Legal Tip 338: The 7 Benefits of a Testamentary Discretionary Trust over a DT

Discussion in 'Wills & Estate Planning' started by Terry_w, 18th May, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Testamentary Discretionary Trusts, TDTs, are the ultimate structure. People are dying to get them they are so good. Testamentary trusts are trusts set up under someone’s will.


    But how do they compare to a normal Discretionary Trust set up during someone’s life time (an inter vivos trust).


    1. Life Span
    A trust has a life of just 80 years. If you intend to set up a testamentary trust in your will this 80 years will start at the date of your death – actually the date the executor transfers the assets to the trustee, so it will last a lot longer than one set up during your life time.


    2. Tax
    Income received by minor children is taxed at adult rates when received from a testamentary trust, but at penalty rates when received from a discretionary trust.

    Tax Tip 343: Tax Savings for Children with Testamentary Trusts Tax Tip 343: Tax Savings for Children with Testamentary Trusts


    3. Family Law
    Testamentary trusts provide superior asset protection on the breakdown of a relationship.


    4. Crafting the Deed
    Because circumstances change you can control the testamentary trust by changing it before you die. Changing a discretionary trust set up can result in both CGT and stamp duty being triggered.


    5. Main Residence CGT Exemption

    A property held by the trustee of a Testamentary could potentially qualify for the main residence CGT exemption. This is much harder in a discretionary trust.


    6. Land Tax Exemption

    Where a beneficiary lives in a trust property there could be a land tax exemption in NSW if the trust is a testamentary trust, but not a discretionary trust.


    7. Transfer without triggering CGT

    It is possible to transfer a property from a testamentary trust to a beneficiary, without triggering CGT. This is not possible with a discretionary trust

    See

    Tax Tip 194: Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT Tax Tip 194: Transferring a Property from a Testamentary Trust to a Beneficiary Without CGT
     
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  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    TTs also tend to have a more precise term for who benefits from the trust. eg Mary Smith, Mary and Peter Smith (siblings) or even two testamentary trusts one each for mary and peter. They also can often include limits on what benefits can be access by a beneficiary eg they can borrow trust capital but not demand it or be paid capital until a defined period of time or a defined event. They may be unable to vest until a specific age etc etc.

    DTs are easily obtained from legal document firms but TTs really need custom estate planning advice (not to downplay the need for a DT to be given legal advice) TTs generally are given legal advice and custom drafted as they are commonly a element of a last will and testament.

    DTs are usually quite broad and include "family" and related parties but without any obligation to give them any trust income or capital. However a TT may be very specific and limit a beneficiary to Mary Smith and her related trusts, companies etc. Or its may broaden and allow "her" family.

    TTs may also relate to very specific assets of the deceased (ie they often do not include the rest and residue type clauses in a will as this would add token cproperty content assets toa trust which are problematic to account for and manage vs say shares, property and cash) where a TT is an "accumulation fund" which may commence with a nominal settled sum (10 or $100 for example) then be added to by way of borowings and gifted sums and compounded growth.
     
    Last edited: 18th May, 2021