We have had a number of clients contact us recently asking whether Testamentary Discretionary Trusts (TDTs) are still valid or if they are still beneficial as an inheritance tool. The answer to that is a resounding yes and in fact, the tax concessions for TDTs have increased!
What is a TDT?
A TDT is a trust that you establish in your Will for the benefit of your family and loved ones. They have been a staple of a comprehensive estate planning structure for many years now, as they provide significant tax flexibility and asset protection benefits after the Willmaker’s passing.
Pre-election concerns
The Australian Labor Party (ALP) planned to introduce a minimum thirty percent tax rate for distributions made to a person from a family trust (including a family trust set up during a person’s lifetime). Many people believed that this thirty percent tax rate would also apply to distributions made from a TDT and therefore that the tax planning advantages of TDTs would be watered down. However, the policy was never intended to apply to TDTs.
During the election, there were also persistent rumours circulating on social media platforms that the ALP would introduce a forty percent ‘inheritance tax’ if they were elected, although Labor confirmed that they had no such intentions.
The ‘continuing’ benefits of TDTs
Whether there was any truth to the rumours or not, with the election of the Liberal National Party (LNP), any concerns that people still had should be alleviated. At this point in time, the LNP have not proposed any adverse changes to the tax treatment of TDTs.
Tax flexibility/minimisation
TDTs are therefore still a powerful inheritance tool. They offer significant tax planning benefits by allowing the trustees to assign income to different beneficiaries in the trust to take advantage of their different tax rates. This is particularly beneficial for minor beneficiaries of the TDTs (such as minor children/grandchildren) who are taxed at adult rates (as opposed to a much higher minor tax rate in a family trust).
In fact, the LNP government has also recently (just last week) passed new tax legislation which increased the tax offsets to low and middle income earners. This means that the effective tax free threshold for beneficiaries has now increased to $21,884 for the financial year 2019/20. So each beneficiary could potentially receive up to $21,884 per year from a TDT (tax free) which could be applied for their education fees and general maintenance expenses etc.
Asset protection
Did you know that only an estimated 30% of your wealth will be received by your second level beneficiaries, for example, your grandchildren? A TDT can help reduce this risk and assist in keeping your assets within the family.
As well as the significant tax planning advantages, TDTs also reduces the risk of the inheritance you leave to a beneficiary going to third parties or in-laws, particularly on the death of the beneficiary. For example if you leave an inheritance to your adult child in a TDT, then on that child’s death the inheritance remains in the TDT for that child’s children (your grandchildren) and will not pass under the child’s Will to their spouse.
TDTs also helps to protect the inheritance from the beneficiary’s creditors and offers some protection against the beneficiary’s spouse in a marital breakdown. The asset protection benefits are also particularly useful where the beneficiary is ‘vulnerable’ (for instance, has a disability, addiction or is a spendthrift, bankrupt or a ‘financially at risk’ person).
What does this mean for you?
If you do not have TDTs in your Will and wish to find out more about their many benefits, please contact us to arrange a meeting with one of our experienced estate planning lawyers who would be more than happy to meet with you to discuss your estate planning requirements.
If you already have TDTs in your Will, rest assured that they are safe and that your beneficiaries will continue to reap the wonderful benefits that they offer. However, we still recommend that you contact us for a review of your estate planning in light of other changes that may have occurred since your estate plan was implemented, including changes to the superannuation laws in 2017 (for example).
You should also contact us for a review meeting if any of the following events have occurred since your Wills were prepared:
- There has been a change in your relationship status (separation, divorce, marriage, etc.);
- Your children are now adults;
- You have become a parent or grandparent;
- The circumstances of someone named in your Will has changed (i.e. they have since passed away or lost capacity); or
- There has been a significant change in your assets (such as if you have set up a family trust or self-managed superannuation fund, for example).
