If we consider a situation where a person is leaving their Estate to their child, a standard Will leaves the inheritance to the child directly or absolutely. The inheritances passes for the benefit of the child (and their creditors) and is free for the taking by any Trustee in Bankruptcy or a creditor who is owed a debt or has some other claim against the child.
However, a Will can be drafted so that upon the death of the Willmaker a Discretionary Trust is created for each child that will inherit the Estate. When a Will creates a Discretionary Testamentary Trust, the inheritance passes to the Trustee of that Trust (often the child) who holds the inheritance on trust for the beneficiaries of that Trust (typically, the child and their family). As the child has not received the inheritance absolutely, the inheritance would not be available to the child’s creditor or form part of their Bankrupt Estate. Instead, the child only receives the inheritance or parts of it absolutely when the Trustee exercises a discretion to distribute money or assets from the Trust (such discretion should be exercised after obtaining legal and accounting advice).
Whilst Discretionary Testamentary Trusts also have significant advantages for implementing tax minimisation strategies in relation to income or capital gains derived from an inheritance, the asset protection benefits of Discretionary Testamentary Trusts should never be over looked. With the wealth of the aging population being greater than ever, and a pandemic upon us that is putting that demographic at significant risks, now more than ever business owners and other at risk individuals should be insisting that their parent’s Wills create Discretionary Testamentary Trusts.