What are the benefits of a discretionary testamentary trust, and who controls the assets?

A testamentary discretionary trust is used to manage family assets and businesses. It has significant tax advantages and asset protection benefits for beneficiaries, making it a popular option for testators who wish to provide financial security and peace of mind to their families.

Firstly, it is useful to outline the basic operational structure of a testamentary discretionary trust. These trusts are operated by the trustee, who controls the trust assets and makes discretionary distributions in favour of the beneficiaries. Conversely, the appointor of the trust has the important power to appoint and remove trustees. The trust deed will also stipulate the testator’s family members as the class of beneficiaries.

The trust itself is considered discretionary as the trustee can withdraw capital and distribute income as they see fit. This provides a high degree of flexibility to the trustee.

On the one hand, it is open to the trustee to retain the capital and produce income for the long-term benefit of the beneficiaries. This provides a protected environment for the environments from which the beneficiaries may benefit. This is especially important in circumstances where they are compromised or vulnerable or unable to support themselves or their dependants due to mental or physical disability, financial hardship from loss of employment, bankruptcy or matrimonial property disputes. The trustee can therefore securely invest the estate funds and generate income for the purpose of providing financial support to the beneficiaries.

The testator can express their preference for the trustee to retain the trust capital through a Statement of Wishes. With that being said, the trustee is not locked into this course of action. It is open to the trustee to remove the capital to suit the particular needs of the beneficiaries upon financial advice.

Finally, these trusts are also desirable for their tax advantages. We recommend that you seek accounting advice to further unpack the financial benefits of a testamentary discretionary trust to suit your particular circumstances.

If you would like further information about incorporating a testamentary discretionary trust into your strategic estate planning, please contact our office on (07) 3839 7555.