A Discretionary Testamentary Trust Will (“DTT Will”) is a Will that creates a discretionary trust on your death to receive all or part of your estate. The assets and income of the trust are managed by the person or company you appoint as Trustee and are utilised for the benefit of your nominated beneficiaries.
A primary purpose of estate planning is the preservation of assets and distribution of wealth within the family. One method for achieving this purpose is to include a DTT in your Will which allows for effect tax minimisation and may assist in the protection of assets from bankruptcy or family breakdown.
DTT Wills have long been a mechanism of high-net-worth individuals to segregate and protect assets and obtain tax advantages. However, there has been an increase in the number of people who can benefit from a DTT Will owing to factors such as:
1. Increase in the value of real property
According to the Australian Bureau of Statistics, house prices in Australia increased by 41.4% between 2011 and 2016 and as such the equity in the family home is potentially a substantial amount. In 2019-2020 66% of Australian households owned their own home (with or without a mortgage) and it is therefore not uncommon for the family home to form part of the inheritance left to the beneficiaries which can increase their tax liability.
However, if your beneficiaries receive the inheritance by way of a DTT, any income can be distributed to a family member of the beneficiary who has a low or even no taxable income (such as minor children) and therefore the tax on the income generated by the inheritance will be lower or there may be no tax to pay at all.
2. Family Breakdown
The number of family breakdowns each year is substantial. According to the Australian Institute of Family Studies, in 2020 49,510 divorces were granted in Australia and this figure does not include the breakdown of de facto relationships. As a result, many people will know or at least know of a person going through family law separation proceedings. Of increasing concern to our clients is how this may affect the inheritance they receive or the inheritance they leave to their own children.
Did you know that if your child receives an inheritance from you and subsequently suffers a relationship breakdown, depending on how the inheritance was applied, it may be considered as an asset of the relationship and form part of your child’s family law property pool? This could result in your child not ultimately receiving the full benefit of the inheritance.
Receiving the inheritance by way of a DTT may assist in protecting that inheritance from being included in the matrimonial asset pool and ensuring that your estate ends up in the hands of your child, and not their ex-spouse.
3. Business Owners
Business owners are generally at an increased risk of creditor demands that may result in the liquidation of a company and the bankruptcy of the business owner. Any inheritance received by a business owner is at risk of being seized by creditors to satisfy their claims.
Receiving an inheritance by way of a testamentary trust isolates the inheritance from the risk of creditors and protects the asset as far as is possible.