Should you rethink your estate planning wishes due to the Federal Budget changes?
What is a Trust?
A Trust is a legal structure used to hold and manage assets, such as property, shares, businesses, or cash, for the benefit of other people. A trust has three key parties: the settlor, who establishes the trust; the trustee, who can be a person or a company that controls and manages the trust’s assets, and the beneficiaries, who benefit from the trust’s income or assets. For example, a family might place an investment property into a trust. The trustee manages the property, collects rent, and distributes income to the beneficiaries according to the trust deed.
Types of Trusts
It would be simple if we had only one type of trust, but as everybody’s circumstances vary, there are a few different types of trusts available to select from. Let me help you to break it down.
By far, the most common are Family Trusts, also known as Discretionary Trusts, that are set up for family members or small businesses to distribute income to beneficiaries. The beneficiaries do not have a fixed income entitlement, resulting in flexible income distribution, estate planning benefits, and asset protection. On the contrary, Fixed Trusts have more clearly defined entitlements with less discretion by the trustee; as such, the beneficiaries have predetermined rights to income and capital.
If the investors are not related than Unit Trust gives beneficiaries rights of owning units, but changes in ownership may have tax implications.
The least heard of would be a Special Disability Trust that can give you peace of mind about how your close person or child with a severe disability would be looked after if you were to pass. This trust is specifically designed to provide for the future care and accommodation needs of that person.
Lastly, a Testamentary Trust is created through your Will and only comes into existence after you die.
How do Testamentary Trusts Work?
Unlike a Family Trust, which is set up while you’re alive, a Testamentary Trust is part of your estate planning. It allows assets you leave behind to be managed by a trustee for the benefit of your chosen beneficiaries. Let’s say you have a family home, shares, investments, and cash savings. Instead of leaving everything directly to your children, you Will can say that upon your death, the assets should be held in a Testamentary Trust (TT) for your children. Assets in a TT may be better protected if a beneficiary gets divorced, is sued, goes bankrupt or has a creditor opposed to leaving the assets directly to your child, resulting in those assets forming part of their relationship property.
Testamentary Trusts are often suitable for parents with children under 18 or who are not financially established or have a disability, families with significant assets, and blended families.
Testamentary Trusts Remain a Valuable Estate Planning Tool
Following the Federal Budget announcement regarding the proposed taxation of Discretionary Trusts, you may question whether Testamentary Trusts continue to offer meaningful benefits.
In fact, Testamentary Trusts may become even more attractive from an estate planning perspective, as the proposed 30% minimum tax on Discretionary Trusts is not intended to apply to Testamentary Trusts.
The Government has indicated that, to qualify for this exemption, a Testamentary Trust must be established for “genuine testamentary purposes.” While this requirement has been announced, there is currently limited guidance on how it will be interpreted and applied in practice.
Early commentary suggests that a Trust is more likely to satisfy the “genuine testamentary purposes” test where its beneficiaries are limited to individuals and income tax-exempt entities, rather than including companies or other trusts as beneficiaries.
Nevertheless, Testamentary Trusts remain a highly effective vehicle for asset protection, succession planning and tax-effective wealth transfer across generations.
Despite perhaps having Will in place, this may be an opportunity to consider estate planning review and ask yourself if your family may benefit from introducing a Testamentary Trust into your estate. Or if you already have TT’s in place, should you consider updating in light of the proposed changes?
Cost and time of drafting your final wishes very often stop us from putting this direction in place. Dying without a Will can leave your loved ones facing an overwhelming and emotionally exhausting situation. While they are grieving your loss, they may also be left to navigate the administration of your estate without any clear instructions, creating unnecessary stress, uncertainty, and potential family conflict.
The greatest legacy of dying without a Will is often not financial loss, but the emotional burden placed on those left behind. Take a moment out of your busy day to contact your Solicitor or Financial Adviser to start your journey towards peace of mind today.
Veronika Holubova (CFP® Professional, MFinP, GradCertFP, ADFP, DipFP) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Any information provided to you was purely factual in nature. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice. While we believe the information in this article is accurate at the time of publication, we do not warrant its completeness or reliability. Information is subject to change without notice.