Incorporating a Testamentary Trust into Your Will
Incorporating a Testamentary Trust into Your Will
A common question posed by clients is, what is the difference between a will and a trust? Are they two separate things? The short answer is, yes and no.?
At the risk of over-simplification, a will is a testamentary document – it is intended to take effect only after the testator’s death, and it is a document which governs the distribution of one’s assets after his or her departure from this world.?
A trust has variously been described as a structure or a relationship, but in this author’s view, it is best viewed as a relationship between parties – the person placing assets into someone else’s charge (i.e., the Settlor or the Testator in the case of a testamentary trust), the person holding and managing the assets (i.e., the Trustee), and the persons who ultimately benefit from or own the assets (i.e., the beneficiary or beneficiaries).?
Contrary to common misconceptions among the public that trusts are shrouded in mystery – used only by the wealthy to obfuscate and conceal wealth, a trust can actually be built into one’s will!?Testamentary trusts, or trusts which are built and worded into wills, are the focus of this article (although it is worth mentioning that trusts can also be?inter vivos, i.e., established in one’s lifetime). Thus, one can potentially have both a will and a trust in one singular document!??
Why Establish a Testamentary Trust in a Will??
1.??????????Provide for Minor or Mentally Incapacitated Beneficiaries?
Some individuals have loved ones who are minors below the age of 21, or who are mentally incapacitated persons, such as elderly parents suffering from dementia or family members with special needs. In such cases, it would be wholly untenable to bequeath assets to loved ones as straightforward, traditional gifts.?
In such cases, the appointment of a trustee is necessary, as the trustee would be able to manage assets for the use and/or benefit of the minor or mentally incapacitated beneficiary. A testamentary trust would thus afford the testator a degree of assurance and peace of mind that someone he trusts is legally empowered to manage assets he would leave behind after death (known as one’s estate) for the benefit of such a vulnerable beneficiary.??
2.??????????Profligate Beneficiaries
Even if all beneficiaries are mentally competent adult, some individuals may still remain concerned about profligate or spendthrift beneficiaries – this could be an adult struggling with overspending, a spouse who has a gambling addiction, etc. Through the proper use of a testamentary trust, in which gifts to a beneficiary are deferred until a certain milestone (e.g., attaining a certain age, holding a stable job with a certain income, etc) is attained, assets may be preserved from being squandered quickly due to beneficiaries’ profligacy.?
This ensures that even after death, one remains able to influence beneficiaries’ behaviour, to impart values of thrift and frugality, and to gradually nudge them toward one’s desired outcome for their lives.?
3.??????????Safeguarding Trust Assets from Bankruptcy or Divorce of Beneficiaries?
Some individuals may also be concerned about their hard-earned assets, accumulated after a lifetime of hard work, falling into the wrong hands. This could include creditors or spouses of beneficiaries, who may lay claim to beneficiaries’ assets pursuant to bankruptcy or divorce respectively.?
If there is a concern or risk that a beneficiary may go bankrupt or undergo divorce, testamentary trusts could go some distance to mitigate these risks and provide asset protection. A testator could opt to give a beneficiary an income for life (e.g., “My Trustee shall give my son an allowance of $5,000.00 per month until his demise”) with a beneficiary entitled to the remainder, if any (e.g., “After his demise, any remaining undistributed sums shall be given to any of his living children in equal shares”). In legal parlance, this is known as a gift-over clause.?
Under such a structure, the beneficiary is not entitled to the assets or capital, instead only being entitled to an income for life out of the capital. Thus, the beneficiary is not beneficially entitled to the estate assets, and this would in turn thereby preclude any claim by creditors or by spouses during the division of matrimonial assets in a divorce.
Furthermore, a trustee may also be given discretion to advance assets from the estate to the beneficiary in his or her sole discretion. As this power is purely discretionary, the beneficiary continues to not be the beneficial assets of the estate assets until such time that the trustee decides to exercise his or her discretion to advance such sums.?
This ensures that estate assets can be ringfenced and protected until such time that it is “safe” or appropriate for the trustee to advance such assets, while also allowing flexibility for the beneficiary to truly inherit assets if it would not be detrimental for this to take place. The trustee can make such an assessment based on a myriad of circumstances – the beneficiary’s marital status (or the state of the marriage), the beneficiary’s solvency and credit status, etc.?
This article does not constitute legal advice. If you require advice on wills, testamentary trusts or estate planning, please do reach out to us.?
Led by Patrick Tan TEP, our firm specialises in comprehensive estate planning as one of our core practice areas. We pride ourselves on legal competence, unparalleled personal service and a commitment to ensuring your peace of mind.
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