This question about whether a surviving spouse will benefit from a testamentary trust has come up with clients twice in the last week and I thought my two cents (should it be five cents now?) was worth sharing with all the other readers of the blog.

Further to my previous blog posts Testamentary trusts: worth every dollar or over complicating things? and Estate planning for couples: When should a testamentary trust start?, I wanted to elaborate further about the three key reasons why I believe a testamentary trust can be of critical importance for a surviving spouse (where there are sufficient assets that will pass into the testamentary trust in the first instance):

  1. Firstly, if the surviving spouse re-partners, without a testamentary trust the inherited assets are automatically the property of the new relationship under the family law to be divided on a relationship breakdown. If a testamentary trust is utilised, the onus of proof shifts to the new partner to argue the inherited assets in the testamentary trust should be property of the new relationship (as the starting point is that the testamentary trust is simply treated as a resource of the surviving spouse, not divisible property of the new relationship).
  2. Where the surviving spouse wants to change their will to provide a benefit to a new partner and any children of the new relationship, the assets inherited from the deceased remain in the testamentary trust and are not distributed under the surviving spouse’s new will. This should give peace of mind that unless the surviving spouse takes positive steps to end the trust or withdraw the inherited assets from the trust environment, the assets which passed into the testamentary trust in the first instance will only be available to benefit the bloodline of the deceased.
  3. For willmakers with minor children, accessing the excepted trust income rules (i.e. the ability to distribute trust income to minors as if they are adults) can be a real game changer for minimising the tax payable on the earnings generated by investment of the inheritance and should set up the family in a tax environment that they simply cannot access anywhere else.

As always, your thoughts and comments are welcome.