Setting up Testamentary Trust in India Benefit and Process

A testamentary trust (sometimes referred to as a will trust or trust under will) is a trust which arises upon the death of the testator, and which is specified in his or her will. A will may contain more than one testamentary trust, and may address all or any portion of the estate.

Who are testamentary trusts created for?

Generally, testamentary trusts are created for young children, relatives with disabilities, or others who may inherit a large sum of money that enters the estate upon the testator's death.

How is a testamentary trust created?

A testamentary trust is provided for in a last will by the “settlor,” who appoints a “trustee” to manage the funds in the trust until the “beneficiary,” or person receiving the money, takes over.

When is a testamentary trust created?

The trust comes into existence at the completion of the probate process after the death of the person who has created it for the benefit of his or her children or others; note this differs from “inter vivos” trusts, which are created during the lifetime of the settlor.

Unlike an inter vivos trust, a testamentary trust does not take effect until the trust maker’s death, at which point it becomes irrevocable. Since it does not take effect during the settlor’s lifetime, he or she is free to make changes to the trust up until death.

What are the benefits of a Testamentary Trust?

There are many benefits as follows:

  1. Flexibility for your beneficiaries
  2. The Trustee may distribute capital and income to any nominated beneficiary at any time and in any proportion. A Testamentary Trust gives the beneficiaries both flexibility and control over when and how they take their inheritance.

  3. Protection of Assets
  4. The assets form part of a Trust and therefore they cannot be taken out of the Trust without the Trustee agreeing to distribute them to the beneficiaries. None of the assets are legally owned by the beneficiaries which may protect the assets of the Trust from some of the following circumstances:-

      2.1 Divorce/breakdown in relationship of a beneficiary - if an intended beneficiary is in a "shaky" relationship (such that the marriage or de facto relationship will dissolve in time), then if the assets are held in a Testamentary Trust, they are not classed as assets of any individual and therefore the Family Court cannot make an order requiring the distribution of those funds. In other words the spouse or partner of an intended beneficiary will not reap the benefits of an inheritance.

      2.2 Creditor Protection - to protect the bequest from creditors of a beneficiary. If an intended beneficiary had a number of creditors and/or is likely to be at risk of being made bankrupt, the Will maker can protect the bequest of monies under a will to them so that the inheritance will not be at risk of being required to be given to the Trustee in bankruptcy or creditors.

      2.3 High-Risk Beneficiaries - if an intended beneficiary is in a high-risk profession or business where negligence claims are likely, a Testamentary Trust will protect the inheritance.

Some other Points to Consider:

Testamentary trusts are most frequently used to leave money to the settlor’s children via a will. Since minors may be too young to effectively manage substantial property immediately, a testamentary trust allows the settlor to leave estate to a child and also to name a trusted guardian as the trustee. The trustee manages the trust until the minor becomes old enough to manage the property him or herself. Generally, the document indicates a certain event, such as when the child graduates or turns 18, at which point the trust expires and the beneficiary can take control of the trust property.

While the primary purpose of most living trusts is to avoid probate, testamentary trusts, unlike living trusts, do not avoid probate. A testamentary trust must go through probate before the will is created. The executor will probate the will and create the trust in the process. The trustee may also require legal advice on how to administer the trust, which can take legal fees from the trust amount. Thus, while testamentary trusts are relatively inexpensive to create, they may become costly once they take effect.

But the biggest benefit of these trusts is that as the assets are transferred to the Trust through a Will there is no Stamp Duty involved to transfer the assets from the owner to the trust. In a non-testamentary trust the stamp duty must be paid to transfer the assets to the trust.

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