What are Testamentary Discretionary Trusts?
A Testamentary Discretionary Trust is a Discretionary Trust set up within a Will. The term “discretionary” means that the person or entity who has day-today control of the Trust, called the “Trustee”, has the discretion as to how assets and income of a Trust are distributed amongst the beneficiaries of the Trust.
Discretionary Trusts often have a wide range of beneficiaries, principally family members of the person/s nominated as the Primary Beneficiary/ies. Hence the term “Family Trust” is often interchangeable with “Discretionary Trust”.
In Testamentary Discretionary Trusts, the Primary Beneficiary is usually a spouse, child, or children of the Will maker.
In short, a Testamentary Discretionary Trust is usually set up for the benefit of the Primary Beneficiary and his or her family. It may be controlled by the Primary Beneficiary and/or trusted individuals who will act in the best interests of the Primary Beneficiary.
Can there be More Than One Testamentary Discretionary Trust in a Will?
Yes. It is common for Will makers to create a separate Testamentary Discretionary Trust for each of their children.
What are the Advantages of a Testamentary Discretionary Trust?
Flexibility
The share of an Estate which passes to a Testamentary Discretionary Trust may be divided amongst a range of potential beneficiaries, meaning there is huge flexibility as to the potential distribution of capital and income.
Possible Taxation Benefits
While we cannot give financial or taxation advice, we understand that Financial Planners and Accountants often advise clients that there may be some taxation benefits associated with a Testamentary Discretionary Trust.
Those taxation benefits include:
- Flexibility in Distribution of IncomeThe ability to distribute income amongst a number of beneficiaries. If some recipients of income are in lower tax bracket than the Primary Beneficiary, less tax may be paid on distributions made to those in lower tax brackets.
- Tax Free ThresholdsFamily/Children under the age of 18 are usually only entitled to receive a very small amount from Discretionary Trust distributions. In ordinary Family/ Discretionary Trusts, which are not created under a Will, the amount which may be distributed to children, tax free, is a little over $400 per year. With Testamentary Discretionary Trusts, the adult tax free threshold applies to children under the age of 18, meaning that each child can receive benefits up to the amount of the full tax free threshold before tax will apply to these distributions (assuming they have no other income).That threshold is currently $18,200. This means any child who is a potential beneficiary of a Testamentary Discretionary Trust might be able to receive up to $18,200 before tax would become payable. Across a number of children, the income that might be distributed could be significant before income tax would be payable.
Asset Protection
- Creditors
Rather than an inheritance passing directly to a beneficiary, the inheritance is placed in a Trust which is typically for the benefit of that beneficiary and his/her family. Should that beneficiary encounter financial difficulties in the future, the assets held within a Testamentary Discretionary Trust may not be available to the child’s creditors, giving the possibility of the preservation of those assets, even if the beneficiary becomes bankrupt. - Potential Family Law Benefits
Not only can asset protection benefits apply in respect of creditors, there is a potential that there may be some benefit in having a Testamentary Discretionary Trust when it comes to Family Law matters.In the event that a person who is a beneficiary of a Testamentary Discretionary Trust is embroiled in Family Court proceedings, the Trust assets may remain intact and not be the subject of a Property Adjustment Order to be distributed to a beneficiary’s ex-spouse in Family Law proceedings.Whether or not the assets of the Testamentary Discretionary Trust are able to be dealt with by the Family Court is primarily a question of who ultimately controls the Testamentary Discretionary Trust.If the person involved in Family Court proceedings controls the Testamentary Discretionary Trust, then the Family Court will likely be able to deal with those assets. However that person may receive credit for the contribution of the Testamentary Discretionary Trust assets as part of the pool of assets before the Family Court.
Overview
Essentially, Testamentary Discretionary Trusts are designed to give greater flexibility to the distribution of an Estate and income on inheritances, with some potential long-term asset protection benefits.
Should you need advice or assistance with estate planning please contact us.
Mark Lillicrap
Principal
