Testamentary Trusts

What is a testamentary trust?

A testamentary trust is a trust that arises upon the death of the testator (the person that made the Will). There are significant tax advantages in distributing the testator’s assets through a trust rather than directly to an individual beneficiary, particularly if a beneficiary has a high personal marginal tax rate because they would pay tax on the income generated by the asset.

There are commonly two types of testamentary trusts: discretionary and protective.

A discretionary testamentary trust gives the primary beneficiary (the person for whom the trust is created) the “discretion” to appoint themselves as trustee of the trust and appointor of the trust (the person who has the power to remove and appoint the trustee). The beneficiary can manage their inheritance inside the trust.

A protective testamentary trust can be an effective tool to prevent waste or dissipation of the estate’s assets by a beneficiary or claims on those assets by third parties as a result of marital or commercial breakdown.

A Special Disability Trust is one type of protective testamentary trust and is regulated by the Social Security Act 1991 (Act). The primary purpose of the trust is to provide only for the accommodation and care needs of the beneficiary.

It is reserved for those with a severe disability or illness who have been named as a beneficiary under a Will. The Department of Human Services must assess the beneficiary as being “eligible” to be a beneficiary under a Special Disability Trust. The beneficiary must meet the have a severe disability which would qualify the person for a Disability Support Pension. Further, the beneficiary must have a disability that would, if the person had a sole carer, qualify the carer for a Carer Payment or Carer Allowance and the beneficiary must be unable to work more than seven hours per week at or above the relevant minimum wage.

Once the beneficiary has been assessed as eligible to be a beneficiary under this specific trust type, the Department will then turn review the terms of the trust deed itself (the relevant clauses in the Will). The clauses in the Will that establish the trust must contain the clauses set out in the “Model Trust Deed” which are essential for a trust to comply with the requirements of the Act.