Contributing to The Age's weekly Real Money newsletter, Nicholas Parker discusses the budget’s tax changes to trusts.

Nicholas tells Money Editor, Dominic Powell, that the mooted changes would be a major change for how trusts are used in inheritance planning, saying they currently offer some unique benefits.

“Testamentary trusts until now had an additional benefit that was unavailable to family trusts, being that the trustee could distribute income to minor beneficiaries at adult marginal tax rates,” he says.

“Distributing income to a minor beneficiary meant that the first $18,200 of income (including capital gain) is tax-free.” However, what makes this different from the Coalition’s dreaded “death tax” is that assets within these trusts are only taxed when they are distributed, so the simple act of dying does not incur any tax. 

The new laws will also not affect any testamentary discretionary trusts that were existing at the time the new tax was announced on May 12. 

Crucially, none of these rules have been passed into law yet, and Labor could well change them before they are. Despite the prospect of higher taxes, Parker says testamentary trusts should still be considered in estate planning, as they provide flexibility to move with changing circumstances. 

He urges people to "not overreact to the headlines" instead ensuring their estate planning documents are structured with "flexibility" to give beneficiaries as many options as possible in managing their inheritance as personal circumstances and tax rules change over time.

 

What about the CGT changes?

Labor will change capital gains tax from the current 50 per cent discount model to an inflation-adjusted model, with a 30 per cent minimum tax as a baseline. 

Parker says there will continue to be a capital gains tax exemption for main residences sold and settled within two years of death. While death itself does not trigger a CGT event, inherited assets such as investment properties, commercial properties and shares will generally face a higher effective rate of tax when they are eventually sold under the new regime, whether by an executor or beneficiary.

 

Read the full article in The Age here.

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