Ferraro & Singh Lawyers provide the following overview of testamentary discretionary trusts to assist you in your estate planning.
Flexibility
A testamentary discretionary trust is established by the terms of your will and gives flexibility as to how and when your beneficiaries receive their benefits from your estate, which protects the beneficiaries’ entitlements and minimises any applicable taxation consequences for them.
This is possible because, under a testamentary trust, the assets of your estate will be held by a trustee for the beneficiaries, not by the beneficiaries. This applies despite the fact that the trustee can be – and usually is – also the beneficiary of the trust, which gives them total control of their inheritance without the assets being at any risk.
Asset protection
The trust structure protects the assets from any claims against the beneficiaries. Where necessary – when the appointed trustee is not the beneficiary – it also protects the trust’s assets from misuse by the beneficiary themselves.
If a beneficiary faces bankruptcy, an asset held for that beneficiary in a testamentary discretionary trust will not be available to satisfy the beneficiary’s creditors.
Likewise, assets held in a testamentary discretionary trust are not part of the pool of assets available to be divided up in family law proceedings, in the event of a beneficiary becoming separated from a spouse or partner.
This protection extends to claims against the estates of your beneficiaries. If the assets to which they are entitled under your will are held in trust, then those assets do not form part of their deceased estates when they die and are not available to any claimant on their estate.
Testamentary trusts can also effectively protect beneficiaries from themselves. For example, if a beneficiary has an addiction, a bequest could be left in a trust which allows them to receive appropriate maintenance and treatment but does not allow them to access the capital.
Taxation
Testamentary trusts can be very tax effective. Income, capital gains and franked dividends from shares can be distributed among all beneficiaries, each year in the most tax-efficient way. For example, income can be distributed to a minor beneficiary who has no other income, rather than to their parent who is otherwise earning a high income and paying tax at the top marginal rate.
