Our clients often ask us what the differences are between a simple will and a testamentary will, and which one is right for them.

In short, a simple will appoints the executors to manage and administer the estate, describes how the testator’s assets are to be distributed after their death. It will typically provide a clear and rigid formula for identifying the beneficiaries, how assets are split between beneficiaries and the method by which inheritances are distributed directly to the beneficiaries.

Conversely, a testamentary trust will establishes one or more trusts upon the death of the testator. Rather than being distributed directly to the beneficiaries, the testator’s assets can be held in the trust by the trustee for the benefit of the beneficiaries. Subject to any conditions set out in the will, the executor and trustee then generally has control over when, how, and to whom capital or income is distributed from the trust assets.

Whilst a simple will is suitable in a lot of use cases, a well written testamentary trust will can offer a lot of benefits to certain people with, for example, multiple high value assets, complex corporate/trust structures, blended families or complicated family circumstances, or very young and/or vulnerable beneficiaries.

In this article we outline a few of the benefits of a testamentary trust will:

1. Asset Protection

Assets held in the testamentary trust are held by the trustee. They are not owned by the beneficiary and can be better protected where the beneficiaries:

• are in a higher risk position, eg people who:
  • are company directors;
  • have provided personal guarantees for loans or under contract; or
  • are a builder, nominated supervisor, architect, designer or other person that has taken on liability under the Design and Building Practitioners Act 2020;
• have third party creditors, or are at risk of bankruptcy or legal proceedings generally.

2. Tax effectiveness

A testamentary trust will can enable the trustee to distribute the estate’s income in a tax efficient way, for example:

• streaming or splitting income from the trust can be streamed or split so that instead of being paid to a high-income earner (who would be taxed at a higher marginal rate) it is instead paid to other lower-income beneficiaries to take advantage of their lower marginal tax rates;
• tax concessions may apply where income from the trust is be distributed to children for the payment of educational costs.

Testamentary trust wills may also offer Capital Gains Tax benefits upon the transfer of assets.

 3. Control and Flexibility over assets and distribution

Protective Trusts

If a testator is concerned that a beneficiary is likely to mismanage their inheritance, a testamentary trust can give better control and more flexibility over the terms on which the beneficiaries receive income and capital.

This is useful for managing the inheritance of young children, or older beneficiaries who are vulnerable ie, not financially responsible or unable to manage their affairs due to age, illness or disability.

By giving the trustee control over the assets, the testator can ensure the assets are in safe and responsible hands. The testator can also dictate:

• the duration of the trust;
• the trustee’s powers to make investments to maximise the value of the assets;
• the payment of the beneficiary’s living expenses, healthcare, and education etc;
• the terms on which income or capital is distributed to the beneficiary.

Determining Eligible Beneficiaries

By determining who is and isn’t eligible to be a beneficiary, testamentary trust wills can help keep assets within the family bloodline to protect and preserve wealth for future generations.

 Key takeaway

It is important to understand the benefits that a well written will can offer and to have a robust succession plan that caters to your circumstances and the needs of your beneficiaries.