Australians suffering with dementia or cognitive decline could be vulnerable to being hit by a “death tax” under the Albanese government’s plans to change trusts.
From July 1, 2028, Labor will impose a 30 per cent minimum tax rate on discretionary testamentary trusts.
These allow a trustee to choose who receives income or assets and are written into a person’s will. They are often established to protect children or vulnerable people after parents have died.
Treasurer Jim Chalmers has argued for the changes targeting discretionary trusts because they can be used to reduce tax by distributing income to beneficiaries on lower marginal tax rates.
Trusts will not be impacted by Labor’s changes provided they are established before July 1, 2028.
However, a testamentary trust does not come into existence until the person passes away.
This could cause problems for Australians who have established a testamentary trust and begin experiencing dementia or serious cognitive decline.
Wealth Lawyers co-founder and former Westpac executive Anthony Hunt warned testamentary trusts authored in a will, but which have not come into effect will not be covered by the government’s grandfathering arrangements.
“These people who are (experiencing dementia) are caught in this horrible trap where they can no longer change their will because they’ve lost the capacity to do it – either through dementia or some other illness,” he told Business Now.
Many who suffer dementia or cognitive decline appoint a loved one as a Power of Attorney to make challenging legal or financial decisions for them.
However, a Power of Attorney cannot change a will.
The only way a person’s will can be changed – regardless of their cognitive ability – is through the Supreme Court.
A trustee or beneficiary can write an application to the Supreme Court to ask if they can create a statutory will.
Mr Hunt said the new tax arrangements will heap excess pressure on Australians caring for a loved one suffering with dementia.
“It does seem very unfair because not only are they in difficult situations, their families are suffering as well and they’re the ones who will bear the longer term consequences of this,” he said.
Sky News’ Business Editor Ross Greenwood has previously warned the trust tax changes effectively amount to a “death tax”.
“The testamentary trust is there to hold the assets once you have passed away and your beneficiaries receive the income, but allows you to be able to dictate when your beneficiary’s teenage kids, for example, will get their inheritance,” he said.
“So, it sits in that testamentary trust, but the government’s now saying that (the income generated will) be hit with a 30 per cent tax, which to me is a death tax.
“I don’t care how you dress it up, it’s a death tax.”
The government has given Australians a three-year transition period to alter their trust structures.
Mr Chalmers has repeatedly said Australians who wish to “avoid” paying the minimum tax can establish fixed testamentary trusts – where beneficiaries’ entitlements are locked in.
The government has also said it is establishing a time period later this year where it will review the tax.
Mr Hunt said he was hopeful the government would address how the tax changes will impact those with dementia, but there was no sign of this yet.
“I’d like to call on the government to say you need to consider the needs of this poor, unfortunate group of people and their families and reconsider what’s going on,” he said.
“There’s been no indications so far that they’re even aware that this is a problem.”
The budget papers said the number of discretionary trusts has doubled over the past two decades and distributed $142.4 billion to beneficiaries in the 2023 financial year.
Under the changes, the flat rate would be applied to asset earnings before they are distributed.
Beneficiaries would then receive a non-refundable income tax credit to ensure they do not pay tax twice.