In order to determine the benefits of a testamentary discretionary trust it is necessary to understand what it actually is.
What is a Testamentary Trust?
Generally, a trust is an ownership structure where the assets of the trust are held by one party (the trustee) for the benefit of another party (the beneficiaries).
A testamentary trust is a trust that is created through a Will and does not take effect until your death. This differs from other types of trust which are usually created by deeds and commence during an individual’s lifetime.
One Will can create multiple trusts and it is possible to have different provisions which can be customised to the needs of your beneficiaries. However, the trust must clearly identify who the beneficiaries are in order to be effective. If there is any uncertainty as to who the beneficiaries of the trust, then it is possible that the courts can resort to the default position as if you died without a Will.
What is a Testamentary Discretionary Trust?
A testamentary discretionary trust is where the trustee has full discretion in regards to the distributions made to the beneficiaries. In some circumstances, the trustee may also have the ability to wind up the trust at any time.
What are the Benefits of a Testamentary Discretionary Trust?
There are significant advantages of using a testamentary discretionary trust. They are as follows:
Tax Advantages: The main tax advantage of a testamentary discretionary trust is that any income, capital gains and franked dividends can be distributed amongst the beneficiaries each year in order to achieve tax reduction. The trustee has the ability to distribute the income of the trust to any beneficiaries of the trust and in the proportions that take the most advantage of the beneficiaries’ personal marginal tax rates. Unlike tax on income for other types of trust, beneficiaries under the age of 18 are taxed at a normal adult rate rather than at penalty rates. From 1 July 2014 a person under 18 years of age can potentially receive $20,542 tax-free if they have no other income. As a result, the possible tax savings of distributing income to children can be quite substantial.
Protection of assets: Another advantage of a testamentary trust is that the assets are owned by the trustee, and the benefit of the income and capital of the trust passes to the beneficiaries. This provides a separation of control and benefit that allows a testamentary trust to provide protection of assets from any legal action involving the beneficiaries. This provides protection from waste and dissipation by the beneficiary and claims on the beneficiary’s assets due to marital or commercial breakdowns.
Flexibility for your beneficiaries: As mentioned above, the trustee has the ability to distribute income and capital to any beneficiary of the trust in any proportion and at any time. The trust can operate for up to 80 years or can be wound up at any time. Therefore, a testamentary trust provides the beneficiaries with both flexibility and control over how they obtain their inheritance.
If you need help with a Testamentary Trust or require further information please get touch with one of our tax lawyers. Contact The Quinn Group on 02 9223 9166 or submit an online enquiry.