Testamentary discretionary trusts are great estate planning tools because they can offer tax minimisation, asset protection and flexibility. A testamentary discretionary trust is a type of trust created under a will, comes into existence only upon the administration of the deceased estate and has four elements: the trustee(s), the assets, the beneficiaries and the discretion.
The trustee is the person (or persons up to four) you designate to be in charge of the trust. The trustee can be the person whom you wish to benefit under your will, or even one of the persons for whom the trust is established. The trustee can also be a company.
Assets of the trust
A testamentary discretionary trust established under the will must receive assets under the will. These can include cash, real estate, shares, cars, boats, art works or any chattels you wish.
Every testamentary discretionary trust must have beneficiaries who are those persons who may benefit under the trust. There is usually a definition of beneficiaries in a discretionary trust, and could be the person you wish to benefit together with their children, grandchildren and any other specified persons or entities.
The trustee of a testamentary discretionary trust has to be given an absolute discretion in distributing some or all of the capital and/or the income of the trust from time to time in various proportions, amounts and categories to the beneficiaries of the trust. In exercising this discretion the trustee decides who gets what and when. This could be important for tax reasons and in the case of proposed beneficiaries who may not be money-wise or who may be easily influenced to their detriment.
Benefits of Testamentary Discretionary Trusts
The benefits of testamentary discretionary trusts include:
Asset protection. A testamentary trust can provide significant asset protection, which will be important if your surviving spouse or an adult child is engaged in an occupation that carries significant risk of litigation or owns a business. Testamentary trusts can also provide some protection for adult children in a divorce property settlement.
Income splitting. All beneficiaries, including those under 18, receive the benefit of the full income tax free threshold, and income above that amount is taxed at normal adult rates. This can be of significant benefit to beneficiaries who have children under 18 as they can effectively pay living and educational expenses for their children out of pre-tax income.
Flexibility. You can tailor the terms of a testamentary trust to suit your particular circumstances. For example, you can restrict access to the assets in a testamentary trust in appropriate circumstances, such as where a major beneficiary has an addiction or is unable to manage a significant inheritance. Testamentary trusts can also provide that a beneficiary has a right to live in a house while preserving the assets for the ultimate beneficiaries (effectively a life interest).
The important thing to remember about testamentary discretionary trusts is that one size does not fit all. For expert advice, contact us today for your free, 10-minute phone consultation.