Insights for Investors by Investors

Testamentary trusts and blended families


Among many other lessons, the pandemic has brought with it the realisation that none of us is invincible. The virus doesn’t discriminate is what the health experts have been telling us for close to two years now.

Naturally, 2020 and 2021 has seen a significant increase in interest in estate planning. Young and old, everyone is more aware of their own mortality and seeking to tick the box that says their estate and assets are all in order.

This is excellent news. The number of estates that end up being challenged in courts continues to grow and without a valid will your wishes are ultimately up to the court. Without clear wishes, assets can be eaten away by any number of different fees.

One of the less well understood areas of estate planning is the ‘testamentary trust’. As the name suggests, testamentary trusts are very similar a traditional ‘family trust’ through which you can hold assets on behalf of your family or other beneficiaries.

The major difference is in the name, with testamentary meaning only assets from deceased estates can be included. Similarly, whilst family trust are most suited to those with more assets and wider families, testamentary trusts can be appropriate for almost anyone.

The clear benefits are straightforward. They offer taxation advantages in that children are able to access the much less punitive adult marginal tax rates. They also offer some level of asset protection in the event of divorce, bankruptcy or the like depending on the jurisdiction.

One of the more common misconceptions about the structure is that they are overly restrictive and make it difficult for your beneficiaries to access their capital. In actual fact, testamentary trusts can be as restrictive or flexible as you like. Whilst some may believe a cap on the amount of capital a child can receive is appropriate, the structure allows you to provide as much or as little flexible as you like.

Similarly, the inclusion of testamentary trusts doesn’t have to be forced on your beneficiaries, they are typically included as an option to the executor. This means if one beneficiary needs capital to buy a house, whilst another is already well set up and seeking to minimise further tax bills, they can inherit their assets in the manner in which they prefer.

The nature of testamentary trusts is that they drastically increase the length of your will, due primarily to the fact that your will becomes the ‘trust deed’ of the trust. The terms can included who specifically can be a beneficiary of the trust, and who cannot, with the benefit of being able to ensure assets stay within the bloodline where this is important.

They do tend to come at a slightly higher cost and require the assistance of a solicitor to prepare.

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