Business entities such as corporations and partnerships are excellent vehicles to conduct a business or conduct commercial operations, but they do not work well as personal piggybanks. When personal assets are placed into a business entity, the potential for the entity to be attacked by a business creditor, taxation official, liquidator or trustee in bankruptcy increases exponentially. The way many of the world’s wealthiest families have maintained their wealth is to transfer personal assets to successive generations of one family through a Testamentary Discretionary Trust (TDT).

TDTs have many benefits, including tax concessions, and are flexible enough to keep up with the family’s changing circumstances. Take a look at some of the benefits and types of Testamentary Discretionary Trusts below to find out how wealth can trickle – or snowball – down the generations.

What is a Testamentary Discretionary Trust and What are the Benefits?

A TDT is a Trust left in a Will to take effect in the period after the executor has administered the estate and distributed the balance of the estate to a trustee or trustees to hold on Trusts created by the Will for the beneficiaries named in the Will.

A major benefit of a TDT is the income tax concession for minors who are taxed as adults with the benefit of the tax-free threshold, which in the current year results in up to a tax-free threshold of $18,200 for each individual minor beneficiary.

Another advantage of the Testamentary Discretionary Trust is that it does not come into effect until death and until then the testator can deal with their personal property without restraint. While the testator is alive, he or she is free to change beneficiaries, trustees and the terms of the Testamentary Discretionary Trust at any time.

Discretionary Trusts are also useful shields in asset protection from former spouses or creditors, and they also enable the testator to protect their assets from being wasted by spendthrift beneficiaries and from being lost by addicted beneficiaries.

Summary of benefits of Testamentary Trust Wills:

  • Tax benefits on distributing income to minor children, grandchildren
  • Tax benefits on distributing income to lower-taxed beneficiaries
  • Protection of assets from former spouses,
  • Protection of assets from creditors,
  • Protection of assets from being wasted by spendthrift beneficiaries
  • Protection of assets from being wasted by addicted beneficiaries.

Discretionary Trust or Fixed Trust – What is the Difference?

A Trust left in a Will may be a Testamentary Discretionary Trust – which allows the trustee the discretion to distribute income and/or capital to an identifiable class of beneficiaries. Or, it may be a Fixed Trust where the income distribution is fixed for a period of time, after which the balance is held for the remainder beneficiaries.

When Does a Discretionary Trust Come into Effect?

The Trust commences at the completion of the administration of the estate. At the earliest, the Trust can commence when the trustee first pays income and is entitled to the income to the extent of the amounts actually paid to them or actually paid on their behalf.

The main benefit of the Testamentary Trust (as distinct from using an Inter Vivos Trust) is that where there are minor children and/or grandchildren and/or great grandchildren (or it is still possible that there will be in the future) income can be distributed to them tax free, or at least at usual adult rates.

How Flexible is a Testamentary Discretionary Trusts?

A TDT, as distinct from a Family Discretionary Trust, is generally drawn to allow for the creation of one or a number of Trusts at the time of the death with a wide range of potential beneficiaries, different property, different trustees and appointors. It can also be simpler for a trustee to deal with the property in different Trusts instead of trying to have one Trust cover all.

Are there Capital Gains Tax Liabilities for Testamentary Trusts?

There is no CGT liability on the transfer of any asset from the executor to the trustee or when the executor starts holding the property as the trustee of the particular Testamentary Trust.

Do you Need One or More Separate Testamentary Trusts?

Much depends on what you are trying to achieve. Changes in the law can also affect the way you draft your Testamentary Trust. It is not a case that once the Will is drawn you can just set and forget. The rule of thumb is that will makers should review their Will and the Trusts created in that instrument as their personal circumstances change.

At Antunes Lawyers, our Wills and Estate lawyers in Sydney can assist you in all estate planning matters, including making a Will and drafting your Testamentary Discretionary Trust. We ensure that all of your assets are captured to pass to family members and loved ones so your wealth can be passed down the generations.

Contact us online or by calling 02 9964 0499 today.

The articles on this website comprise legal general information and not legal advice. The general information presented here must not be relied upon without legal advice being sought. In the event that you wish to obtain legal advice on the contents of this general information you may do so by contacting our office or your existing solicitor.