A testamentary discretionary trust is a powerful tool provided by law which, if leveraged properly, can protect your assets and ensure financial security for your loved ones long after your passing.
What exactly is a testamentary discretionary trust? How does it work? In this article, we'll discuss testamentary discretionary trusts and why they might be a wise choice for your estate planning needs.
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What is a Testamentary Discretionary Trust?
You may have heard people talk about family trusts from time to time. A testamentary discretionary trust has many similarities in that it is its own legal entity, it allows for sharing of assets and income, and it can have various control mechanism built into it.
When included into a will, you will usually hear the will referred to as a Testamentary Trust Will. This type of will typically includes a range of customised clauses which cause the testamentary trust to come into being upon your death, based on a pre-defined rule set which you set down in your will.
This means that there are no fees or expenses to establish and manage the trust while you are alive as it does not exist until you die.
Including a testamentary trust into your will is an effective way to establish a clear set of guidelines and rules which give effect to your desired inheritance plan. As its own legal entity, the testamentary trust must abide by the terms you establish it on.
This lets you, as the testator, decide how your assets are divided and best administered to protect your beneficiaries.
As described later in more detail, the terms of the testamentary trust can survive long into the future, which means you can ensure future generations of your family are well looked after.
These may be grandchildren, great grandchildren, nieces, nephews and other family members that you decide.
A testamentary trust is controlled by a ‘trustee’, often a trusted family member or professional advisor. The trustee makes investment, distribution, and tax planning decisions for the trust in such a way that is in the best interests of the beneficiaries.
Similar to family discretionary trusts, a testamentary trust generally allows trustees to use their discretion on how best to distribute income and capital to beneficiaries.
You can set down the degree to which trustees can exercise discretion to adjust allocations based on age, disability or need for upkeep, circumstantial financial needs, or tax law changes.
How Does a Discretionary Testamentary Trust Operate?
A testamentary discretionary trust lets you decide how your assets are distributed after death. This is done by customising the rules of management and distribution which the trustees must follow.
First, you must designate a trustee to manage a testamentary discretionary trust for the beneficiaries. This trustee may be an individual, several individuals, or a professional body offering trustee services.
You then need to determine what assets are to form the basis of the trust upon your passing. When you pass, those nominated assets are set aside and form the ‘capital’ of the fund which the trustee is then to manage and distribute, including any income derived from its management.
The beneficiaries must be nominated within the terms of the will establishing the trust so that the trust has clear and identifiable beneficiaries.
The trust deed beneficiaries usually have little control over decisions or rights to specific assets held by the trust. Instead, the trustee decides trust distribution eligibility at their discretion to satisfy beneficiary needs as they may change from time to time.
So, it is important to ensure the trustee is comprised of responsible and trusted peoples.
Conclusion
A testamentary discretionary trust can be a great tool to protect your wealth. It gives testators control over asset distribution and provides flexibility for beneficiaries.
An experienced wills lawyer can assist you manage legal procedures and document your objectives. With appropriate preparation and expert help, you can develop a plan that safeguards your legacy and provides you peace of mind that your loved ones will be cared for as you intend.
While there is some complexity to utilising a testamentary discretionary trust in your estate planning strategy or acting as trustee for one, the benefits can be significant and worth the inconveniences that complexity brings.
We have found that an ‘education session’ for the trustees and beneficiaries go a long way to ensuring everyone understands the real benefits that can be derived from your testamentary trust, if properly managed.
By understanding how to use the trust as a tool in such a session, your trustees and beneficiaries can achieve practical solutions to protect against adverse circumstances – such as personal bankruptcy, legal claims which put personal assets at risk and also relationship breakdown resulting in property separation.
A testamentary trust may not be for everyone – while some protections will apply regardless, those with a very simple estate or small family may derive a more limited degree of benefit.
With the help of an experienced solicitor, you can make an informed decision about whether a testamentary trust will achieve your intended goals.
To start exploring the benefits of a testamentary discretionary trust, get in touch with our estate planning lawyers to discuss your circumstances.