What is a Testamentary Discretionary Trust?

A testamentary discretionary trust is a trust established in someone’s will. It comes into existence only when the person dies. A lineal descendant testamentary discretionary trust is a trust established in someone’s Will for the benefit of their lineal descendants.

Let’s assume that someone died at Point A. The executor’s job involves finding all the assets, paying out any debts and usually, at Point B, distributing what’s left to the beneficiaries. If there is a testamentary discretionary trust, part or all of what’s left remains in the estate and is distributed later – at any time between Point B and Point C, depending on the terms of the will. Point C can generally be up to 80 years from Point A. A Will and Estate Plan can establish more than one testamentary discretionary trust.

Who controls the assets?

Whoever is named in the Will as trustee controls the trust assets. Like any trust, a testamentary discretionary trust can be as flexible or restrictive as desired. The trustee can be given full discretion or no discretion as to who should receive income and capital from the trust and when they should receive it. The trustee is often the same person who was appointed as executor, and can also be a beneficiary. For example, a parent can establish a testamentary discretionary trust for each child’s inheritance. Each adult child can be the trustee of their own trust, and may also be an executor.

Using testamentary discretionary trusts to split income with young children

As an estate planning strategy, using a testamentary discretionary trust can be of benefit:

(a) for families with small children or grandchildren

(b) where extra income would be needed to support the surviving families should a parent die;

(c) where minimising tax is important

How does it work?

Rather than all the deceased’s assets being distributed by the executor upon death, some or all of the assets remain in trust for the benefit of a specific group of beneficiaries named in the Will. Trust income distributed to children, of any age, will be taxed at adult rates rather than the penalty rates that normally apply to minors’ unearned income. As noted above, the trustee can have full discretion as to who receives trust income and capital, or restrictions can be provided.

Why use a lineal descendant trust?

A lineal descendant trust (LDT) is established for your lineal descendants – your children and grand children, and on down your lineal family tree. A properly drafted LDT can assist in keeping an inheritance out of the reach of the Family Court where a beneficiary is involved in a family law property dispute.

Protect inheritances from the in-laws

Many parents are concerned that the inheritance they leave to their children could end up in the hands of a son-in-law or daughter-in-law if their child’s marriage breaks down. If a child receives an inheritance in their own name, that inheritance will generally be intermingled with the child’s other assets (e.g. by paying off a mortgage) and thus will become ‘matrimonial property’available for distribution by the Family Court. However, if you give each child their inheritance via a LDT provided for in your will, those assets can be kept apart and protected from direct distribution. How successfully the assets are protected depends on how the Will and LDT are drafted and the circumstances at the time of drafting so specialist advice should be obtained.

Integral Financial Planning is  located on the Gold Coast and can assist you and help facilitate your Wills and overall Estate Plan with specialist lawyers in these areas.

With the latest technology we can assist you regardless of your location and welcome you to make contact with us on 0755592250 for an initial consultation at our expense.

You should seek personal advice prior to implementing any strategies as there are many rules and limitations that need to be considered, please refer to our general advice warning, terms and conditions.

This material has been provided by third party specialist lawyers.

 

Written by

Justin is the Director and Principal Financial Planner of Integral Financial Planning located on the Gold Coast. He has over 10 years of experience if providing Financial Planning Advice and is an Authorised Representative of GWM Adviser Services Limited. He can be contacted on 07 55592250