Will the 2018 Federal Budget Impact on Testamentary Trusts for Estate Planning?

Testamentary Trust Wills are widely utilised by Estate Planning lawyers to provide clients with asset protection measures for the next generation and enable flexible income distribution (which can result in significant tax savings for families with minor children).

But will the 2018 Federal Budget change this?

What is a Testamentary Trust and what are the taxation benefits?

A Testamentary Trust (sometimes called a Will Trust) is a discretionary trust which is created in your Will.

Creating a Testamentary Trust in your Will is often a more tax-effective alternative to making a direct gift to a person under a standard Will.

For example, Peter dies leaving his dependant wife Mary, and two young children. In addition to the matrimonial home and other assets, he had a life insurance policy of $800,000. If this was invested at 5%, it would generate an income of $40,000 per year.

If Mary received the life insurance policy personally, she would pay tax on the $40,000 income at her own marginal rate.

Compare this with a scenario where funds are left to Mary’s Testamentary Trust – this enables her to distribute $18,200 to each of her minor children tax-free every year. This is because (unlike a Trust created during a person’s lifetime) Testamentary Trusts can distribute income to minors at adult marginal tax rates.

Proposed Budget Changes

It is proposed that the concessional tax rates available for minors receiving income from Testamentary Trusts:

  1. will be limited to income derived from assets that are transferred directly from the deceased estate into the Testamentary Trust, and
  2. are not applicable to income derived from additional assets that the beneficiary themself places into their Testamentary Trust at a later date.

However, it is the view of many Estate Planning and Taxation lawyers that the proposed changes (due to come into force on 1 July 2019) are not ‘changes’ at all – simply a clarification of the legislation already in place, as it has been widely accepted for many years that the concessional tax rates available for minors do not extend to ‘non-estate’ assets held within the Testamentary Trust.

What will the impact be?

In our opinion, the impact will be minimal, unless the drafting has unintended consequences (such as an asset transferred to a Testamentary Trust subject to a debt later being deemed a ‘non-estate’ asset once the debt is paid off).  Watch this space.

If you would like further information about Testamentary Trust Wills, please contact our Future Planning team.

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