Recent federal budget discussions about trusts have sparked debate around Testamentary Discretionary Trusts (TDTs).
While the name sounds complicated, many people include these trusts in their Wills to protect children, grandchildren, and inherited assets. However, should lawmakers treat TDTs the same as family or discretionary trusts for tax purposes?
Many lawyers and estate planning professionals would argue that they should not. Unlike a family trust, which someone establishes during their lifetime, a TDT only takes effect after death. Families often use TDTs to protect inheritances from risks such as relationship breakdowns, bankruptcy, financial hardship, and poor spending habits.
TDTs can also provide tax benefits, particularly for younger beneficiaries. However, tax savings are not the primary reason most families use them. Asset protection and flexibility for future generations are usually the key drivers. If the proposed changes do not specifically exclude TDTs, they could disproportionately affect lower-income beneficiaries and people facing financial challenges.
I am a Wills and Estates lawyer, not an accountant. However, these proposed changes could significantly affect estate planning strategies. Once the law becomes clear, it may be a good time to review your estate plan.