Join Australia's most dynamic and respected property investment community

Legal Tip 9: What is a Testamentary Discretionary Trust?

Discussion in 'Legal Issues' started by Terry_w, 27th Jun, 2015.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Legal Tip 9: What is a Testamentary Discretionary Trust?

    Once you start to build up some assets each of us should seriously consider incorporating a testamentary discretionary trust in our wills.

    Most wills contain simple bare trusts, but testamentary discretionary trusts are the more complex trust which can run up to 80 years (or more in some instances). You may still leave certain assets directly to people with other assets left to the trustee of the trust on the terms as outlined in the will. Generally they will be 20 to 30 pages in length and there can be 1 trust or multiple trusts in the one will.

    The trust terms are set up when the will is done, but the trust comes into existence after the death of the testator. The testator is the settlor of the trust and the initial trust property is what the settlor transfers to the trustee. There is no CGT or stamp duty on the set up or the initial transfer of funds to the trust and property can even be transferred from the trustee to a beneficiary years later without CGT being triggered.

    The trust can also incorporate a sub trust to cover superannuation - a superannuation proceeds trust. It can be very important to segregate super as there are different tax consequences depending on who receives the super.Paying it to the trustee or into the pot of the residue of the will can mean it is taxed.

    The terms of a testamentary trust can be wide and varied - might cover that next time.
     
    Anne11, Dale, larrylarry and 3 others like this.
  2. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    837
    Location:
    WA
    Great to have these tips Terry
     
  3. Tim & Chrissy

    Tim & Chrissy Well-Known Member

    Joined:
    5th Dec, 2015
    Posts:
    813
    Location:
    NSW
    Does this Trust type allow the division of income among beneficiaries each financial year?
     
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    It depends on the terms. You can draft it so income is accumulated, or you can have it so income can be distributed to different classes of beneficiaries. It can be set up like a normal discretionary trust.
     
    Last edited by a moderator: 4th Nov, 2016
  5. Tim & Chrissy

    Tim & Chrissy Well-Known Member

    Joined:
    5th Dec, 2015
    Posts:
    813
    Location:
    NSW
    So each financial year when we do our tax we can split the liability among the beneficiaries?
     
  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    The trust could distribute its income to the beneficiaries and this income would be included in the beneficiaries tax returns. The trust income is added to other income of the beneficiaries and they are the ones that would pay tax on it.

    The benefit with a testamentary trust is that children can earn up to $20k pa and pay no tax. Whereas in a trust set up outside a will the children can only earn $416 before they are taxed at 66%.
     
    Last edited by a moderator: 4th Nov, 2016
  7. Tim & Chrissy

    Tim & Chrissy Well-Known Member

    Joined:
    5th Dec, 2015
    Posts:
    813
    Location:
    NSW
    Fantastic, I was reading up further on them and became confused about whether or not the trust only came into effect upon death.

    As it is linked to my will would it normally be beneficial to have the solicitor who drafted the will set up the trust?
     
    Last edited: 18th Dec, 2015
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    Testamentary trusts can only come about at death.

    If the solicitor knows how to draft one then yes. But beware, some think they do but don't. There is even one firm out there which just staples a discretionary trust deed to a normal will.
     
  9. Tim & Chrissy

    Tim & Chrissy Well-Known Member

    Joined:
    5th Dec, 2015
    Posts:
    813
    Location:
    NSW
    Okay so what sort of trust allows me to distribute the income to the kids each year?
     
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,970
    Location:
    Sydney
    While your alive a discretionary trust, a unit trust (if the kids are unit holders) or a hybrid trust. but they will be taxed at penalty rates over $416 in income pa if they are under 18.

    After your dead, a testamentary trust, whether unit, hybrid or discretionary. Minor children will then be taxed as adults.
     
    Last edited by a moderator: 4th Nov, 2016
  11. Tim & Chrissy

    Tim & Chrissy Well-Known Member

    Joined:
    5th Dec, 2015
    Posts:
    813
    Location:
    NSW
    Got it, so a discretionary trust is what I'm after and once the children turn 18 and get involved in the properties I will start distributing trust income to them.