Testamentary Discretionary Trust

Jonathan and Janet Smith both die within a few months of each other. They have one son Nick who is a poor financial manager with a history of failed business ideas. Nick’s last get rich quick scheme was to trade frozen concentrated orange juice futures, due to laziness and stupidity he lost all of his and his investors money and had to declare himself bankrupt. Jonathan and Janet left their entire estate to Nick; which was lost to the trustee in bankruptcy.

Had Jonathan and Janet created a testamentary trust for the benefit of Nick and his family, the estate would have been saved.

A testamentary trust is created by a Will (or codicil to a Will) and takes effect when the person who has created the will, dies. Testamentary trusts are usually set up to protect assets.

They are created if beneficiaries:

  • are minors;
  • have diminished mental capacity;
  • won’t use their inheritance wisely; and
  • does not want family assets split as part of a divorce settlement or become part of bankruptcy proceedings

Testamentary Trusts are flexible enough to be customised to suit the objectives and needs of the Will maker and beneficiaries. There are taxation and asset protection advantages associated with Testamentary Trusts, however the taxation advantages are secondary to the asset protection a trust affords.

The Will maker usually names a trustee in the Will who must look after the assets for the benefit of the beneficiaries until the trust expires.

The trust ends when a minor reaches a certain age or a beneficiary achieves a certain milestone, as specified in the Will.

A trust must have:

  • Trust property
  • The trust document (referred to as a deed)
  • certainty of property and objects so that the trust is administratively workable;
  • must comply with evidence requirements; and
  • with trust rules.

A Will maker bequeathed shares in a company £2,000 on trust until the beneficiary turned 25. When the beneficiary reached 21 (the age of maturity at the time) he sought access to the capital and dividends immediately

The rights of the beneficiary were held to supersede the wishes of the Will maker the beneficiary that has an absolute interest in the trust property, is not bound to wait until the expiration of that period, but may require payment the moment they are competent to give a valid discharge.

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