Testamentary Discretionary Trust: Minimise Capital Gains Tax

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What is Testamentary Discretionary Trust?

It is when a trustee holds the decision to distribute the capital and income to beneficiaries by having the same or different proportions. The coverage of such trust is only those beneficiary listed as part of the Will.

Testamentary Discretionary Trust is considered a highly beneficial tool for estate planning. As Capital Gains Tax is inevitable, the Testamentary Discretionary Trust keeps it in the minimum.

When is Capital Gains Tax triggered?

Asset disposal triggers CGT. When an asset is passed to a beneficiary under a will, such does not constitute a disposal. Given this instance, Capital Gains Trust will not take effect.

Capital Gains Tax is only triggered if the beneficiary receiving the asset decides to dispose of it. The trustee may transfer the asset to a beneficiary. This can be done by declaring either Low or No Income to reduce CGT liability. The beneficiaries may defer the need for the assets sale. This is true if assets are held within a trust.

A good example is when a property acquired by a senior member of the family fronting Bondi Beach in the 70s may at present be worth well over $5 million. Capital Gains Tax event will not be triggered if such property is passed to a younger member of the family through the testamentary discretionary trust.

Advantages of Testamentary Discretionary Trust?

A great advantage of a testamentary trust relates to splitting the asset/s between beneficiaries. In the absence of trust, all beneficiaries pay an extra amount of tax for the year.

Since trust is present, CGT can be split across other beneficiaries. Wives or other children may be added in the mix to lessen CGT’s effect. The tax even gets further reduced with the consideration of the maximum tax-free threshold. Corresponding rebates (if the beneficiary has children) are also considered.

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Spouses’ employment may also be considered in the computation for the final Capital Gains Tax. An unemployed spouse receives a certain tax rate. It shaves off a significant dollar amount to the overall tax liability computation.

In conclusion:

Testamentary discretionary trust significantly reduces CGT. Not to worry or intimidated, though. Just remember that testamentary discretionary trust has a correlation to the following:

  • Members of beneficiary listed under the Will;
  • Trustee’s involvement on whose party gets more share of the pie;
  • Extended beneficiaries as part of overall CGT computation.

A trusted and expert Financial Planner may need to discuss this even further. Have a sit-down and in-depth discussion to further your financial knowledge.


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The material on this website has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained on this website is General Advice and does not take into account any person’s particular investment objectives, financial situation and particular needs. Before making an investment decision based on this advice you should consider, with or without the assistance of a securities adviser, whether it is appropriate to your particular investment needs, objectives and financial circumstances. In addition, the examples provided on this website are provided for illustrative purposes only.

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