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The Benefits of a Testamentary Discretionary Trust

Unlock the power of Estate Planning with a Testamentary Discretionary Trust!


When it comes to safeguarding your assets and securing the financial well-being of your loved ones, estate planning is an essential step.

While many people are familiar with the concept of a trust, there is one particular type that stands out for its flexibility and versatility - the Testamentary Discretionary Trust.


Designed to provide you with enhanced control over how your assets are distributed after your passing, this powerful legal tool offers numerous benefits that can help you protect your wealth and leave a lasting legacy.


In this blog post, we will explore the benefits of implementing a Testamentary Discretionary Trust in your estate plan.


Whether you're seeking asset protection, tax efficiency or simply peace of mind knowing that future generations will be taken care of, read on to discover why this trust should be on every savvy individual's radar.


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Who Should Use A Testamentary Discretionary Trust?

Who should use a testamentary discretionary trust? This is a question that many individuals and families ask when considering their estate planning options.


A testamentary discretionary trust can offer several benefits for those looking to protect and manage their assets for future generations.

One group of people who may benefit from a testamentary discretionary trust are parents with minor children. By setting up this type of trust, parents can ensure that their children's inheritance is managed responsibly until they reach a certain age or milestone.


It allows the parents to nominate responsible and trusted adults to make informed decisions to ensure that the inheritance is not squandered by decisions which less mature children may otherwise make.


This can provide peace of mind knowing that their children's financial needs will be taken care of even if the parents are no longer around.


Another group who may find value in a testamentary discretionary trust are individuals with complex family dynamics or blended families. In these situations, it may be important to have control over how assets are distributed after death.


The flexibility offered by this type of trust allows for the trustee to make decisions based on individual circumstances, taking into account any conflicts or sensitivities among family members.


Business owners and professionals also stand to benefit from utilising a testamentary discretionary trust as part of their estate plan. By protecting assets within the structure of this type of trust, individuals can safeguard against potential claims from creditors or lawsuits.


High risk professions carry with them increased likelihood of being sued or becoming bankrupt. This type of trust can help retain the ownership and integrity of inherited assets by securing them in a separate legal entity.


There are various scenarios where using a testamentary discretionary trust can be advantageous. Whether you have minor children, complex family dynamics, or significant assets at stake, this type of trust offers flexibility and protection for your loved ones down the line.

Consulting with an experienced estate planning lawyer can help determine if incorporating such a trust into your overall plan is appropriate for your unique circumstances



The Advantages of a Testamentary Discretionary Trust


One of the key benefits of a testamentary discretionary trust is the ability to protect assets from potential risks such as bankruptcy or property separation in the event of relationship breakdown.


By placing assets in a trust rather than directly transferring them to beneficiaries, you may be able to help shield those assets from claims that may arise.


Another advantage is the flexibility it offers in distributing wealth among family members. With a testamentary discretionary trust, you have the power to specify how much each beneficiary receives and when they receive it.


This allows you to take into consideration individual circumstances such as age or financial responsibility before releasing funds. Furthermore, by appointing trustees who will manage the distribution of assets according to your instructions, you can ensure that your wishes are carried out even if circumstances change over time.

The trustees act as custodians for the assets which are inherited into the testamentary trust and make important decisions based on what they believe would be best for the beneficiaries.


Importantly, testamentary discretionary trusts can hold a myriad of asset types including cash, property, company shares, and intellectual property.


This means you can gift into a testamentary trust almost any type of asset you hold. The variety of qualifying assets lets you customise your estate inheritance strategy.

Once established upon death, a testamentary trust fund can generate revenue or support beneficiaries immediately. The trustee can preserve and manage property transferred into the trust in a responsible manner where beneficiaries may be unable to do so themselves.


This allows value growth and a protection much sought after, particularly for underage beneficiaries, those with disabilities or, to be blunt, those who have not learnt to handle money efficiently or responsibly.


You can even establish multiple testamentary trusts under your will, to hold different types or amounts of assets, on distinctly different terms.

A testamentary discretionary trust is a very versatile tool and can therefore be a good choice for people who want to decide how their fortune is allocated and managed after death, protecting their loved ones on a responsible basis for years into the future.


A testamentary discretionary trust can also protect assets from creditors and lawsuits. The trustee might withhold assets from beneficiaries who are struggling financially or the subject of a legal claim that is putting their personal assets at risk.


The act of withholding allocation can be used to preserve the trust fund until such time that those unfavourable circumstances have passed.


A well-structured trust can also help shield inherited wealth to minimise inheritance being taken away by partners of beneficiaries who may separate, and if not for the trust fund may otherwise form part of the property pool to be divided up.


Due to the degree of discretion that the trustee can be authorised to exercise in administering a testamentary trust, the trustee can consider each beneficiary's needs at any given time and determine the most appropriate disbursement to them.

A testamentary discretionary trust can help your family with income splitting in a legal and compliant manner, and such a way that is most beneficial at any given time.

This may include helping beneficiaries manage tax liabilities by distributing income and capital gains to more effectively navigate taxation laws that may apply from time to time.


Before creating a testamentary discretionary trust, it is important to examine tax implications based on individual circumstances and legislative changes. This is particularly important if beneficiaries are foreign residents.

As this type of trust can allow for long-term management of assets for up to 80 years (as at date of this article), the benefits provided can be realised far into the future.

The trustee can be changed from time to time as trustees become unable or unwilling to manage the trust fund. This means that control of the trust fund can be retained by the family, enabling intergenerational asset preservation and succession planning.



Drawbacks of a Testamentary Discretionary Trust


A testamentary discretionary trust has many benefits, but it's vital to evaluate the drawbacks. Trust creation and maintenance can be complicated and time-consuming.


Planning, legal paperwork, and continuing management (including tax returns) are needed.

Managing a testamentary discretionary trust can be more expensive, but typically similar to most family trusts.


Trustees and tax reporting typically incur continuing annual costs. Creation of a testamentary trust will generally be more expensive than completing a ‘basic will’ with a lawyer.


So, the upfront cost may not be affordable to some people wanting to complete a will. It is also important that you obtain sound financial advice in relation to taxation as certain laws applying to trusts generally could attract unwanted tax to the distribution of assets to the testamentary trust or to the ongoing management of it.


A testamentary discretionary trust's lifespan is another drawback. This time may be set to a given time or event under the terms of the trust, or as the law changes the time frames could vary or even be removed. For now, the maximum ‘lifespan’ of a testamentary trust is 80 years.


Flexibility in allocating assets among beneficiaries might be beneficial, but it also implies trustees may not follow the testator's final desires. The degree of discretion that a trustee is entitled to exercise in allocating the fund to beneficiaries may cause family conflict and relationship tension.



Conclusion

A testamentary discretionary trust can offer numerous benefits for individuals who want to ensure their assets are protected and distributed according to their wishes.


By establishing this type of trust in your will, you can provide flexibility, control, and protection for your loved ones after you're gone. A testamentary discretionary trust provides tax planning opportunities.


Through careful estate planning strategies within the framework of this type of trust structure, it's possible to manage tax liabilities more effectively upon transfer of assets to future generations.


Creating a testamentary discretionary trust can provide peace of mind knowing that your hard-earned assets will be managed wisely and distributed according to your desires – all while helping to protect against unforeseen events that could jeopardize their intended use.


Consulting with an experienced estate planner is crucial in order to fully understand how this type of arrangement works and tailor it specifically for your unique needs and circumstances.


To learn more how a Discretionary Testamentary Trust Operates have a read of our previous article on What is a Testamentary Discretionary Trust?

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