Testamentary Trusts: What You Need to Know

A testamentary trust can be one of the most effective tools available in estate planning. When included in your Will, it can provide valuable tax benefits and help protect your family’s inheritance long after you’re gone.

What is a Testamentary Trust?
A testamentary trust is a trust created by your Will that only takes effect after your death. Instead of assets being gifted directly to beneficiaries, they are held in a trust and managed for their benefit. Until that time, the trust remains inactive.

How Does a Testamentary Trust Work?
A testamentary trust separates control of assets from the benefit of those assets. A Trustee is appointed to manage the trust and make decisions about how income and capital are distributed. The beneficiaries are those who may benefit from the trust, but they do not legally own the assets themselves.

This structure allows the Trustee to respond to changing circumstances over time and provides an added layer of protection for the inheritance.

Key Benefits of a Testamentary Trust
One of the major advantages of a testamentary trust is flexibility. Income earned by the trust is distributed each year and taxed in the hands of the beneficiaries who receive it. Importantly, children under 18 are taxed as adults on income received from a testamentary trust. This means each child can receive approximately $22,000 per year tax-free, which can significantly reduce the overall tax paid by a family.

A testamentary trust can also help protect an inheritance for children. For younger children, it allows you to control who manages the inheritance and how it is used, rather than them receiving a lump sum at a fixed age. For adult children, the trust structure can reduce exposure to risks such as divorce, separation, bankruptcy or business failure.

Is a Testamentary Trust Right for You?
A testamentary trust may be worth considering if you want greater control over how your assets are used after your death, or if protecting your family from financial and legal risk is a priority.

They are commonly used where tax efficiency matters, where assets are being left to children, or where long-term protection of an inheritance is important. Testamentary trusts are not just for complex estates, but they must be included in your Will. You only get one opportunity to put them in place.

Need Help? We’re Here.
Whether a testamentary trust is right for you depends on your personal circumstances. If you would like advice tailored to your situation, we can help you understand your options and ensure your Will is structured to protect your loved ones and your legacy.