Testamentary trusts are no longer for Australia’s wealthy
The rise in blended families, mental health conditions and an ageing population of wealthy Australians has redefined how testamentary trusts are being used.
It wasn’t long ago in Australia’s history that testamentary trusts were used exclusively by wealthy men seeking to rule their families from the grave.
In the early 20th century, there were fewer blended families, men exercised greater power over household finances, and wives were at greater risk of destitution if their husbands passed away.
Testamentary trusts are a type of trust established under a will that doesn’t come into force until the willmaker passes away. They are tax-effective, designed to hold and distribute assets for beneficiaries under a set of rules established by the willmaker.
Years ago, they were typically used to ensure family members received a perpetual allowance and their children’s education and boarding fees were paid if they were suddenly to pass.
Thankfully, times have changed.
As our socio-economic composition and values have evolved over the past 50 years, so too have the motivations for establishing testamentary trusts. Here we examine how three shifting demographic drivers are making testamentary trusts an ideal option for Australians of all backgrounds.
Divorce and blended families are on the increase
The first shift is the increasing prevalence of divorce in households since the mid-1970s, which has added layers of complexity when it comes to inheritance.
Since no-fault divorce was introduced in 1976, divorce rates have risen fourfold from 1 per cent per annum to approximately 4 per cent per annum. Today, one in eight (12 per cent) Australian families are blended or stepfamilies. This evolution of the family structure has created two distinct challenges for willmakers.
Firstly, the willmaker must now consider the risk of the beneficiary – perhaps the willmaker’s son or daughter – becoming divorced in future, and their ex-wife or ex-husband potentially walking away with a large share of the willmaker’s estate. Secondly, with blended families, the willmaker might only want their blood relatives to receive certain assets.
In both scenarios, testamentary trusts are being used by everyday Australians as a mechanism to protect assets for direct blood relatives and keep funds out of unwelcome hands.
Greater prevalence of mental health conditions, substance abuse and self-harm
Almost half of Australian adults experience a mental health condition in their lifetime. Furthermore, one in five young people are currently experiencing high or very high levels of psychological distress.
Mental health conditions have become common in Australia, despite the valiant efforts of government, healthcare and not-for-profits in treating these conditions. Sadly, some mental health conditions have also been shown to be linked with alcohol and substance abuse, self-harm and problem gambling.
As a willmaker, it can be heartbreaking to witness children battling a mental health disorder, and it can be conflicting when it comes to estate planning. Knowing they won’t be there someday for the family member, many willmakers want to ensure their funds help the beneficiary and provide critical care, while also ensuring no misuse or harm occurs as a result.
A carefully designed testamentary trust can be used to help finance the beneficiary’s health care needs and ensure they are provided adequate funds to support their long-term wellbeing, while also minimising the risk of conflict with siblings, theft and abuse.
More wealth at stake for ageing individuals
The final factor that is changing the way testamentary trusts are used is our growing proportion of older, wealthier Australians.
Today, Australia’s median estate size ranges. In Victoria, for instance, the median estate is $500,000, and about 20 per cent of estates are worth $1 million. We’re on the cusp of an enormous intergenerational wealth transfer, with Baby Boomers estimated to bequeath $224 billion per annum by 2050.
On the other side of this transfer are younger generations doing it tough, locked out of an unaffordable and competitive housing market and able to save little due to high prices of rent, fuel, groceries and utilities. These economic conditions have raised the stakes for willmakers, who may feel they are at risk of being swindled by manipulative relatives who are desperate to purchase a home.
The scary thing is that this is already happening. The Sydney Morning Herald reported in November a growing epidemic of ‘inheritance impatience’ fuelling cases of elder abuse in Sydney, where the median house price has increased to $1,578,099.
While testamentary trusts cannot be established during the willmaker’s lifetime, they can play an important role after death in ensuring funds remain available to beneficiaries in a tax-effective environment, as well as protecting funds from falling into the hands of those not named.
With higher rates of divorce in households, a high prevalence of mental health conditions and wealthier ageing Australians, it’s no surprise we’ve seen a change in the way testamentary trusts are being implemented.
Every Australian extended family has likely experienced one of these three circumstances in some way. As a result, when making a will, it’s worth speaking to a professional about how a testamentary trust can help minimise family conflict, create wealth for your loved ones in a tax-effective environment and ensure your wishes are upheld after you have passed.
The good news is that testamentary trusts are not hard to establish with the help of a professional. They don’t have to be difficult to manage either, particularly with the help of a trustee company.
