Recent federal budget discussions about trusts have sparked debate around Testamentary Discretionary Trusts (TDTs).
While the name sounds complicated, these trusts are commonly included in Wills to help protect children, grandchildren and inherited assets. But should TDTs be ‘lumped in’ with family or discretionary trusts when dealing with the tax treatment?
Many lawyers and estate planning professionals would say no. Unlike a family trust, which is set up during someone’s lifetime, a TDT only comes into effect after a person dies. Families often use them to help protect inheritances from risks such as a beneficiary separating from a partner, bankruptcy, financial pressure or vulnerable spending habits.
There can also be tax advantages, particularly for younger beneficiaries, but tax saving really isn’t the main reason most families use them. For many people, the driver is the asset protection and flexibility for future generations. It is a concern that if proposed changes do not specifically exclude TDTs, the people most impacted may be lower income beneficiaries and those in precarious financial circumstances.
I’m a Wills & Estates lawyer, not an accountant, but these proposed changes have the potential to significantly impact estate planning strategies. When the law is settled, it may be good time to revisit your estate plan.