Do you wish to control how your estate is dealt with after you die? Are you concerned that
your beneficiaries will lose the family wealth through recklessness or divorce? Do you wish
to make provision for the care of a disabled person, or a person outside your family?
You need a Discretionary Testamentary Trust.
What is a Discretionary Testamentary Trust?
A Discretionary Testamentary Trust (DTT) is a trust set out in your will that comes into effect when you die.
Upon your death, your Executor calls in all your assets, pays your debts and any specific legacies, and then transfers the balance of your estate to be held by the trustee of your DTT.
Your DTT can give either absolute or fettered discretion to your trustee to decide who, when and how your beneficiaries receive capital and income of the DTT.
Why use a Discretionary Testamentary Trust?
Reasons for using a DTT are usually:-
- for the significant tax benefits offered by a DTT; and/or
- for the protection of assets in bankruptcy proceedings or in the Family Court, or to provide on-going support for a vulnerable beneficiary, such as a disabled child.
Discretion to withhold income or distribute unequal amounts of income from a DTT enables the trustee to take advantage of concessional tax rates.
Unlike other trusts that have a tax-free threshold of $416 per annum for minors, distribution of income from a DTT to an underage beneficiary will be tax-free up to $18,200, or $20,452 if the low income tax offset is available.
As with assets transferred by will, Capital Gains Tax, which would normally be triggered upon transfer of an asset, is deferred until such time as the beneficiary sells or transfers that asset, enabling the beneficiary to choose when the CGT event occurs
Unlike assets transferred by will, a DTT appointing numerous beneficiaries enables the CGT asset to be transferred to any selected beneficiary. Any capital gain generated can also be distributed amongst beneficiaries with the most concessional marginal tax rate.
Principal residence exemptions are also available on trust assets provided provision is made for a qualified right of residence.
A DTT can be used to protect a beneficiary from losing or wasting a testamentary gift, or to protect the beneficiary from claims made through the Family Court by an ex-spouse or by creditors through debt collection proceedings, such as bankruptcy. Care must be taken to avoid ‘trust busting’ by a Court by ensuring that a beneficiary has no proprietary interest in assets of the DTT.
A superannuation death benefit lump sum will attract superannuation death benefits tax of up to 31.5%, unless the payment is made to a ‘death benefits dependant’. A death benefits dependant can include a child, a disabled person or a person actually dependant on the deceased.
Does your super fund provide the superannuation trustee with discretion to decide to whom and how benefits are paid after your death in order to maximise the untaxed component of your super? If not, you should consider a direction to your executors that the beneficiaries of your super are death benefits dependants only, with an ‘equalisation clause’ to enable your executors to adjust the shares of your overall estate to achieve overall equality between beneficiaries.
If you have any questions, or wish to discuss your particular circumstances, please email, or call Jenny-Ellen Kennedy on (03) 6224 8900.