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Most people would be more than happy to receive an inheritance. However, for those who have put in place asset protection strategies or who could be facing any form of litigation, directly receiving an inheritance can cause significant unnecessary difficulties.
People in financially high risk occupations, such as professionals, business owners and company directors, will often prefer not to receive inherited assets directly in their own names.
One solution is to ensure appropriate estate planning strategies are implemented via the wills of people likely to leave an at risk individual assets.
For example:
This stamp duty expense (and any capital gains tax, legal and accounting fees) could have been avoided if Vivian’s parents had included a TDT in their wills.
A Testamentary Discretionary Trust (TDT) is a trust established in someone’s will. It comes into existence only when the person dies. A Lineal Descendant TDT is a trust established in someone’s will for the benefit of their lineal descendants.
Whoever is named in the will as trustee controls the TDT’s assets. Like any trust, a TDT can be as flexible or as fixed as desired. The trustee can be given full discretion or no discretion as to who should receive income and capital from the TDT and when they should receive it.
The trustee is often the same person who was appointed as executor, and can also be a beneficiary. For example, a parent can establish a TDT for each child’s inheritance. Each adult child can be the trustee of their own trust, and may also be an executor.
TDTs can be used for a variety of purposes, including:
As an estate planning strategy, TDTs can be of benefit:
As mentioned above, a TDT is simply a trust established by someone’s will.
Rather than all the deceased’s assets being distributed by the executor upon death, some or all of the assets remain in trust for the benefit of a specific group of beneficiaries named in the will.
Trust income distributed to children, of any age, will be taxed at adult rates rather than the penalty rates that normally apply to minors’ unearned income from a standard (non will-created) trust.
The trustee can have full discretion as to who receives trust income and capital, or restrictions can be provided. For example:
A lineal descendant TDT is established for a person’s lineal descendants – that is children and grandchildren, and on down a lineal family tree. A properly drafted lineal descendant TDT can assist in keeping an inheritance out of the reach of the Family Court where a beneficiary is involved in a family law property dispute.
Many parents are concerned that the inheritance they leave to their children could end up in the hands of a former son-in-law or daughter-in-law if their child’s marriage breaks down.
If a child receives an inheritance in their own name, that inheritance will generally be intermingled with the child’s other assets (e.g. by paying off a house mortgage) and thus will become ‘matrimonial property’ available for distribution by the Family Court.
However, if a child’s inheritance is distributed to a lineal descendant TDT under a will, those assets can be kept apart and protected from direct distribution (even if income from the assets is reinvested within the TDT from time to time).
How successfully the assets are protected depends on how the will and lineal descendant TDT are drafted and the circumstances at the time of the relationship breakdown.
A properly drafted TDT provides a number of significant benefits for the family left behind after a person dies. Unfortunately, any ‘second chance’ ability to get assets into a TDT after death is quite limited – and usually very costly.
Normally, anyone who is aiming to build wealth during their lifetime, and to provide for their family after their death, should consider putting in place a TDT (or lineal descendant TDT) under their will. A properly drafted TDT can generally create a ‘set and forget’ structure that provides peace of mind now, while still accommodating the needs of evolving family dynamics in the future.
If you have any questions or need more information, please call the Legal team on (08) 9227 6300 or email legal@austasiagroup.com.
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This publication has been prepared by AustAsia Group, including AustAsia Legal Pty Ltd (ACN 123 160 476).
AustAsia Legal Pty Ltd – Liability limited by a scheme approved under Professional Standards Legislation.
Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this document as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.
Information in this publication is accurate as at the date of writing, 18 October 2017. Some of the information has been provided to us by third parties. Whilst it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor any member of AustAsia Group, nor their employees or directors give any warranty of accuracy, nor accept any responsibility, for any errors or omissions in this document.
Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.
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