Discretionary Testamentary Trusts

23-Sep-2010

The deceased’s last will and testament contains the rules by which their estate is managed by their Executor (Trustee or Legal Personal Representative, often referred to as the LPR).

The LPR pays the debts & expenses of the deceased and distributes the remaining assets to the beneficiaries in accordance with the Will.

Once all liabilities are paid and all assets distributed to beneficiaries, the estate is finished.

Rather than distribute assets to a beneficiary personally, some Wills set up a Discretionary Testamentary Trust (DTT). Assets are distributed to the DTT which is controlled by the beneficiary.
The beneficiary does not own the assets but controls them and has discretion over the allocation of income and capital of the trust to their family members.

A DTT can last for 80 years after the date of death of the deceased.

The advantages and disadvantages of DTTs are set out as follows:

 Advantages

 Disadvantages

 • Ability to distribute income and capital gains from sale of investments to multiple people thereby lowering the overall tax burden  • Land tax may be payable on any properties owned (this may not apply to properties owned privately)
 • Ability to distribute income or capital gains to minors (typically grandchildren or great-grandchildren) who are taxed as adult tax payers.  • Operating a trust structure is more complex and will attract higher accounting fees than direct asset ownership
 • Trust structure allows family members to be involved in the management of the trust assets (as trustees) hence creating a family asset pool  • May require siblings to act co-operatively as trustees. Could be a problem where siblings are in conflict.
 • Trusts can operate for up to 80 years and hence last longer than an individual’s lifetime  • The trust ends at the end of 80 years, when all trust capital and income must be distributed to beneficiaries. This may have CGT and stamp duty implications for the final generation of trust beneficiaries.
 • Can be used to hold and invest funds for a specific purpose – such as holding properties or educating grandchildren  • There is no absolute protection against attacks on trust assets, court decisions and changes to legislation can further diminish the protection offered by trusts
 • Assets of the trust receive significant protection from claims of bankruptcy, divorce and other attacks if disqualification clauses are inserted in the terms of the trust  





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