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WHAT IS A DISCRETIONARY TRUST?


13/01/2016


You have worked hard to build up a portfolio of valuable assets in your lifetime.  If you want your direct descendants to maintain control of your wealth after you die, one option to consider is a discretionary trust in your will.

A discretionary trust – often called Family Trusts or if created in a will is called a Testamentary Trust – can be set up so that your spouse, and the partners of your children and grandchildren, are able to receive income from the trust only, however capital can only be received by you, your children and your grandchildren.

Tony Mitchell, an experienced expert on estate planning with Stacks Law Firm, raises this possible scenario:

“A couple, let’s call them Jim and Sally, have been married for 30 years, and have three adult children. Jim dies suddenly, and Sally later marries Sam. A few years later Sally and Sam divorce. There are two scenarios, each with a very different outcome:

Scenario 1:  In his Will Jim left all his wealth to Sally.  However Sally can’t stop Sam wasting her inheritance gambling.  By the time Sally dies, none of her inheritance remains to pass on to her children.

Scenario 2:  A testamentary discretionary trust established by Jim in his Will entitles Sally to receive income from the trust, but limits distributions of capital to Jim and Sally’s children and grandchildren. Accordingly, when Sally and Sam divorce, Jim’s wealth is protected from a claim by Sam, and the capital remains intact to benefit Jim and Sally’s children and grandchildren in the future.

“Other benefits of a testamentary discretionary trust can include a reduced tax liability, protecting spendthrift beneficiaries from themselves, caring for children when they are young, caring for beneficiaries who have a disability, protecting assets from creditors and protecting assets in the event of a relationship breakdown,” Mr Mitchell said.

Income earned by a discretionary trust can be distributed among family members who have the lowest marginal tax rates so as to take advantage of multiple tax free thresholds. In a testamentary discretionary trust, income can also be distributed to children, making this quite legitimate tax minimisation arrangement even more attractive. 

It’s important to have any trust set up properly and legally with regard to each individual’s needs and particular circumstances. Every family is different and there may be children or adults who need to be provided for well into the future, such as those with a disability.

Tony Mitchell of Stacks Law Firm stresses it is important to consult an experienced expert in the field as trusts can be complicated and it is vital to set them up correctly.



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