Testamentary Trust

Testamentary Discretionary Trust

A Testamentary Discretionary Trust (TDT) operates very similarly to a Family Discretionary Trust. It has a trustee and two or more potential beneficiaries who are entitled to receive the income and/or capital of the trust at the trustees discretion. It is called a discretionary trust because the trustee in each financial year exercises its discretion to determine who will receive the income and/or capital from the trust fund and in what proportion.

 

In addition to the position of trustee, a TDT may also include the positions of an appointor and/or guardian. An appointor may be included in the terms of the trust deed if an independent trustee is appointed, thereby giving the power to appoint or remove the trustee to one of the beneficiaries of the trust. In most cases this would be the primary beneficiary.

Similarly a trust may include a Guardian for the same reasons. A Guardian’s function is to oversee some of the more significant decisions a trustee may make. For example if the trustee wishes to make a capital distribution it may be required to obtain the consent of the Guardian before doing so.

Benefits of a Testamentary Discretionary Trust

  • Asset Protection
  • Income Splitting
  • Income Streaming
  • Generational Wealth Management (providing for future generations of the one family)

Asset Protection

A Testamentary Discretionary Trust can protect the assets which a beneficiary inherits should they find themselves:

  • in financial difficulties (bankrupt); or
  • involved in a property settlement because of a relationship breakdown.

This type of trust can also protect the interests of a vulnerable beneficiary, for example beneficiaries with a disability, a gambling problem or a drug addiction.

The separation between the legal owner and beneficial owner of the trust assets allows for this protection to exist.

NB.  There are limitations to the effectiveness of a Testamentary Discretionary Trust, please contact us to discuss your personal circumstances.

Income Splitting

It is the income splitting capability of a TDT which makes this structure so attractive. Unlike family discretionary trusts, Testamentary Discretionary Trusts provide a favourable tax position when paying income distributions to a minor (child under 18). This is because a minor beneficiary of a testamentary trust is taxed as an adult. This means that a minor beneficiary is entitled to receive the $18,200 tax free threshold and the standard adult tax rates thereafter. This can be compared to a minor of an inter vivos discretionary trust (a trust created during one’s lifetime) who is only entitled to $416 tax free and any income above.

Income Streaming

Income streaming is the ability to pay different classes of income to different beneficiaries. For example paying the fully franked dividend received on BHP shares to Beneficiary A and paying the rental income from an investment property to Beneficiary B.

This gives the trustee the greatest flexibility when it comes to distributing income to the beneficiaries, it also allows for a more tax effective trust.