What is a Testamentary Discretionary Trust?

What is a Testamentary Discretionary Trust?

by Jacqueline Brauman.

A Testamentary Discretionary Trust (TDT) operates very similarly to a Family Discretionary Trust, except it is set up in your Will and begins after you die. It has a trustee and two or more potential beneficiaries, such as your children, who are entitled to receive the income and/or capital of the trust at the trustee’s discretion.

It is called a discretionary trust because the distributions each year are not set. 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.

The benefits of a testamentary discretionary trust include:

  • asset protection
  • income splitting
  • income streaming
  • generational wealth management.

A TDT can protect the assets which a beneficiary inherits from you, should they find themselves in financial difficulties (their inheritance is protected from their creditors) or involved in a property settlement because of a relationship breakdown. There are limitations to the effectiveness of a TDT if they are not set up correctly.

This type of trust can also protect the interests of a vulnerable beneficiary, such as a child with a disability, a gambling problem or a drug addiction.

The income splitting capability of a TDT makes this structure attractive. Unlike Family Discretionary Trusts set up during your lifetime, a TDT provides a favourable tax position when paying income distributions to a minor (child under 18 years). This is because a minor beneficiary of a TDT is taxed as an adult, instead of at penalty rates, and means that a minor beneficiary is entitled to receive the full tax free threshold without paying any income tax (currently $18,000). This is contrasted to distributions under a Family Discretionary Trust where a minor is only entitled to $416 tax free.

If you are going to see a solicitor to make a Will, make sure you talk to a solicitor who can give you proper advice on a TDT.

Contact us to arrange a chat with one of our legal professionals. It doesn’t hurt to ask.


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