In general estate planning, when a person passes away the assets comprising their estate are transferred to their nominated beneficiaries. This means that the beneficiaries receive full title to those assets in their personal capacity.
Issues with this general form of estate distribution are that it does not guarantee the person’s estate will remain within the bloodline of their family and also will not be protected from third party claims. This may be fine for those who are not concerned with such issues however, for those who are, the use of testamentary discretionary trusts can be very useful.
Why a Testamentary Discretionary Trust?
There are many different types of trusts, however testamentary discretionary trusts are used for the purpose of estate planning and only come into effect upon the passing of the person who has created them.
Testamentary discretionary trusts are most commonly used in estate planning for the purpose of ensuring a person’s estate remains within their family bloodline and the assets of the estate are protected from third party claims.
What actually is a Trust?
It is important to understand that unlike a person or a company, a trust is not an individual legal entity; rather, a trust is a ‘body’ that holds property for the purpose of benefiting the beneficiaries of the trust.
A beneficiary of a trust can be a person, company or a trustee of another trust, who is entitled to receive benefit from the property of the trust. For the purpose of testamentary discretionary trusts, beneficiaries are generally always individual people, for example a spouse or children of the person who has passed.
Because a trust is not an individual legal entity, it needs a representative to act on its behalf; this representative is called the ‘Trustee’. The Trustees are responsible for the transactions the trust enters into and how the trust deals with and maintains the property contained within it.
A Trustee can either be an individual person, a group of individuals, a company or a combination of all three. In testamentary discretionary trusts the Trustees are generally the executors appointed under the Will, or the beneficiaries of the trust, but are normally individual people and not companies or other entities.
The relationship between Trustees and beneficiaries of a trust is such that the Trustees (in their capacity as trustee of the trust) take on the legal ownership of the property contained within the trust, whilst the beneficiaries are the actual beneficial owners of the property and are the only ones entitled to enjoy it. This relationship draws the distinction between what is legally owned by the beneficiary and what isn’t, which in return sets out what can be claimed against and what cannot.
How will a Testamentary Discretionary Trust protect my assets?
A good analogy to describe the operation of a testamentary trust is that it is similar to a safe; valuable belongings are kept inside the safe and only the Trustees have the key to unlock it and the power to distribute those valuable belongings.
In practice, the ‘valuable belongings’ are the same as the ‘property’ of the Trust and can include anything from money in bank accounts, shares, property and other assets that comprise a person’s estate.
The reason we use the analogy of a safe is because the underlying purpose of a testamentary discretionary trust in practice is to protect the property within it from claims by third parties (such as creditors or ex-spouses); similarly, a safe protects valuable belongings from people who are not entitled to them.
Continuing with the safe analogy; once one of the valuable belongings is taken out of the safe the item automatically bares the risk of being able to be taken by an unentitled party. The same goes for the property of a testamentary discretionary trust; once property is taken out of the trust and distributed to a beneficiary, that particular property is no longer protected by the trust. This means it is available to have claims brought against it by third parties should that beneficiary find themselves in such circumstance.
This is particularly useful in circumstances where a beneficiary under a testamentary discretionary trust may have a career in a profession where there is a high risk that they could be sued. It is also useful in protecting assets of an estate during a breakdown of a beneficiary’s spousal relationship as it ensures the ex-spouse cannot claim property that the beneficiary is entitled to whilst it is still held within the trust.
What else can Testamentary Discretionary Trusts do?
When incorporating testamentary discretionary trusts into a Will our drafting can also include ‘cascading bloodline provisions’. These provisions ensure your estate is passed down to the children of your beneficiaries should they have predeceased or not survived you for 30 days after your death. The purpose of such provisions enables your estate to remain in yours or your beneficiary’s bloodline and be passed down through generations.
Another advantage of incorporating a testamentary discretionary trust in your Will is that it enables more control over how the assets in your estate are handled after your death. As the property within the trust will be controlled by the Trustee and not the beneficiary, the Trustee will have the flexibility to adapt the management of the property in the trust to the changing needs of your beneficiaries.
This flexibility is particularly vital where beneficiaries are minors under the age of 18; in such circumstance the Trustee has the ability to use the property in the trust for the benefit of that child’s educational and welfare needs but then also change the use of the property as the child gets older and their circumstances change.
How do I set up a Testamentary Discretionary Trust in my Will?
As detailed in this article, the use of a testamentary discretionary trust in estate planning is useful for a number of reasons, such as:
- Protecting assets of an estate from third party claims;
- Ensuring the assets of an estate are passed down to younger generations; and
- Providing flexibility in the use of the assets for the changing needs of beneficiaries.
Testamentary discretionary trusts need to be drafted by an experienced estate planning lawyer to ensure the trusts are set up in a valid and enforceable manner.
Should you wish to discuss how you can incorporate testamentary discretionary trusts in your estate planning then please contact our office to find out more.
Authored by Tessa Calver-James – Lawyer at MBA Lawyers.
McDonald Balanda & Associates Est. 1970
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