Documentation, Tax

Testamentary discretionary trust death benefit bonus

Advisers should consider the role a testamentary discretionary trust can play in producing a more tax-effective outcome and ensuring protection against external risks with regard to the distribution of significant SMSF death benefits, a specialist trust deed service provider has said.

SuperCentral noted the use of a testamentary discretionary trust is particularly significant when SMSF death benefits are being paid to adult children who are not considered to be dependants of the deceased member.

To illustrate the point, SuperCentral special counsel superannuation and estate planning Brian Hor cited an example where a death benefit of $2.4 million is paid out as a direct lump sum to two adult children who run their own businesses and have children of their own.

In this situation, Hor noted had the deceased member prepared a will that established a testamentary discretionary trust for the beneficiaries, the inheritance could have been processed in a more tax-effective manner as a portion of the investment income from the trust could be distributed to their children.

In addition, he pointed out the death benefit from the SMSF would also be protected from any risks arising from each of the adult children’s businesses if it was to be paid into a testamentary discretionary trust.

According to Hor, the strategy to pay the death benefit into a testamentary discretionary trust would not have any adverse tax consequences as neither beneficiary could be classified as a dependant of the deceased member.

Without incorporating a testamentary discretionary trust in a situation like this, the beneficiaries will lose the ability to protect their inheritance payouts as well as miss out on the opportunity to take advantage of highly concessional tax treatment available if some of the investment income from the trust is distributed to minor children, he added.

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