What is a Testamentary Discretionary Trust?

Given that is an inevitable reality we all face, estate planning is an issue that affects everyone. The most common type of succession plan is a simple will, under which a deceased person’s estate is transferred to their spouse, family or whoever else they wish to leave their property and belongings to. There is however an alternative to this. A more advanced succession strategy is a will with testamentary discretionary trust. Whilst this is a more complex succession structure, a will with testamentary trust presents a number of significant advantages over a simple will.

Advantages of a Testamentary Discretionary Trust

Under this kind of structure, the residuary of the deceased’s estate is held in trust for the estate beneficiaries. In simple terms, a trust is a relationship that exists between an entity (referred to as a trustee) holding trust property for the benefit of the trust beneficiaries. The trustee holds the legal title to the property, however the beneficiaries possess a beneficial interest in it. Under a will with a testamentary discretionary trust, instead of the deceased’s estate being transferred to the estate beneficiaries, it is held in trust for their benefit. This poses two distinct advantages: protection of assets and tax planning.

An estate planning lawyer will assist you in the preparation of a will with testamentary discretionary trust. This kind of estate plan offers both asset protection and tax advantages.

Protection of Assets

A testamentary discretionary trust offers significant asset protection advantages compared to a simple will. This kind of succession planning structure can protect the assets and property you want to leave to your family third parties, such as creditors, in the event one of your estate beneficiaries becomes bankrupt or is subject to legal action or court proceedings. It also offers protection in the event of family breakdown. If you leave your estate to your children within a discretionary trust, it is difficult for these assets to be attacked by a former spouse of your children in the event of family breakdown.

Tax Advantages

If your estate is likely to generate significant income, a trust structure can be utilized to provide tax advantages. Trust income can be allocated or ‘streamed’ to beneficiaries in a manner that is most tax effective. Income that children receive from testamentary trusts is also treated favorably. Usually, unearned income that minors receive from trusts are taxed at a penal rate. Income received by children from testamentary trusts is taxed like adults, meaning that this money receives the benefit of the tax-free threshold and marginal tax brackets. A revenue lawyer can help with this expertise and experience can help you establish a will with testamentary trust that is tailored to best meet your needs and circumstances.

It is absolutely essential that you speak to experts with years of experience in this area to understand your options around a TDT and/or whether you need a Testamentary Discretionary Trust at all. The team at PG Gell legal are very experienced in this area and can help you through this process.

Peter Gell

Peter was admitted as a solicitor in 1981 and holds qualifications in law and a Masters degree in taxation conferred by the University of NSW. Peter practises in taxation advisory, estate planning and wills, probate and commercial law.