What is the difference between discretionary and testamentary trusts?
In Australia, a discretionary trust and a testamentary trust are two different types of trusts with distinct characteristics.
A discretionary trust is a trust where the trustee has the discretion to determine how income and/or capital of the trust is distributed to the beneficiaries. The trustee has the power to decide which beneficiaries receive distributions and how much they receive, based on the terms of the trust deed. Discretionary trusts are commonly used for estate planning, asset protection, and tax planning purposes, and are typically established during the lifetime of the settlor.
On the other hand, a testamentary trust is a trust that is established under a will and comes into effect upon the death of the testator. The trust is funded with assets from the testator’s estate and is typically created to provide for the long-term care and support of beneficiaries, such as minor children or disabled family members. Testamentary trusts can be either fixed or discretionary, meaning that the trustee may have the discretion to determine how income and/or capital of the trust is distributed to the beneficiaries, or the trust may be established with specific instructions regarding distributions.
One key difference between discretionary trusts and testamentary trusts is that the latter is established through a will and is therefore subject to probate, which can be a lengthy and expensive process. Additionally, while discretionary trusts can be established during the lifetime of the settlor, testamentary trusts are only created upon the testator’s death.
Overall, the choice between a discretionary trust and a testamentary trust in Australia depends on the specific circumstances and goals of the settlor or testator, and it’s important to seek the advice of a qualified legal or financial professional to determine the most appropriate type of trust for your individual needs.
What is a “Trust”?
A Trust is a legal arrangement where you appoint a Trustee to hold your assets for the benefit of your beneficiaries. Trusts can be set up in many different ways to suit your circumstances and the circumstances of your beneficiaries.
What is “Testamentary Trust”?
A Testamentary Trust is a Trust that you can set up in your Will and that will not come into effect until after you die. Most people will set up a Testamentary Trust in their Will if they have young children or children with a disability who would not be able to manage their inheritance.
The advantage of setting up a Testamentary Trust is that you can decide how the assets in the Trust are to be managed as well as how the income from the Trust is to be used for the benefit of the beneficiaries. This may include directions on using the money for the living expenses and education expenses of the beneficiaries.
Related: What is a testamentary trust?
What is a “Testamentary Discretionary Trust”?
A Testamentary Discretionary Trust is a Trust, set up in your Will, where you give the Trustee the power to decide how the assets and income in the Trust are to be managed and distributed to the beneficiaries. The benefit of a Testamentary Discretionary Trust is that it allows your Trustee to be flexible and be able to address any changing circumstances in the lives of your beneficiaries.
How do I choose a Trustee?
You need to choose your Trustee very carefully when setting up a Testamentary Trust or a Testamentary Discretionary Trust in your Will. This is because your Trustee will be the legal owner of the assets in the Estate and have the power to distribute the capital and income of your Estate to your beneficiaries.
Some things to consider when deciding on a Trustee are their age, financial experience and whether they will have the time and commitment to manage the Trust. Another consideration is whether you wish to appoint more than one Trustee and, if so, whether they are able to make decisions independently or whether they must make decisions about the Trust jointly. It is always a good idea to talk to your intended Trustee or Trustees to make sure that they are comfortable with their appointment as Trustee.
How do I set up a Trust in my Will?
To set up a Trust in your Will you need to ensure that your Will is drafted by an expert Wills and Estate Lawyer who understands the legalities surrounding Trusts and can ensure that the Trust you set up is valid and will operate in the manner that you intend.