A testamentary discretionary trust (TDT) is a trust that is established by a will and its terms are stated in the will. It does not come into effect until the death of the will-maker. Hence, on the death of the will-maker, the property is left to be held by a nominated trustee, [who can be the beneficiary] for the named beneficiary/beneficiaries, pursuant to the will, which becomes the trust deed. Normally, the beneficiaries can decide whether to receive their entitlement in trust.

A will-maker will make a TDT will for either or both of two main reasons: To take advantage of the potentially significant tax effectiveness that a testamentary trust can offer, and To give asset protection to a beneficiary. This may be to protect a beneficiary from him or herself, or from a third party. A TDT provides benefits and options to beneficiaries which are not otherwise available.

A trustee of a TDT can distribute: $18,200.00 to a minor beneficiary tax free. income to beneficiaries taking advantage of their concessional tax rates.

The asset protection provided by a TDT is a good reason for signing one. How a trust achieves asset protection is by separating ownership of the trust assets from the beneficiaries and giving it to the trustee. As stated above the trustee holds the assets for the benefit of the beneficiaries. Two aspects of asset protection arise from a TDT: Protecting a beneficiary from losing or wasting a gift through her or his inability to manage the gift due to, for example, youth, immaturity, disability, drug addiction or alcoholism. Protecting a beneficiary from claims by other parties. Such claims can be from creditors, divorce or bankruptcy. By using a TDT to protect young beneficiaries a will maker can ensure that they will not receive control of their inheritance until they reach maturity. In the case of disabled or vulnerable beneficiaries they may never obtain control. However, they will still receive the benefit of their inheritance throughout their life. It is often of concern to a will-maker that the wealth he or she has generated may be lost by his or her beneficiary through such events as rearrangement of property on divorce, a failed business, bankruptcy, professional liability or even a succession claim. By leaving the assets to beneficiaries in a TDT a will-maker can protect them from such events, yet allow the beneficiaries to benefit from the assets.

Superannuation death benefits are tax free when paid to a dependant (a spouse and child under 18). If the will-maker includes a “superannuation proceeds will trust” in her or his will, it allows the executors of the will to hold the superannuation lump sum in that trust as a separate trust of the TDT, which limits beneficiaries to dependants. Therefore, the superannuation death benefits tax will not occur.