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Testamentary discretionary trust
A Testamentary Discretionary Trust is a discretionary trust created by a Will. Such trusts have the flexibility and absence of fixed entitlements that make them ideal for the required purposes set out below.
Generally discretionary trusts are characterised by a set of potential beneficiaries who have no formal entitlement to the assets or income of the trust until the trustee exercises its discretion to give them that entitlement. With respect to the trust’s assets, the trustee can exercise that discretion any time and certainly when the trust is wound up (called ‘vesting’). With respect to the trust’s income, that exercise of discretion by the trustee normally occurs immediately prior to the end of each financial year.
Testamentary Discretionary Trusts have become popular in recent years because of the concessional tax treatment for income distributed to children from a Testamentary Trust under Division 6AA of the Tax Act. But Testamentary Discretionary Trusts can provide a range of benefits including:
- asset protection;
- family asset retention;
- protection of vulnerable beneficiaries;
- providing for the current spouse while insuring the deceased’s children ultimately get estate capital; and
-
tax benefits for infant beneficiaries.
Asset Protection
Your Will can provide that your estate is held in a Testamentary Discretionary Trust with a number of potential beneficiaries, including your spouse, children and grandchildren. If any of those beneficiaries has the prospect of having their assets seized by their creditors the discretionary nature of their interest in the Trust may protect their entitlement to estate assets. This would be achieved by the Trustee simply refusing to exercise any discretion in their favour until the claims against them were resolved and no longer existed – even after a period of bankruptcy if that was necessary.