Securing your child’s future (Part 2 of 4): The significant potential advantages of testamentary discretionary trusts

The significant potential advantages of testamentary discretionary trusts

When planning for the future one thing to consider is whether to include testamentary discretionary trusts in your Will. These trusts are typically set up to be optional for your spouse or children’s use, but your spouse or children would very often be crazy not to utilise them for the potentially very significant advantages they can provide.

A testamentary trust can be created within a Will so that the assets of your estate are held on trust for certain beneficiaries after the initial administration of your estate is finalised. What this means is that when you die the assets of your estate will be entrusted to certain trustee/s you nominate, who will have control and discretion over when and to whom the income and/or capital of such assets are paid.

A testamentary trust can help to save tax and protect assets and if these are matters which are important to you when it comes to providing for the care and welfare of your children (or so as to better protect or provide for your spouse) then you should seek advice to include appropriately-tailored testamentary trusts in your Will.

In greater detail, testamentary trusts may provide:

• Tax advantages, particularly in terms of your child or their family’s net income taxation position from year to year in future, but also potentially as concerns land tax or capital gains tax; and, even more importantly for many..
• Asset protection advantages, providing a good measure of protection against future threats such as bankruptcy, creditors’ claims, professional negligence claims, and even some potential advantages in the event your spouse or child has a future separation or relationship breakdown which exposes their inheritance to the inherent risks associated with a relationship property settlement.

Whilst such trusts are certainly no guarantee of protection in a Family Court setting, it is hard to deny they can still provide key advantages, even if only in that they quarantine and separate out inherited assets from other personal assets – a feature which often makes it easier to identify the inherited assets (or accrued income from the same) and so argue those assets ought be left out of the relationship asset pool being considered for division in a property settlement negotiation.

Protecting Vulnerable Children

The way in which a Will deals with vulnerable children needs to be different to how independent children are addressed, to ensure that they are adequately protected and not left in a situation where they may be taken advantage of, or may have their inheritance squandered or attacked by some third party. A child may be vulnerable by way of impaired physical or mental incapacity, perhaps associated with their being very young or very old, or due their suffering some form of addiction (substance abuse, gambling, or even an extreme tendency to spend rather than save).

In such situations it is often appropriate and best for the child concerned that you seek the advice of a specialist Estate Planning lawyer to tailor a discretionary trust or more restrictive protective trust so that provisions are appropriately made for that child’s:

• Physical needs;
• Future accommodation;
• Education and advancement in life;
• Support mechanisms and/or persons;
• Hobbies and interests; and
• Medical treatment and health care.

If a child is in a vulnerable position and you have serious concerns about how their affairs may be managed in the future then you may be advised to implement a more-restrictive all needs protective trust in your Will to provide a structure where a separate trustee holds the trust assets for the benefit of the beneficiary on an indefinite basis, with a requirement that the specific needs of the beneficiary be routinely reviewed as part of the ongoing administration of that trust.

Such trusts also need to be adaptable in certain respects to take advantage of social security entitlements your child may be or become eligible for. It is possible to allow that some or all of a protective trust can be optionally partitioned into a Special Disability Trust for your child if they qualify for such a trust, and doing so can greatly improve the entitlements they are eligible to access (by virtue of Centrelink disregarding some or all of the assets and income of such a trust for their assets and means testing assessment purposes).

We are here to help

Our friendly and professional Wills and Estate Planning specialists can provide you with peace of mind, and ensure that the future of your family is secured against the risks of any death or loss of capacity, by discussing and assisting you to prepare and implement a practical and comprehensive Will and other complementary Estate Planning documents.

For more specific information on any of the material contained in this article please contact Nick Muirhead on +61 8 8210 1220 or nmuirhead@normans.com.au or Stefanie Magliani on +61 8 8217 1373 or smagliani@normans.com.au.