Testamentary Trust v Discretionary Trust
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There are many reasons why setting up a trust can be beneficial for your family and your financial security, but how do you know which trust is best for you, your family and your personal situation and assets, how can a trust be set up to protect your financial interests moving forward?
Testamentary trusts – what are they and what are the benefits?
A testamentary trust is something which takes effect after the death of the person leaving behind their estate.
A testamentary trust is included in a will to provide the deceased with more control over the distribution of their assets as they are passed on to the beneficiaries. A testamentary trust works by transferring the physical assets (such as property, cash, shares or vehicles) to the trust for the use and benefit of the nominated beneficiaries. The beneficiary can enjoy certain aspects of use of the assets, such as living in a property or receiving an income from the trust and can also reap the benefits of the tax advantages and asset protection a trust can provide.
The biggest benefit of a testamentary trust is asset protection. When the assets are part of a trust in most circumstances they cannot be touched by a creditor if the beneficiary becomes bankrupt and they do not form part of the asset pool if the beneficiary has a relationship breakdown and needs to reach a financial settlement with their former spouse. Another benefit of a testamentary trust is being able to leave assets to a child or other family member who is not in a position to manage the assets themselves due to a health issue or disability, or because they have a history of financial instability due to a drug, alcohol or gambling addiction or simply due to poor money management. A testamentary trust allows the beneficiary to benefit from the assets in the trust without being able to squander them.
Testamentary trusts can also have significant tax benefits, depending on personal circumstances of the beneficiaries and the makeup of the trust’s assets. Any income from the trust can be split across multiple parties, including minor children who would not normally be taxed, therefore reducing the tax liability of the beneficiaries. You should seek advice from a tax professional to learn more about how the tax benefits may apply to your situation.
A discretionary trust operates during one’s lifetime and affords asset protection and tax effectiveness for the specified class of beneficiaries (compared to a testamentary trust which is only triggered after death). It allows for the accumulation and distribution of assets while the trustee is living, meaning new assets can be purchased and money can be invested by the trust. Beneficiaries of the trust can receive income from it each year as determined by the trustee.
The key benefit of a discretionary trust is its tax minimisation benefits and, as such, discretionary trust structures are typically adopted by families running a business.
How can I have my assets transferred to a trust?
If you are preparing a will or are thinking about transferring your assets to a trust you should seek the advice of a structuring and estate lawyer who can talk you through the benefits and disadvantages of each type of trust. Attempting to set up a trust without the advice of a legal professional could have negative implications on your estate and potentially open it up for disputes after you pass.
It is equally important to ensure a trustee is nominated to administer the trust. A structuring and estate lawyer can assist you in appointing a trustee to administer your estate.