be reliant upon others to act in their interests.

Due to its general nature, this information is not intended to be legal advice. You should not act without first obtaining advice specific to your circumstances.