A testamentary discretionary trust is simply a discretionary trust established by a will. It is also sometimes called a protective trust. To gain more beneficial treatment – a family trust election must be made for tax purposes.
A testamentary discretionary trust can also be established for the benefit of non-family members, or even organisations such as charities – but the benefits, especially tax concessions, are fewer where family members are not the beneficiaries and the exercise is therefore usually less worthwhile.
Testamentary discretionary trusts can protect assets from any creditors of beneficiaries in the event that they are sued, or become bankrupt, as the asset will be held by the trustee, not the beneficiary. Such trusts may also avert family provision claims against the estates of deceased beneficiaries, as again beneficiaries will have no personal ownership of assets. There is also some degree of protection of assets and income held for a beneficiary in a testamentary discretionary trust for a beneficiary, from any spouse of that beneficiary if they become involved in family law proceedings.
Testamentary discretionary trusts also provide a means of accessing favourable taxation treatment by ensuring all beneficiaries use their income tax free thresholds. In relation to losses and franking credits a family trust election can secure tax advantages otherwise unavailable, provided that the trust passes the family control test and makes distributions of trust income only to beneficiaries of the trust who are members of the family.
For testamentary discretionary trusts which are not family trusts, flexibility as to when and to whom to distribute income can still provide tax advantages.
The tax benefit of a testamentary discretionary trust as against an inter vivos trust is that distribution of income to minors is taxed in the hands of minors at normal marginal rates. They therefore get the benefit of the tax-free threshold and the low rates of tax enabling payment of their school and other expenses either tax free or with little tax. An elderly testator with six young grandchildren can provide significant tax savings to the parents of those children in this way.
Testamentary discretionary trusts are not appropriate for everyone. It is important to considering the family members, their current and future financial circumstances – including their businesses, companies, other trusts of which they are beneficiaries and do they expect to receive a substantial inheritance from others.
Sometimes you might legitimately be concerned that you loved ones will squander an inheritance, because of a drug abuse, alcohol abuse or mental issues. Testamentary trusts are a wonderful tool of providing for them without giving them control over the asset.
How?
Your lawyer will meet with you to explore your circumstances. The trust is set up by way of a Deed. There are several off the shelf deeds you may use, but is best that even if you resort to this, you consult with a lawyer and your preferred tax advisor to ensure that the deed is suited to your needs. A good standard trust Deed will set you back about $500 but a complex one will cost you more. We will provide you with a quote for our services before starting any work.
You will be called the settlor and appointor of the trust.
Those whom you want to see benefit will be called the beneficiaries
Often the trustee, who will administer the trust deed, is a company set up for that purpose. Your solicitor can establish a company for you at a cost of between $800 and $1200. Using a company for a trustee gives the advantages of flexibility and that the directors are bound by the Corporations Law Act, in addition to the trustee’s fiduciary (good conscience) duties.
It is crucial that you get the right legal, tax and financial advice when considering a testamentary trust –
Our Will Dispute Lawyers in Parramatta can help with contested wills
A loved one dying is extremely distressing, and it’s only made worse if there are issues with the will. Unfortunately, a death can bring a lot of issues among families, and if you wish to contest a will, you should contact a will dispute lawyer. CK Lawyers can assign you a will solicitor who can help protect you legally and help you get the best possible outcome in your situation.
