Tuesday, October 12, 2021

Avoiding complexities** with testamentary trusts

One issue that potentially arises whenever spouses embark on an estate planning exercise is the prospect of there being testamentary trusts established unnecessarily.

In particular:
  1. As there is never a way to know with certainty which spouse will die first, best practice dictates that each spouse establishes a testamentary trust under their respective will (assuming testamentary trusts are otherwise appropriate).
  2. If one spouse dies, then often steps are taken by the surviving spouse to remove the testamentary trust from their will, and instead ensure that the remaining estate passes to the testamentary trust established under the deceased spouse’s will.
  3. If however both spouses die in close proximity to each other, or alternatively, the surviving spouse fails to update their will, then two testamentary trusts are established (one under each estate).
  4. In many cases, particularly where there are young children, the establishment of two testamentary trusts can be unnecessary and cause significant additional complexity and costs.
  5. To help avoid this outcome, most specialist estate planning lawyers will ensure that they draft provisions into the wills to allow the legal personal representative of the estate of the second spouse to die to distribute assets directly to the testamentary trust established under the will of the first spouse to die.
  6. Depending on the terms of the testamentary trusts, it may be possible to achieve the same outcome without the relevant clause and the post next week will explore a private ruling released by the Tax Office where such an outcome was able to be achieved without any taxation consequences.
** for the trainspotters, the title today is riffed from the Paul Weller song ‘Kosmos’. View hear (sic):