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 as set out in the Willmaker’s will.
There are significant advantages to utilising a TDT in your Will, especially where assets could be at risk, or where there is sufficient wealth in an estate.
Beneficiaries
The TDT will nominate a “primary” beneficiary, in addition to “general beneficiaries”. General beneficiaries will usually include relatives of the primary beneficiary (including parents, spouse, siblings, children, grandchildren, aunts and uncles), together with companies and trusts which the primary beneficiary controls or has an interest in, and often charities. The Trustee can distribute the income of the trust to the primary and general beneficiaries at his or her discretion.
Trustee
Where the primary beneficiary is over 18, they can be appointed as the Trustee of their own TDT. If the primary beneficiary is under 18, a trusted person can be appointed until the beneficiary turns 18, and sometimes this person can continue to act as joint Trustee until the primary beneficiary reaches a certain age, such as 25. This can allow for a period of “mentoring” by the trusted adult while a child is a young adult and may not have the wherewithal to wisely manage significant wealth.
Where a TDT is being established for multiple children, a corporate Trustee can be used.
Appointor
The person holding the office of “Appointor” has the ability to “hire and fire” the Trustee. Usually, the Primary beneficiary will be the Appointor. There may be asset protection reasons why a distinct or perhaps joint Appointor may be recommended.
Advantages
- Tax effective
Ordinarily, a beneficiary will inherit the assets in the personal name and are therefore required to pay any tax on the income of the asset at their marginal rate. However, under a TDT, children (under the age of 18) are treated as adults and the $18,200 tax free threshold will apply. This allows a Trustee to distribute $18,200 to each child and grandchild of the primary beneficiary, tax free, per year, as they desire.
Furthermore, the income and any capital gains from the TDT assets can be distributed to one or more beneficiaries in a tax effective manner.
- Asset protection
There may be a level of protection available to the beneficiaries against a third party (such as asset protection from creditors, or in some cases in family law disputes).
- Flexibility:
TDTs can last up to 80 years. Therefore, they can provide for multiple generations through the one document. However, they can also allow for entire trust to be vested at any time at the primary beneficiary’s election.
Additionally, TDTs afford the Trustee discretion as to which beneficiaries receive a distribution. This means that the Will can give the Trustees flexibility around which beneficiary receives a distribution, when they receive it, and how much the beneficiaries are entitled to. This allows for effective tax planning within a family.
Disadvantages
1. Costs
The primary disadvantage to TDTs is the cost of setting them up and managing them. Trustees will be required to keep accounts of the TDT assets and liabilities as well as lodge annual tax returns of the trust.
Written by Kristel Winkler, Director & Natalie Ross, Law Clerk
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
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