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What is a Testamentary Discretion Trust (“TDT”)? Do I need one?

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A TDT is a trust which is set up under your will on your death. A TDT allows your estate assets to be held in trust (or trusts) for your nominated beneficiary/ies. It provides a structure to manage and distribute your estate assets.

Who are the parties involved in a TDT?
The TDT has four main parties:-

  1. You as the willmaker who gifts assets to the TDT under your will. Your estate assets then become the assets of the TDT;
  2. The trustee of the TDT. This is the day to day controller of the TDT and decides when, in what amounts and to which of the beneficiaries any distributions are made from the trust’s income and capital. The trustee will often be your intended beneficiary of the TDT, or, if your intended beneficiary is at risk or vulnerable, it may be a suitable independent third party who will manage the TDT on their behalf.
  3. The Appointor or Principal of the TDT. This is the ultimate controller of the TDT and can hire and fire the trustee. It, again, will often be your intended beneficiary of the TDT, of, if your intended beneficiary is at risk or vulnerable, it may be a suitable independent third party who will control the TDT on their behalf.
  4. The beneficiaries of the TDT. These are the parties who may receive distributions of income or capital from the trust assets (i.e. from your estate assets). These will generally include your intended beneficiary, their spouse, children, other descendants and family members, related companies, trusts, etc.

What are the advantages of a TDT?
A TDT allows control and flexibility to distribute income and capital from your estate, can be used to protect assets for vulnerable or at-risk beneficiaries and also to minimise tax implications for your beneficiaries.

Control and/or Flexibility
A TDT is not owned by a particular beneficiary. The trustee holds the assets of the TDT on trust for the beneficiaries of the TDT and has discretion to determine when and to whom distributions of income and capital are made from the TDT. Therefore, it allows you to leave your estate assets in the control of your intended beneficiary but they may then choose to distribute the income and capital from the trust to themselves, their spouse, their children, their related companies and trusts etc. Therefore, this allows maximum flexibility for your intended beneficiary.
It may also allow you to protect the capital whilst providing only income (or a life interest) for a second spouse or vulnerable or at risk child, depending on the terms of the TDT.

Asset Protection
By transferring your assets to a TDT under your will rather than to beneficiary’s personal name, you may protect your estate assets from your beneficiary/ies’s:-
– external creditors not just at the date of your death but also in the future. This may be helpful if they are in an occupation that carries significant risk of litigation or if they run a business;
– current or previous spouse in the case of a marriage or relationship breakdown, as the TDT may limit the ability of the partner to make a significant claim upon the trust assets*; and
– may also allow you to put in place an independent trustee to manage the funds for a disabled or at-risk beneficiary thereby safeguarding their share of your estate.

Taxation Advantages
A TDT has all the usual taxation advantages of a family or discretionary trust in that the trustee of the trust may choose to stream income to whichever of the beneficiary/ies of the trust it chooses to so as to minimise the overall tax payable on the income of the trust. However, TDTs have a further advantage over family or discretionary trust; under current tax law, TDTs can treat minor beneficiaries (i.e. children under 18) as adults for tax purposes so that they are eligible to receive an amount of income from the TDT equal to the tax-free income threshold without having to pay any tax for the first three years after the date of your death. If your intended beneficiary has one or more children, this may result in a significant taxation saving.

When should a TDT be considered?
If you have significant assets which may form part of your estate on your death and be payable to any beneficiary under your will, then a TDT should be considered.
Further, if any of your beneficiaries may be at risk or vulnerable and you wish to provide some asset protection for their share of your estate, then a TDT should be considered.

Costs of TDTs
Obviously, the cost of a TDT Will is more expensive than a simple will, and, if the TDT is utilised by your intended beneficiary, there will be ongoing administrative costs including accounting fees and tax return costs.
However, the taxation, asset protection and flexibility benefits of a TDT in an appropriate situation are significant.
If you think that you may wish to consider making a TDT Will, or discuss whether it may be appropriate for your circumstances, please contact our office on 07 3370 5100 to discuss.

*Such claims will vary from case to case and specific advices should be obtained in each case.

Article by Sarah Higton
Senior Associate LL.B (Hons), LL.M (Applied Law majoring in Wills and Estates)

We have assembled a highly experienced, capable team of legal practitioners, committed to delivering you expertise across all legal services. Find your local office: