Quite often a client will come to us and say they have heard about a Will that provides for a ‘testamentary discretionary trust’ and they want to know if it is necessary and what it means.  This blog answers the seven main questions we are asked about testamentary discretionary trusts.

1. What is a testamentary discretionary trust?

A testamentary discretionary trust is simply a trust which is established in a Will.  The beneficiaries receive their estate distribution on the terms of a trust rather than in their personal name. 

The trustee has the day-to-day control of the trust.  An independent trustee can be appointed or the Primary Beneficiary can be the trustee of their own trust, either on their own or jointly with another person.  

There are two main benefits:

• Asset protection
  • A beneficiary does not own the assets in a testamentary trust which means that creditors will generally not be able to access the assets of the trust;
  • An independent trustee can be appointed if the assets are at risk, such as through the beneficiary suffering from a gambling problem or drug dependency;
  • The trust can offer protection from a family law breakdown;
  • The trust can be drafted such that a person is deemed ineligible to act as trustee if they are declared bankrupt;
  • To best safeguard assets, a will-maker might consider appointing two trustees and two appointors.

• Taxation advantages including:
  • Minor beneficiaries are taxed at normal adult rates on excepted trust income rather than at the penalty rates that usually apply to minors.  Income earned on assets forming part of the trust will generally be ‘excepted trust income’;
  • The trust can be used to stream different categories of income to different beneficiaries;
  • Income can be distributed to beneficiaries whose marginal taxation rate is low;
  • The class of beneficiaries can include tax-exempt entities.

The trustee can remain in place for up to 80 years or earlier if the trustee decides to vest the trust.

2. Do I need to set it up now?

The terms of the trust form part of the Will.  However, the testamentary trust only comes into operation after the testator’s death.  After signing the Will no further steps need to be taken until the testator dies.

3. What are the ongoing costs of the trust?

The trust will need a tax file number and tax returns will need to be lodged each financial year.  There can be associated accounting costs.

4. Is my estate large enough to warrant setting up a trust?

Regardless of the size of the estate, the trust still offers asset protection and tax advantages.  As long as the ongoing costs of the trust are not disproportionate to the benefit and your assets form part of your estate (property held as joint tenants and assets held by a family trust for example for not form part of your estate) the trust can be advantageous.

It is also possible to give beneficiaries (once they have reached the preservation age) the option of whether they take their distribution personally or on the terms of the testamentary discretionary trust.

5. Will the trust make it complicated for my Executors?

The trust does not need to be complicated.  At Perspective Law we take the time during the estate planning process to ensure our clients understand the terms of the trust and that it upholds their wishes.  We also assist beneficiaries of deceased estate and can provide guidance in relation to the setting up of the testamentary trust, including referrals to accountants or financial advisers.

Most of our clients feel at ease after completing their estate plan and knowing their Will reflects their wishes and provides tax advantages and asset protection for their beneficiaries.

6. Is the cost of preparing the Will worth it?

The cost of drafting a Will which includes testamentary discretionary trust is more expensive than the cost of a simple Will.  However, the testamentary trust can result in significant tax savings for your beneficiaries.  The asset protection also makes the Will an investment.  If, for example, estate assets are distributed to a beneficiary in their personal name and they have been declared bankrupt, the assets will vest in the bankruptcy trustee.  This alone makes the Will worthwhile.

7. I already have a family trust – can I just use that?

It is possible to name family trusts as a beneficiary of the estate.  However, assets that pass into a testamentary trust are subject to a much lower tax rate.  Entitlement to concessional rates of tax will generally be limited to income from the transferred assets and not from assets subsequently acquired.  This is different to a testamentary trust where all the income of the trust estate can be taxed concessionally.

Other considerations include:

• The vesting date of the family trust will be sooner than the possible vesting date of any testamentary trust as the trust does not come into operation until the testator’s death;
• There can be uncertainty around the control of the family trust at the time of death;
• Alternatively, the family trust can be an eligible beneficiary of a testamentary trust and distributions can be made to the family trust from the testamentary trust.

To discuss further, call Lauren Nolan now or email us at lauren.nolan@perspectivelaw.com