The information provided below is general in nature and should not be relied upon legal advice. You should call 03 5445 1000 and speak to a lawyer at OFRM about your particular circumstances.

Supercharge your will with a Discretionary Testamentary Trust

A normal Will provides a gift to a beneficiary without any conditions. However, a Discretionary Testamentary Trust (“DTT”) has the effect of supercharging the gift. The main advantages are listed below.

Taxation

The primary beneficiary can divide the income earned by the DTT between family members and themselves. The big advantage is that children under 18 are taxed at the same rate as an ordinary adult. This special rule applies to trust distributions from a Deceased Estate. Where children receive trust distributions from a traditional Family Discretionary Trust, they can only earn $416 per annum tax free and the excess is taxed at the highest rate. But distributions from a DTT to a child are taxed at the ordinary adult rate of $18,200 tax free and then at the normal marginal rates.

Protection from Creditors

As the primary beneficiary does not, strictly speaking, own the assets contained in the DTT, this means that the inheritance is not at risk of being claimed by a creditor, should the primary beneficiary become bankrupt or otherwise have claims made by creditors. The primary beneficiary can use the DTT assets to pay creditors if they wish to do so, but they cannot be compelled to use those assets.

Protection from Relationship Breakdown

The Family Court can take into account the assets contained in the DTT if there is a marriage breakdown, but inheritances are treated slightly differently from normal assets accumulated during the life of the relationship. There is definitely an advantage if the inheritance is quarantined from the general community assets of the parties. However, the best way to protect an inheritance is for the primary beneficiary to enter into a Binding Financial Agreement which complies with the provisions of the Family Law Act. The agreement would state that upon separation, the other party can make no claim against the inheritance contained in the DTT.

Encouragement to Save and Accumulate

Because of the advantages listed above, there is a real incentive to save and accumulate the inheritance provided through the DTT. Most parents are comfortable that their child will be able to make sensible decisions with any inheritance, but most would like the inheritance to be accumulated, if possible rather than being spent immediately on activities or assets which will not produce a long term benefit. Funds in a DTT have some similarity to superannuation. Both offer taxation benefits and protection from creditors. The real benefit from both funds derives from accumulation and strategic planning for the use of the funds.

With superannuation there are restrictions upon withdrawing the funds unless you have reached retirement age. With a DTT, there is no restriction upon withdrawing the funds, but you cannot add other funds to a DTT and still obtain the special income splitting advantage with children under 18. Consequently, from a practical point of view, you would not want to add any additional funds to a DTT other than funds sourced solely from the inheritance. Income can be accumulated within the DTT.

How is a DTT implemented?

The Will incorporates the terms and conditions for DTT and these can be tailored to suit the individual needs of each person. Once the Will has been made, the DTT sits in a dormant position in the Will and becomes active upon the death of the Will maker. It is important to note that the beneficiary is usually not compelled to take the inheritance through the DTT. There is no stamp duty payable upon the creation of a DTT (which is in contrast to the stamp duty of $200 which is normally payable upon a traditional Family Discretionary Trust). The beneficiary is obliged to keep separate records for the DTT and each year an individual tax return for the DTT must be prepared, which indicates what income has been allocated to beneficiaries. This is a very straight forward tax return for most situations.

Why do it at all?

The parent has worked very hard to accumulate assets. A DTT gives the child the best opportunity to make use of those assets. Not only will it benefit the child, but it also gives the opportunity to benefit grandchildren, should they occur, and can even be used for successive generations (up to a maximum of 80 years from the date of death).