What is a Testamentary Discretionary Trust and why might you want one?

A traditional will leaves the estate to the beneficiaries equally, and contains further instruction in the event of the beneficiaries predeceasing the testator.  It may also contain specific bequests requests relating to the testator’s personal property.

This will, while effective an effective estate planning tool for those in uncomplicated circumstances, leaves the inheritance open to the creditors or ex-partners of beneficiaries in the event of financial difficulty or relationship break down.  There are also be adverse tax implications if a beneficiary invests their inheritance; if the beneficiary is earning other income, the income from the estate investment is taxed in addition to the beneficiary’s marginal tax rate.

In order to avoid these issues, it is often prudent to consider creating a Testamentary Trust.  This may also be worth bearing in mind if you are:

• a member of a blended family;
• the parent or guardian of a disabled dependent; or
• party to a number of business relationships.

A Testamentary Trust is a trust created by will, and comes into existence upon the death of the testator.  As opposed to a traditional will, the estate is distributed to the trust, rather than to individual beneficiaries.  The estate is distributed to the trustee who holds it on trust for the beneficiaries, and administers the trust according to the terms of the will.  The trustee is empowered to allocate income and capital to the testator’s chosen beneficiaries, in accordance with the intentions of the testator.

Future proofing the estate

This mechanism protects the estate, as far as is possible, from attack in family law or bankruptcy proceedings.  If drafted correctly, a Testamentary Trust can protect the estate from being consumed unwisely by the beneficiaries themselves (often referred to as the, “Lamborghini factor”).  The testator may choose the age at which the beneficiary may take complete control of the assets of the trust.  Until that age is reached, the estate is to be managed and distributed at the discretion of the trustee according to the terms of the trust contained in the will.

Tax advantages

A Testamentary Trust may also create tax advantages when compared to other trusts or will structures.  Taxation legislation provides that income and capital gains derived by minors under the age of eighteen (18) years from inheritance received as a result of a will are not subject to penalty tax rates.  This means that each child has a tax-free threshold of $6,000.  Taxable income between $6,000 and $20,000 will be taxed at the relatively low rate of 17%.

Any income gains, capital gains and franked dividends can be distributed among the beneficiaries by the trustee each year in the most tax-efficient way.  These concessions also apply to any income or capital gains derived from assets acquired from the reinvestment of the estate.

While the preparation of a Testamentary Trust is somewhat more complicated than a simple will, and thus more time consuming, the benefits may outweigh the costs if your situation is more complicated because of a blended family situation or more complicated business structures.

Further information

If you would like to discuss how Dundas Lawyers can assist you with any aspect of estate planning, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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