Key people in a discretionary testamentary trust

The key people in a discretionary testamentary trust include:

  • the primary beneficiary
  • potential beneficiaries, and
  • the trustee.

Primary beneficiary

This is the beneficiary receiving the inheritance. The trust is created for the primary benefit of this person.

Potential beneficiaries

These are the people, in addition to the primary beneficiary, who are eligible to receive distributions of capital and income from the trust.
 
Potential beneficiaries include anyone who falls within a class of persons defined in relation to the primary beneficiary. These classes include the ‘siblings’, ‘partner’, ‘children’ and ‘grandchildren’ of the primary beneficiary, as well as ‘any companies or trusts’ of which the primary beneficiary is a director or trustee.
 
By nominating potential beneficiaries by class instead of name, the Testator ensures that the trust endures changes to the circumstances of the primary beneficiary.
 
For example, should a class of potential beneficiaries not exist at the time of drafting the Will, any persons who later come into existence and subsequently fall into a class (whether they come into existence before or after the Testator’s death) will automatically become a potential beneficiary of the trust.

Trustee

The trustee controls the trust. The trustee manages the inheritance inside the trust and decides who amongst the beneficiaries of the trust receives distributions of capital and income. The trust is drafted so that the primary beneficiary chooses the trustee (unless the trust is protective, in which case the Executor appoints the trustee).

In this way, the primary beneficiary controls their inheritance held inside the trust. The primary beneficiary also has the power to remove and appoint the trustee (the “power of appointment”).

If the beneficiary elects to take their inheritance (or part of it) via the trust, the inheritance is given to them as trustee of their own discretionary testamentary trust. The beneficiary (as trustee) can then invest the trust property (the inheritance).

Each year, the trustee distributes income generated from the trust property. The trustee can distribute the trust income and capital between the primary beneficiary and potential beneficiaries. The trustee has discretionary power to choose which beneficiaries of the trust benefit from the trust.

Beneficiaries have no right to demand any income or capital. The beneficiaries merely have a right to be considered by the trustee to receive some income or capital from the trust. Each beneficiary who receives a distribution from the trust is taxed on the income at their personal marginal tax rate.

The income distributions can be varied depending on the tax position of each particular beneficiary to achieve the most tax effective distribution.

Find out how we help trustees get the most out of their SMSF. 

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