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It is important to make decisions about your estate before you pass away to prevent disputes over your assets. Creating a will allows you to distribute your assets among family members or friends in the way that you want. For instance, you can nominate to give assets to particular recipients in your will outright. Alternatively, you can also place them ‘in trust’ so that trustees control them. One type of trust that might arise out of a will is a testamentary trust. This article will explain what testamentary trust is and the advantages of using one.

What Is a Trust?

A trust is a type of legal entity that arises when a person holds assets on behalf of someone else. The person holding assets is known as the ‘trustee’. Additionally, the person benefiting from the trust is known as the ‘beneficiary’. Trusts are an important legal structure as they permit a trustee to hold assets for the benefit of somebody else. Additionally, trusts are most commonly used in organisations that have a charitable purpose or for succession planning. 

What Is a Testamentary Trust?

A testamentary trust is a popular type of trust used in wills. A testamentary trust is where the terms of the will state that trustees must hold some assets in trust for beneficiaries.

For example, this may occur where there are underage children nominated as beneficiaries.

For a testamentary trust to arise, the person making the will must expressly state this at the time that they sign the will.

Advantages of Testamentary Trust

1. Security

One advantage of creating a testamentary trust is that it provides security for the trustee and beneficiary. This is because there is a trustee who must hold assets for the benefit of the beneficiary. If the beneficiary is young or immature, the trustee can decide when to give the asset to the beneficiary. Alternatively, the will might set a date for when the beneficiary can receive the asset. For example, a will might state that the beneficiary can receive the asset when they reach a certain age.

A testamentary trust also creates security in situations where a beneficiary assumes financial risks, such as running a business. If something goes wrong, the beneficiary still remains the legal owner of the trust’s assets. Furthermore, creditors cannot take these assets away the beneficiary’s business becomes insolvent. Therefore, this asset protection provides security for the beneficiary.

2. Flexibility

Testamentary trusts are also very flexible. As there are trustees involved, you do not have to choose exactly who receives what assets. This is because a testamentary promise acts in the same way as a discretionary trust. Furthermore, this means that the trustee has the discretion to distribute assets to the respective beneficiaries when they see fit. 

3. Life Interests

Another reason why people use testamentary trusts is due to life interests. A life interest in a property means that one person has an interest in the property until they die. Additionally, this interest passes onto the beneficiaries once they pass away. For example, a parent may want to ensure their child has a secure home. Therefore, they can grant a life interest to their child in their testamentary trust. After the parent passes away, their child has the right to use the property for their life. 

Key Takeaways

A trust is a type of legal entity allowing one person to hold assets on behalf of someone else. A testamentary trust is a type of trust that arises out of a will. The advantages of a testamentary trust make it a popular inclusion in wills in New Zealand. Specifically, a testamentary trust provides security, flexibility and an ability to include life interests in a will. For legal assistance with trusts, contact Legal Vision’s trust lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

How do I create a testamentary trust?

You must make it clear in your will that you are creating a testamentary trust when you pass away. The best way to do this is to consult a qualified lawyer who can help you draft a will properly.

Do I receive tax benefits if I create a testamentary trust?

A testamentary trust will not give you tax advantages as New Zealand does not have capital gains tax, nor inheritance tax.

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