3 reasons to include a testamentary discretionary trust in your will
Are you aware of the benefits of a Testamentary Discretionary Trust (TDT)? It's an amazing tool that can be incorporated into your will to protect your assets and ensure your loved ones are taken care of. Many people mistakenly think that trusts are only for the super wealthy, but with the current state of the Australian housing market and the amount of wealth being passed down from generation to generation, a TDT is something that majority of my clients utilise.
Let me share with you three compelling reasons why you should consider using a TDT:
1. Tax minimisation
One of the most significant advantages of a TDT is tax minimisation. Since a TDT is established because someone has passed away, the Australian Taxation Office has determined that minors (children under 18) should receive the same tax benefits as adults. As a result, each child in the TDT can receive up to $22,000 in income that is tax-free.
Imagine your TDT has $1 million worth of assets invested and is generating a 5% return. The income it creates is $50,000 per annum. If you have two young children, you can distribute $44,000 of this income to them tax-free. The remaining $6,000 would be distributed to you and added to your income, taxed at whatever rate you're at on June 30th.
Please note that this is general information, and it's advisable to seek advice from an accountant.
2. Asset protection in a breakup
Another great benefit of a TDT is reducing your exposure to family law risks. Since a trust isn't owned by those who benefit from it, it is treated as a financial resource rather than an asset in a family law separation. Therefore, it can't be "split" the same way as property that you own. You're already starting on the front foot, and your spouse would need to establish and prove that the trust is your alter ego and should be included as an asset.
Including a TDT with multiple trustees can also help protect your adult children's inheritance if they're not in a stable relationship. It gives you peace of mind that your children will benefit from your estate rather than your partner's gold-digging ex.
3. Asset protection for high-risk occupations
If you or any of your beneficiaries are in high-risk occupations such as lawyers, doctors, directors, or sole practitioners, having assets owned by a TDT will provide protection. A TDT also protects the inheritance from bankruptcy claims, which can flow on from any negative judgement debt.
Choosing to use a TDT rather than a direct gift can benefit your children and family immensely. However, there's one catch - you only get one chance to use it. A TDT must be in place when you pass away, which means it must be included in your will.
If you want to learn more or see if a TDT is right for your situation, book a consultation and include it in your will. Don't wait until it's too late to protect your assets and secure your family's future.