Retirement asks us to plan for a future we cannot fully predict. Legacy planning asks us to decide how much of today’s wealth can safely belong to someone else. Increasingly, the challenge is not choosing between the two but knowing where one ends and the other can begin.
That is the balance many Australians hope to strike after decades spent building their hard-earned savings - having enough to enjoy a comfortable retirement while ensuring that there’s enough left over to make a meaningful difference to the lives of their children and grandchildren.
But even the clearest intentions are difficult to translate into firm financial commitments. How much can parents afford to give without compromising their own retirement? Should wealth be divided equally, or according to each beneficiary’s needs? And how can a family make those decisions today when its circumstances could look markedly different in a few years from now?
Discretionary trusts have long provided families with the flexibility to navigate this uncertainty, allowing trustees to adjust distributions as circumstances change. The Federal Government’s proposed tax reforms could put a price on that flexibility.
From July 2028, they would face a minimum tax of 30%, although certain trusts and income would be excluded. Affected trustees could instead elect to fix beneficiaries’ entitlements to income and capital - potentially reducing the tax burden, but also limiting their ability to respond as family circumstances evolve.
The reforms are not yet law, but they are a timely reminder that legacy planning is not one decision made at the end of life. It is a series of choices about what you can afford to give, how much flexibility you want to retain, and when that wealth can have the greatest value to the people you intend to support.
Before making any changes, here are three areas families should consider carefully.
1. What is needed for you, and what is set aside for someone else?
Before deciding how much wealth to pass on, those approaching or in early retirement must first establish how much they can afford without compromising their own financial security.
For many, the answer is far from certain. ASIC estimates 2.5 million Australians will retire over the next decade, yet 48% of those aged 50 to 66 worry about running out of money in retirement, and just 18% have a clear retirement plan in place.
Consider a couple planning to divide their investment portfolio equally between three children. Their current asset position may comfortably support that intention, but the eventual inheritance will depend on how much they draw down, how markets perform and whether healthcare or aged-care expenses exceed expectations.
This is where retirement and intergenerational planning need to be considered together. Working with a financial adviser, families can determine how much capital they might require throughout retirement, testing different spending, longevity and investment-return scenarios rather than relying on a single projection.
That assessment should extend across superannuation, personally held investments and assets within family trusts. Through this, families can identify which assets will provide retirement income, which may need to be accessed for unexpected expenses and what can reasonably be set aside for beneficiaries.
It should also inform how assets are invested, and over what timeframe. Capital that may be needed for aged care at short notice should remain readily accessible, whereas money earmarked for a grandchild's education in fifteen years may accommodate a longer investment horizon.
Importantly, setting aside wealth for the next generation does not necessarily mean transferring ownership immediately. Families might want to retain access to certain assets but establish a separate investment strategy for the funds they are confident will not be needed in the short-term.
For the couple, this process could either confirm that their intended bequest is affordable, or reveal that a smaller allocation would leave them better placed to meet their own needs.
Once families have determined what they can afford to leave behind, the proposed trust tax reforms may raise further questions: what is the right structure to use, and should they commit now to how wealth will be divided?
2. How much is the ability to change your mind worth?
The family may wish to preserve an equal inheritance while providing additional income to whichever child needs support along the way. A discretionary trust has traditionally allowed them to do both.
The proposed reforms would make that harder. To remain outside the 30% minimum tax regime, an affected trust could elect to fix beneficiaries’ entitlements to income and capital. In doing so, however, the trustee would surrender much of the latitude to vary distributions between beneficiaries.
Reversing course later could also carry a significant tax cost. If the trust no longer met the conditions of the election, its net income could be exposed to the top marginal tax rate plus the Medicare levy for that year, before the 30% minimum tax applied thereafter.
That trade-off may still be worthwhile for some families, particularly those using corporate beneficiaries, or bucket companies. Under the draft rules, companies would not receive the tax offset available to individual beneficiaries for minimum tax already paid by the trust. The same income could therefore effectively be taxed once in the trust and again in the company, producing a combined tax rate of up to 60%.
Restructuring into a company or fixed trust during the proposed transition period is another option, with rollover relief intended to ease some of the tax consequences. Although stamp duty, transaction costs and the longer-term tax treatment would still need to be considered.
Before committing, families should work with their financial adviser to model the economics of each path over time. The relative value of fixing entitlements will depend on the trust’s expected income, the mix of individual and corporate beneficiaries, the likely duration of the structure and the costs involved in restructuring or reversing course later.
That analysis may also sharpen a separate planning decision: whether all wealth earmarked for the next generation should remain tied to an eventual inheritance, or whether some of it is better deployed earlier for a defined purpose.
3. What does the structure need to achieve before the wealth changes hands?
A child trying to buy their first home may need support years before wealth would ordinarily pass through an estate. The same applies to education costs, which may have been met long before an inheritance arrives.
Research from the Australian Institute of Family Studies found that financial assistance provided earlier in life can have a greater influence on opportunities such as housing and education, even where the amount involved is smaller than a later inheritance. That creates distinct roles for the structures used to hold that wealth.
A testamentary trust, for example, can provide control over assets after death and, in some circumstances, tax advantages, including ordinary progressive marginal tax rates on excepted income distributed to minors. Under the proposed reforms, testamentary trusts established for genuine testamentary purposes would also be excluded from the minimum tax.
Those benefits are valuable where the intention is for assets to remain in the estate. But because a testamentary trust only comes into existence on death, it cannot help with expenses that arise beforehand.
For capital that may be put to use earlier, investors may need to consider structures that preserve ownership while still allowing money to be set aside for a future beneficiary.
Investment bonds are one example. The owner retains control over the investment and who ultimately receives the proceeds, while earnings are taxed within the bond at an effective rate of up to 30%. Subject to conditions including the 125% contribution rule, withdrawals after ten years can also be made without additional personal income tax.
This treatment will not suit every investor. The internal tax rate may exceed the marginal rate of a lower-income beneficiary, and investment bonds are generally better suited to money that can remain invested for the longer term.
That makes the decision less about choosing a preferred structure and more about matching the structure to the characteristics of the capital. Money expected to fund a home deposit, education or another known expense has a different liquidity profile and investment horizon from assets intended to remain in the estate for decades.
For some families, that may justify holding those pools separately, so each can be invested and taxed according to the role it is expected to play.
Treat inheritance as a series of decisions, not a single event
The proposed reforms may bring forward decisions about how wealth is divided or distributed, but they cannot anticipate how a family’s circumstances will change. Nor should the pursuit of lower tax obscure the distinction between preserving an inheritance and putting that wealth to use when it is needed.
Australians should be able to enjoy the retirement they have worked towards while giving careful thought to what they leave behind. A lasting legacy is not simply the wealth that survives its owners, but the opportunities it creates for those who follow - and the difference it can make during their lifetime.
Felipe Araujo is the Chief Executive Officer of Generation Life Limited AFSL 225408 ABN 68 092 843 902. The information provided is general in nature and does not consider the investment objectives, financial situation or needs of any person and is not intended to constitute personal financial advice. The product’s Product Disclosure Statement (PDS) and Target Market Determination (TMD) are available at www.genlife.com.au and should be considered in deciding whether to acquire, hold or dispose of the product. Generation Life excludes, to the maximum extent permitted by law, any liability (including negligence) that might arise from this information or any reliance on it. Past performance is not a reliable indicator of future performance.