Increased Tax Benefits of Testamentary Discretionary Trusts for Investors and Business Owners
There have always been good reasons for investors and business owners to consider utilising testamentary discretionary trusts in their wills. There is now more reason than ever to consider this.
These trusts are an alternative to leaving assets outright to your beneficiaries (such as your spouse or partner or your children) and can provide the following benefits:
- Isolate the assets which you have left to a spouse or partner, so that they are less likely to be mixed with his or her assets and in turn with those of a future spouse or partner;
- Some protection from family law property claims against your spouse or child;
- Protection against claims by a bankruptcy trustee or creditors of your spouse or partner; and most significantly
- Income tax advantages for your beneficiaries.
As a result of the recent Federal budget, the income tax benefits of testamentary discretionary trusts have been significantly increased.
A testamentary discretionary trust enables your beneficiary (such as your spouse or adult child) to distribute income from the assets which you have left in the most tax effective manner. Rather than she or he receiving the income from those assets personally (which is not attractive, if she or he is in a high tax bracket), that income can be distributed to members of her or his family, including infant children, who may pay little or no tax.
The Federal budget increased the individual tax free threshold from $6,000 to $18,200. If for example your adult child has three children, then this has increased the potential tax free income which his or her family can enjoy from the assets which you leave, from $12,000 per annum to $54,600 per annum. If there were no testamentary discretionary trusts in your will, and the assets you left your adult child earned an income of $54,600, then, if he or she were earning a salary of over $80,000, this extra income from the inheritance would be taxed at 38.5%, including Medicare levy, giving rise to a tax liability of $21,021. If his or her salary and other income took him or her into the maximum tax bracket, then the tax would increase to $25,389.
Therefore, if the assets which you are to leave to a beneficiary are likely to give rise to significant income, there is now the potential to enable him or her to make significant tax savings by including a testamentary discretionary trust in your will.
We recommend that you discuss with us the potential taxation advantages of a testamentary discretionary trust in your circumstances. Please talk to our In House Solicitor, Sarah Hatch about establishing a Family Will – sarah@taurusfinancial.com.au