Who needs a trust and why?
What does a trust have to do with a will?
What is a discretionary testamentary trust?

A discretionary testamentary trust is a type of trust that is created under a will and comes into existence upon the death of the will maker. There are advantages to establishing a trust like this, which include tax minimisation, protection of assets and flexibility.

A discretionary testamentary trust must have a trustee: a person/s or company who will be charge of the trust.

The trust will own assets under the will, and assets can include cash, real estate, shares, cars, boats, artworks or any other assets.

The trust will have beneficiaries – those people who may benefit under the trust; usually family members and can be other persons or entities.

The trustee has discretion to distribute income or capital from time to time in varying proportions, amounts and categories to the beneficiaries of the trust. The trustee has the discretion to make distributions so any appointed trustees should be reliable and trustworthy.

Advantages of a Discretionary Testamentary Trust
Often one of the biggest assets owned by someone is their life insurance policy. When owned by the trust (by being paid out into the estate of the person whose life was insured), the income from the proceeds of such life insurance policy can be split among children and others rather than one person paying all the tax on it (at much higher rates). This is because the recipient of the income pays the tax, rather than the trust. From a tax point of view, sharing the taxation burden makes sense. Tax is still paid; just paid at much lower rates.
A discretionary testamentary trust can protect assets is from bankruptcy. Because the owner of the assets is the trust, they cannot be liquidated if one of the beneficiaries goes through a bankruptcy.
There could also be protection if a beneficiary enters a relationship that ultimately fails. If there is a property settlement, it is less likely that the assets of the trust will form part of the marital pool of assets that will be divided.
There are also advantages in the area of capital gains tax. The sale of an ordinary asset will trigger a capital gains tax event. But if the asset is held in a trust, it can quite often be moved to a beneficiary without triggering a capital gains tax event.

Overall discretionary testamentary trusts offer more flexibility, especially when catering for a myriad of ‘what-if’ events.

Case Study

John and Judy establish a discretionary testamentary trust which comes into effect upon their deaths. They have a son, Peter, who will be the trustee of the trust. Beneficiaries of the trust include Peter, his wife Sarah, their children and grandchildren.
The assets in the trust include both life insurance proceeds, the family home, an investment property and some cash. When Peter assumes control of the trust after the death of his parents, he is able to split income from the life insurance proceeds to his children and grandchildren at low tax rates.
Later, he will also be able to transfer the family home and investment home to his children (if he chooses to do that) without paying capital gains tax on the asset transfers.
Should he, his children or grandchildren face bankruptcy proceedings, the assets held by the trust should not be liquidated, offering protection for future generations.
Should Peter and Sarah divorce, there is a better chance that the assets in the trust will be protected from the property settlement.

The benefits of a discretionary testamentary trust will only come into effect upon your death, but it is worth considering to protect assets for future generations. You should seek specialist advice when considering establishing a trust.

Bryan Mitchell is an Accredited Specialist in succession law (wills and estates including estate planning). Mitchells Solicitors has a second, brand new location. You can visit us by appointment only at: Riverside Centre Level 18, 123 Eagle Street, Brisbane.

On 21 October 2014 the Justice Legislation Amendment (Succession and Surrogacy) Bill 2014 Act (the Act) received assent – it is now official, the landscape for Estate litigation has changed.

What is the impact?

The Act changes the law as to who can challenge an Estate in Victoria (Estate claim). The Act comes into effect from 1 July 2015 and will apply to :

an estate of any person who dies on or after this date; and
any claims made after this date.

Up and until 1 July 2015, any person can continue to bring an Estate claim on the basis that the Estate (either by Will or the intestacy laws) does not adequately provide for them. The range of persons who can claim can be as wide as children, domestic partners, step children, grandchildren, carers, related family members and non-family members (such as friends, neighbours).

Who can claim?

From 1 July 2015, essentially two categories of persons will be able to claim. Only those who are ‘eligible’ and who fit into a defined category will be able to claim, they are:

Group one – related/immediate family members :

a spouse or domestic partner;
a child or stepchild of any age with or without a disability;
a person who for a substantial period during the life of the deceased believed that the deceased was his/her parent and was treated by the deceased as a natural child of any age; and
a former spouse or domestic partner (only if no property settlement reached).

Group two – others :

a grandchild;
a registered caring partner;
a spouse or domestic partner of a child of the deceased (including a step child or person who for a substantial period during the life of the deceased believed that the deceased was his/her parent) if the relevant child of the deceased dies within one year of the deceased’s death; and
a person who, at the deceased’s death is a member of the household in which the deceased was also a member (or had been in the past and would have been likely again in near future have the deceased not died).

If an eligible person forms part of group two :

that person must be wholly or partly dependent on the deceased for proper maintenance and support; and
the Act casts an obligation upon the Court to assess that person’s ability to, by reasonable means, provide for their own proper maintenance and support.

The Act is not as restrictive for adult children/step children as what was contemplated in the Bill. For instance, the requirement that an adult child or step child be wholly or partly dependant on the deceased for their maintenance and support has been removed.

It is likely that there will be a significant number of claims issued leading up to 1 July 2015.

Post 1 July 2015 it is likely there will be a significant increase in the number of persons who become a registered carer, with Births, Deaths and Marriages. Those persons who can be registered as a ‘registered caring partner’ do not need to be a direct family member.

There is also likely to be an increase in executors or administrators delaying applications for a grant of probate or letters of administration for a deceased Estate so as to avoid claims being brought before the commencement of the Act. This may well result in different litigation being issued to force an executor/administrator to apply for a grant of representation, rather than stall.

The positive outcome is that a Willmaker’s fundamental rights to leave their estate as they see fit is strengthened and deceased estates will be less susceptible to opportunistic claims.

To read the full article, please click here.

If you have any queries please either contact Sam Frey, Jennifer Maher or Sharon Favero.