TESTAMENTARY DISCRETIONARY TRUSTS IN ESTATE PLANNING
Testamentary discretionary trusts (TDTs) are used by many people as a part of their estate planning. A TDT is a discretionary trust established under a Will. It does not come into operation until the death of the Willmaker.
Instead of assets being gifted directly to a beneficiary, they will pass to the Trustee of the TDT, who will hold those assets in accordance with the terms of the TDT set out in the Willmaker’s Will.
There are significant advantages to utilising a TDT in your Will, especially where beneficiaries could be at risk of losing assets, or where there is significant wealth in an estate.
Beneficiaries
The Willmaker nominates a “primary” beneficiary or beneficiaries for the TDT, in addition to general beneficiaries. General beneficiaries usually include relatives of the primary beneficiary (such as parents, spouse, siblings, children, grandchildren, aunts and uncles), together with related companies and trusts, and often charities. The Trustee can distribute the income of the TDT to the primary and general beneficiaries at his or her discretion. Capital distributions are also at the Trustee’s discretion but can be restricted to specific beneficiaries.
Trustee
Where a primary beneficiary is over 18, they can be appointed as the Trustee of their own TDT. If a primary beneficiary is under 18, a trusted adult can be appointed as Trustee in their stead.
Where a TDT is established for multiple primary beneficiaries, a corporate Trustee may be appropriate.
Appointor
The person holding the office of “Appointor” can “hire and fire” the Trustee. Usually the primary beneficiary will be the Appointor. If the primary beneficiary is under 18, a trusted adult can take the role. It is also common to require young primary beneficiaries (say between the ages of 18 to 25) to share this role with a trusted adult while they are still developing financial wisdom and maturity.
There may be asset protection reasons for nominating a distinct or perhaps a joint Appointor.
Advantages
- Tax effective
Without a TDT, a beneficiary will take inherited assets in their personal name. If they then invest those inherited assets, they will therefore be required to pay tax on any income generated from the assets, at their marginal rate. However, if the assets are held in a TDT, any income generated from those assets can be split between the various beneficiaries of the TDT and taxed in the beneficiaries’ hands in a more tax effective manner.
Beneficiaries of a TDT under the age of 18 are treated as adults for tax purposes and will benefit from the more generous tax-free threshold that applies for adults. This means each child and grandchild under 18 who is a beneficiary can “receive” (by payment of costs of living, school fees, etc) at least $18,200 in TDT income every year, completely tax free, as the Trustee sees fit.
- Asset protection
TDTs offer a greater level of protection to the beneficiaries against a third party (such as asset protection from creditors or, to a potentially lesser extent, in family law disputes).
- Wealth management
In Queensland, TDTs can potentially last up to 125 years from the date they commence. Therefore, a TDT can be a powerful vehicle for growing and stewarding intergenerational wealth. With the potential to provide for multiple generations, TDTs provide a unique opportunity to plan safeguards for protecting your family’s inheritance particularly where beneficiaries may be financially immature or vulnerable.
- Flexibility:
The Trustee of a TDT has the discretion as to which beneficiaries will receive a distribution, how much the beneficiaries are entitled to, and when they receive it. This can allow for more effective estate and tax planning within a family.
With considered drafting, the terms of a TDT can also allow the primary beneficiary to elect for the TDT to be vested (ending the trust) and the remaining TDT assets to be distributed to them personally. This gives the primary beneficiary the freedom to take their inheritance without the terms of the TDT if they desire.
Disadvantages
1. Costs
For Willmakers, the cost of a Will with one or more TDTs is always going to be higher than a Will with no TDTs. However, where a Willmaker’s estate has sufficient wealth, the future savings for their family from a TDT are likely to far exceed these upfront costs.
After a Willmaker dies, there are costs of setting up and managing a TDT (payable by either the estate or the TDT). Trustees are required to keep accounts of the TDT assets and liabilities and lodge annual tax returns for the TDT and should seek professional assistance (if required) in carrying out their duties.
Written by Kristel Winkler, Director & Kathleen Stonehouse, Senior Associate
Speak to one of our Estate Planning Lawyers for advice on whether a testamentary discretionary trust is recommended in your circumstances. Call our office on (07) 3188 5124 or find out more about our Estate Planning Services here: Wills & Estates | Donovan Winkler Lawyers
Recent Comments