A testamentary discretionary trust is established by the terms of your Will and gives flexibility as to how and when your beneficiaries receive benefits from your estate. It can be considered as part of broader estate planning where control, beneficiary protection and future family circumstances need to be addressed.
For current context, read our Legal Guide: Testamentary trusts: the death tax is off the table.
This is possible because, under a testamentary trust, the assets of your estate will be held by a trustee for the beneficiaries and not by the beneficiaries themselves. This applies despite the fact that the trustee can be - and usually is - also the beneficiary of the trust, which gives them total control of their inheritance without the assets being at any risk. A testamentary trust is discretionary as the trustee will hold the assets at its discretion, for the protection of those assets and the beneficiaries.
Tax and planning considerations
Testamentary trusts may have tax and planning consequences that should be considered with appropriate tax and financial advisers. From a legal perspective, the trust terms should clearly record trustee powers, beneficiary classes and how trust assets may be controlled.
Beneficiary asset protection
A testamentary discretionary trust protects your beneficiaries from future creditors, predators, and the tax man, or possible claims on their inheritance due to a marital breakdown or business failure. In certain circumstances the trust can even protect the assets from misuse by the beneficiary themselves. For example, if a beneficiary has an addiction, a bequest could be left in a trust which allows them to receive appropriate maintenance and treatment but does not allow them to access the capital.
Additional Controls
Additional controls determining access to specific assets and for what purpose can also be specified within the trust.
Understanding Testamentary Trusts: Let our videos explain.
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