The reasons behind a popular strategy designed to protect assets left in a will is changing.

Testamentary trusts have been used for hundreds of years as a way to protect assets for future generations but the reasons driving their use is changing in line with society’s values.

“Testamentary trusts are an old fashioned concept, but it's a concept which has been able to modernise as time has gone on,” Equity Trustees National Manager, Continuing Trusts, Jonathan Guthrie-Jones, says.

Testamentary trusts place the control of assets left in a will to one person or organisation – the trustee – while the financial benefits of those assets flow to beneficiaries. This separation of control and benefit allows testamentary trusts to protect assets from misuse or any legal action involving the beneficiaries.

The most popular use harks back to a time of deeper gender inequity: men would often leave their assets in a testamentary trust to provide their wife with an income until her death or remarriage.

“We knew that with the changes to society that those sorts of trusts would fall out of favour. It's no longer necessarily the case that the husband is the one that owns all the assets in his name in a marriage, for example.

“What we’re seeing instead is they’re being set up to protect beneficiaries who are vulnerable. It’s a broad term that can include mental health, disability, substance abuse problems, or even a person who just isn’t great with money.”

Almost half (44 per cent) of Australians aged 16-85 have experienced a mental disorder at some time in their life, according to government data [1]. There is now a far wider acceptance across society about acknowledging and treating mental health issues, particularly following the stress of the COVID-19 pandemic which prompted greater government funding and support.

These new testamentary trusts can be highly flexible or prescriptive, depending on what the will maker wants.

“They can be quite restrictive and quite controlling, in the sense that they can say, ‘we’ll hold these assets in trust and payments to specified beneficiaries are fixed’. Or they can be quite open and say, ‘all the income and capital can be distributed at the trustees discretion’.”

One recent testamentary trust directed the trustee to pay for anything related to the beneficiary’s property and that the beneficiary could go on an overseas holiday flying business class twice a year.

Optional testamentary trusts are also growing in popularity: they allow the beneficiary to choose whether to have the assets managed in the structure.

“The beneficiaries themselves are good at being able to say, ‘I've got problems’. There's one, for example, where the funds weren’t meant to be held in trust but the person put their hand up and said, ‘I don't trust myself to be able to control this and don't trust the people around me to not take advantage of me’.”

The key for those planning to leave assets to family members is to be open about their intentions. Without that transparency, problems can arise if assets are left to multiple children, but one of them unexpectedly has those assets held in a testamentary trust.

“It’s really important to be open in that estate planning phase with your beneficiaries so they know what’s coming and why it's coming. It can be quite difficult to accept when you thought that it was going to be a different way.”

More information about Equity Trustees’ trustee services is available on our website

 

[1] Prevalence and impact of mental illness - Mental health. (2020, August 21). Retrieved from https://www.aihw.gov.au/mental-health/topic-areas/mental-illness