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.