The Federal Budget may have sparked fears of a new “death tax”, but testamentary trusts have survived. With significant tax, asset protection and succession planning benefits still available, testamentary trust Wills remain a powerful tool for Australians looking to protect wealth and provide for future generations.
The recent budget announcement brought life’s two certainties back into the headlines: death and taxes.
The budget announced a minimum 30% tax on discretionary trusts from 1 July 2028 and Wills were caught in the firing line.
A Will can pass assets to your beneficiaries through a trust. This is called a testamentary trust.
Initially, testamentary trusts were to be included in the minimum 30% tax rate. However, the backlash on a perceived ‘death tax’ led to a carve out.
This means that the tax-planning advantage of testamentary trusts has been preserved.
For those with significant personal assets (think $1m or more), considering testamentary trusts remains a vital part of succession planning.
There are three main advantages of a testamentary trust Will. As testamentary trusts are created only on your death, the advantages are for your beneficiaries, not for you. Although, you do have the benefit of knowing your loved ones are properly cared for.
The first advantage is tax planning. Testamentary trusts can distribute income to a range of beneficiaries. This allows tax minimisation. They can also go further than other investment trusts by distributing income to minors and taking advantage of the lower tax rates, including the tax-free threshold. Regular investment trusts cannot do that.
The second advantage is a general asset protection advantage. If you leave assets to a vulnerable beneficiary, the assets are exposed to their risks. A child who runs a business is exposed to high personal risk. Any inheritance could be lost to a creditor. However, assets in a testamentary trust are protected.
The third advantage is that the assets are kept within your bloodline. A gift received personally by your beneficiary will in turn pass under their Will, for example to their spouse. A testamentary trust keeps control with your Will and protect your hard-earned estate for your children, grandchildren and further descendants. You can leave the in-laws out!
Pacific Law can help with your Will and succession planning. We will help you understand testamentary trusts as an option and see if they are right for you.
