Testamentary Discretionary Trust Wills (TDT Wills)

All financial Planners seem to be aware of them –but not all seem to understand the benefits or perhaps their shortcomings!

Used correctly they can be of great benefit in asset protection, tax saving and succession planning.

Their benefits

Tax Benefits

The normal trust that most people are familiar with –inter vivos trusts-pay no income tax provided they distribute their profits to beneficiaries each year. If the beneficiary is a minor then they can receive $416 tax free and then pay penalty tax

A Testamentary Discretionary Trust however is different. A beneficiary under this Trust can distribute the income to their minor children who are not in receipt of any income such that the beneficiary will receive the first $18,200 tax free and then pay tax at adult rates not at the higher rate normally associated with a trust- as set out above. If  a person say inherited three hundred thousand as a beneficiary in a will and invested it, that person would pay tax on the interest received. If however the Will was a Testamentary Discretionary Trust Will, the beneficiary could elect to leave the inheritance in the Trust-then distribute the interest to his say three infant children and thus 3 x $18,200 i.e. $54,600 can be distributed from the interest received- tax free. This is perhaps the greatest benefit offered by a TDT Will.

Blood Line

The TDT Will also allows assets to pass through the blood line-(thus avoiding spouses and non blood family members)-to children, grandchildren and great grandchildren.

Matrimonial Disputes

By leaving the assets to a beneficiary in a TDT –and then ensuring the beneficiary of the trust is not the trustee of the trust at the time the marriage begins failing some asset protection may be offered. It needs to be noted however that the Family Court has wide ranging powers-which it uses-and even if it finds the assets in the trust are out of its reach it may well make findings that the assets are a resource of the TDT beneficiary and may well then alter the final asset distribution between the divorcing parties accordingly. Putting the assets in a TDT Will is however the best way to protect a beneficiary (apart from leaving the asset to them during your lifetime or owning it jointly with them) and the beneficiary can clearly show a divorce court the asset came not from joint labours with their spouse but from an inheritance.
As the asset has not blended with other joint matrimonial assets it is a powerful argument to the Family Court that the asset should not be split and should remain the asset of the Testamentary Trust beneficiary.

Bankruptcy

Assets which are vested in a person are assessable to the Trustee in Bankruptcy. If these assets are in a TDT Will then the argument is that the assets are not so vested and hence are not available to the Trustee in Bankruptcy. Thus protection can be obtained if your children or grandchildren are ever faced with this potential problem.

Their Detriments

• They are a lot costlier to draw than the standard Will and some lawyers are inexperienced in drawing them.
• TDT Wills are not required by everyone and a specialist legal practitioner should advise you, whether or not your circumstances justify the cost in setting one up.
• In addition it should be noted that a beneficiary of a TDT Will can take out the monies held in trust for them at any time, thus destroying the potential benefits you have set up for them.The intended beneficiaries should be advised in advance therefore why you are setting up the TDT Will and the benefits they can receive from same.
• A tax return needs to be filed for each Trust set up under the Will once the Will maker is dead and thus this is a continuing ongoing cost-albeit probably a reasonably small one in relation to the benefits received.
• If the Trust set up is a complex one, then added legal expenses may be incurred each year in getting legal advice to see the trust is operating within the TDT Will structure.

These Wills therefore should only be drawn by a specialist Wills’ practitioner after the benefits and detriments have been explained to the Will Maker-but they do offer real benefits to the beneficiaries as discussed above.