Australians suffering from dementia or cognitive decline may be vulnerable to a so-called 'death tax' under the Albanese government's proposed changes to discretionary testamentary trusts. From July 1, 2028, Labor intends to impose a 30 per cent minimum tax rate on these trusts, which allow a trustee to decide who receives income or assets and are typically written into a person's will to protect children or vulnerable individuals after the parent's death.
How the Changes Affect Dementia Patients
Treasurer Jim Chalmers has argued that the changes target discretionary trusts because they can be used to reduce tax by distributing income to beneficiaries on lower marginal tax rates. Trusts established before July 1, 2028, will not be impacted. However, a testamentary trust only comes into effect upon the person's death. This creates a significant problem for Australians who have included a testamentary trust in their will but later develop dementia or serious cognitive decline before the trust becomes active.
Wealth Lawyers co-founder and former Westpac executive Anthony Hunt warned that testamentary trusts written into a will but not yet in 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.
Power of Attorney Limitations
Many individuals with dementia appoint a loved one as Power of Attorney to handle legal and financial decisions. However, a Power of Attorney cannot alter a will. The only way to change a will, regardless of cognitive ability, is through the Supreme Court. A trustee or beneficiary can apply to the court to create a statutory will, but this process can be complex and costly.
Mr. Hunt said the new tax arrangements will add pressure on families caring for a loved one 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.
Criticism of the 'Death Tax'
Sky News Business Editor Ross Greenwood has previously described the trust tax changes as effectively 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 dictate when your beneficiary's teenage kids, for example, will get their inheritance. 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,' he said.
Government's Transition Period and Review
The government has provided a three-year transition period for Australians to alter their trust structures. Mr. Chalmers has repeatedly stated that those wishing to avoid the minimum tax can establish fixed testamentary trusts, where beneficiaries' entitlements are locked in. The government has also announced a review of the tax later this year. Mr. Hunt expressed hope that the government would address the impact on those with dementia, but noted there has been no indication they are aware of the problem.
Background on Discretionary Trusts
According to budget papers, the number of discretionary trusts has doubled over the past two decades, distributing $142.4 billion to beneficiaries in the 2023 financial year. Under the proposed changes, a flat 30 per cent rate would be applied to asset earnings before distribution, with beneficiaries receiving a non-refundable income tax credit to prevent double taxation.
