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What’s a testamentary trust?

A ‘testamentary trust’ is a trust that is created upon death under the terms of a person’s will (that is, the persons final will or testament)

A couple of typical uses of a testamentary trust include:

  • To preserve the deceased’s assets for the benefit of young children (minor)
  • To protect assets from ending up in the hands of a son or daughter’s spouse after a short unsuccessful marriage or untrusted relationship.
After death, assets are placed in the testamentary trust for the benefit of a child or children until they are of an age, or level of ability, at which they can manage the assets for themselves; or for the benefit of a child or children until a marriage or relationship has lasted for a time specified by the deceased.
Four features

As with all trusts, there are four basic features involved with establishing a testamentary trust.

The first feature is the person who creates the trust, that is, the deceased person or ‘testator’. This person is also called the ‘settlor’, because he or she ‘settles’ the assets in the testamentary trust.

The second feature is the assets, technically referred to as the ‘trust property’.

Thirdly, there are the beneficiaries, typically minor children or young adults. These are the people who stand to benefit from the trust.

And fourthly, there are the trustees appointed by the settlor to make decisions about the investment as well as the distribution of assets and income in the testamentary trust for the benefit of the beneficiaries.

Keep this in mind

It’s often recommended to have three trustees in the case of a testamentary trust as this will remove the chance of there being a voting stalemate when it comes to making decisions about the assets.

It can be expensive to set up and operate a testamentary trust, so it’s important that the trust contains enough assets to make it economically worthwhile.

Also keep in mind that the beneficiary of a testamentary trust is subject to the normal tax rules.

Do the research

Before setting up any type of trust you should ensure you read as much as you can about them and don't forget to consider seeking professional advice.

Trusts can be complex, expensive to establish and difficult to unwind. Speak to your accountant or financial planner about finding a lawyer who can assist you with setting up trusts, including a testamentary trust.

For advice you can trust, book a complimentary first appointment with Switzer Financial Services today.


Published on: Tuesday, February 16, 2010

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