What is a testamentary discretionary trust?

In general, a trust describes an ownership structure where the assets of the trust are owned by the trust, managed by the trustee but are held for the benefit of beneficiaries of the estate.
A discretionary testamentary trust is a trust that is created within and by your Will but does not take effect until your death. A discretionary testamentary trust may be created using specified assets, a designated portion of your estate or the entire remaining balance of your estate.
The advantages of a testamentary trust are outlined as follows:

  • Flexibility for your beneficiaries: The trustee may distribute capital and income to any nominated beneficiary at any time and in any proportion. The trust can be wound-up at any time or kept open for an extended period of time.
  • Protection of assets: None of the assets are legally owned by the beneficiaries, which may protect the assets of the trust from legal proceedings, such as in the event of marital breakdown or bankruptcy.
  • Taxation advantages: Taxable income generated by the trust can be allocated among the beneficiaries of the trust in a tax-effective manner. The beneficiaries pay income tax on their allocated share of income according to their normal marginal tax rates. However, beneficiaries under 18 are taxed at normal adult rates rather than at penalty tax rates. So the potential for tax savings when trust income is allocated to children may be substantial.

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