Testementary Discretionary Trusts

If organizing your Will is all about devising the best method to transfer assets upon death then establish within your Wills a Testamentary Discretionary Trust. James Legal Consultants offers expert legal assistance in this area with lawyers focused solely on estate planning issues. Fixed price quotations can be provided at an initial free consultation with no obligation to proceed. The considerable tax and asset protection qualities associated with a trust may be the most valuable gift you ever give to your partner and children.

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Under a simple standard “Mum and Dad Will” all assets usually go to the survivor of the husband and wife and then on the death of the survivor, everything goes to the children.
They will legally own the assets in their own names and any income generated by such assets is their responsibility to declare on their Personal Tax Return .On large estates significant tax liabilities may be incurred.

The thinking behind a testamentary discretionary trust is different.

Under this structure the ultimate control and legal ownership of your estate assets rests with your trustee.
Your beneficiaries do not legally own the assets of the trust, they merely have a right to be considered in the distribution of the income or capital of the trust.
The trustee decides which beneficiaries will receive income and capital from the trust.

It is this testamentary trust regime which allows for some of the following benefits to be achieved:

The Advantages

Minimising Taxation

•Any income and capital gains earned by Testamentary Trusts can be split amongst the beneficiaries of the Trust in a much more effective way.
Children may be allocated income at adult tax rates. This means that each person who receives income receives it up to the tax-free threshold and has the benefit of the lower scale of tax rates till the top marginal rate is reached. A family of a surviving parent and even just two children will be much better positioned to financially cope with the loss of a breadwinner.
•Significant tax savings can be achieved on an annual basis.
•You can still retain control of all assets. You will have access to the income and capital of the Trust.
•The wide net of beneficiaries permits not only parents but also, grandparents to allocate income to grandchildren for educational purposes and achieve tax savings as well.

The following simple example illustrates the benefit of income splitting in a testamentary discretionary trust.

Helen and Ian have one son, Michael.

Michael earns $80,000 pa as an engineer and is married to Sue who does not work or earn income from any other source. Michael and Sue have three young children, David, Paul and Anthony.

Helen and Ian wish for Michael to receive their combined estate assets of $500,000 on the death of the survivor of them.

They are however unsure whether to:

* gift their combined estate to Michael personally; or
* establish a testamentary discretionary trust with Michael as the trustee.

If after Helen and Ian’s death the $500,000 was invested and earned net income at a rate of 6% pa then the income tax liability for the 1st year under each of these options would be:


As you can see, if Michael received his inheritance personally, he would be required to pay substantially more tax than if he was able to split this income between his family members.
It may be that a combination of the two options is suitable. Michael may wish to receive part of his inheritance personally, say $100,000, in order to discharge the mortgage on his family home, but then wish for the balance of $400,000 to be held upon a testamentary discretionary trust with the ability to split income between his family.

A well drafted Will can provide this additional flexibility and in this way Michael may structure the manner in which he takes his inheritance so as to suit the needs of his family and to minimise his overall income tax liability.

                                                 Asset protection

A testamentary trust will protect the assets held by the trust should any of your children or either of you be involved in any legal proceedings.
If for example one of your beneficiaries is entrepreneurial and fails in business estate assets inherited will be protected from their creditors in the event bankruptcy proceedings are instituted.
Statistics reveal that over fifty percent of marriages end in divorce. A testamentary trust will assist in protecting your assets in the event that any of your beneficiaries are involved in divorce.
Recent changes to the law may reduce this protection but these changes are largely untested in higher Courts. It remains the best option available.
The use of Trusts results in a clear separation of those assets that have been inherited by your beneficiaries and those assets that have been acquired during the marriage. This will assist to preserve estate assets in any split of property arising in Family Law Court proceedings. Settlement negotiations are also enhanced where assets are positioned with alternate Trustees out of the direct control of a party to legal proceedings.
A carefully drafted testamentary discretionary trust will help to ensure your assets will continue to advantage your beneficiaries without being needlessly wasted through the actions of a spendthrift , intellectually incapable, bankrupt or divorcing beneficiary.

An example may help to illustrate the value of these protection benefits.

Mary is survived by her children, Jane and Ed who benefit from Mary’s estate to the tune of $250,000 each. Mary’s Will is structured so that the gifts are inherited by Jane and Ed personally.

Jane is married to Peter who has a business. As is often the case, Jane being a director of the company for the business, has signed a personal guarantee for the debts of the business. Unfortunately Jane and Peter’s marriage turns sour and their business ultimately fails. When the bank calls in Jane’s personal guarantee she is forced to sell the assets she has acquired from her mother’s estate to repay the debt. If that wasn’t bad enough, later that year at tax time, Jane discovers that the sale of her mother’s assets has triggered a huge capital gains tax bill which has ultimately left her worse off than if she had received no inheritance at all.

If Jane had not received the $250,000 worth of assets from her mother’s estate but instead these assets had been placed into a testamentary discretionary trust this problem may have been avoided and Jane may still have the benefit of her inheritance as she does not have the legal control and ownership of these assets as the assets are not hers personally and are therefore inaccessible by the creditors of the business.
Vulnerable Beneficiaries

Ed has always had problems dealing with money and could often been found down at the pokies or at the casino gambling away his pay. A lump sum inheritance of $250,000 ended up providing him with a few nights of gambling bliss but eventually left him with nothing.

If Mary had established a protective testamentary trust in her Will for Ed with an independent trustee, the trustee could monitor the flow of funds available for Ed and ensure these funds were applied in a more productive manner for Ed’s welfare and benefit well into the future.

For professional assistance with Enforcement of Agreements, please contact James Legal Consultants using the Contact Us link above.