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Do you need Testamentary Discretionary Trusts? The what, why, who, how

in Estate Planning by Slater and Gordon on
Do you need Testamentary Discretionary Trusts? The what, why, who, how

Lawyers Rabia Javed-May and Laura Harding walk you through your options

What is the best way to provide for your partner, spouse, children or loved ones when you die? The answer may be a Testamentary Discretionary Trust (TDT). TDTs can offer significant advantages for beneficiaries and can last for generations.

What goes into structuring a TDT?

Trusts are a structure for management and distribution of assets. There are four main roles in a trust, including the:

  1. Trust maker (in a TDT this is the will maker), who provides the assets
  2. Trustee/s, who manages and distributes the assets
  3. Appointor/s, who can hire and fire the trustee
  4. Beneficiary / beneficiaries, who are entitled to receive income and/or capital distributions from the assets themselves

A TDT is a trust set up by your Will. TDTs are a valuable estate planning tool used to maximise flexibility, protect beneficiaries and minimise tax implications. They are especially useful where you have a vulnerable beneficiary who has a disability, is at risk of financial stressors such as a family breakdown or bankruptcy, or for beneficiaries who have difficulty managing money.

A TDT may also offer significant protection and benefits to beneficiaries who are not considered high risk. These TDTs are often controlled by the beneficiary themselves, and allows them to distribute the assets and income to themselves and their family.

Why are TDTs recommended?

TDTs offer great flexibility for managing and distributing an estate. By working with an experienced Estate Planner there are many outcomes that can be achieved that are simply not possible in a standard Will. For vulnerable beneficiaries, a friend, family member or company can be appointed as trustee to manage their inheritance for them, to ensure they are provided for well into the future.

One of the major benefits of a TDT Will is asset protection. Assets held in a well-drafted TDT can be protected from external creditors, as the money is held to be owned by the trust and not the beneficiary. Similarly, assets cannot be accessed in the case of a marriage or relationship breakdown, although they may be considered as a financial resource by the courts. There are many strategies that trustees can use to ensure money stays protected whilst offering maximum flexibility for beneficiaries under the guidance of an experienced financial advisor or lawyer. One example is that a beneficiary can loan themselves money from the trust to pay off their mortgage. This means they have the benefit of paying off the house, whilst still retaining the protection of the trust.

Tax advantages of TDT

TDTs also offer tax advantages in many circumstances. Whilst estate assets are generally not subject to tax upon distribution (with the exception of superannuation in some circumstances), any income that estate assets earn if invested will be taxed at the beneficiary’s income tax rate. If these funds are held in a TDT, the beneficiary has greater flexibility over when and to whom this income is distributed. Under TDTs, distributions to minor children receive normal tax concessions with a tax-free threshold of $18,200 plus a low income tax offset, depending on the child’s circumstances. Compare this to distributions to minor children under a normal family trust that will generally be taxed at the top rate of 46.5%. Depending on your circumstances and the value of your estate, a TDT can result in thousands of dollars in tax savings for beneficiaries and their families every year.

Who should be getting a TDT?

You should be considering a TDT in your Will if:

  • There will be a significant distribution to any beneficiary in your Will
  • You wish to provide asset protection to a beneficiary in cases of family law proceedings or bankruptcy
  •  You have a vulnerable beneficiary who would benefit from someone else managing their inheritance.

Following your death, there are ongoing administrative costs for a TDT, such as accountant fees for lodging tax returns, so it is worth considering whether there are sufficient assets in your estate and discussing with a specialist Estate Planning lawyer about your particular circumstances.

How do you go about setting up the TDT the right way?

Our cost and obligation free initial appointments with an Estate Planning specialist can help you to determine whether a TDT Will is the right fit for you and your family. To schedule an appointment with us, call 1800 555 777.