In essence, a DTT is a structure that can be put in your Will that can save your beneficiaries from paying unnecessary tax, and may offer other protections to your beneficiaries as well.
Under a Will with no DTT, everything passes directly to your beneficiary - let’s say your spouse. In simplistic terms, your spouse eventually receives this money into their own bank account and can then use or invest is as they choose. Your spouse does not pay income tax for receiving the money, but they do pay tax at their usual rates on the interest they receive from investing the money.
However, if there was a DTT in your Will, your spouse has an option about taking the money. They can instead choose for the money to go into the DTT you set up, rather than to them directly. Your spouse has total control over this trust (unless you choose to structure it differently) and can take money out of it as they need it. However, they can also choose to take money out of it via a range of people who have better tax treatment than them - most notably, minor children and grandchildren, who have very good tax treatment in these types of trusts (full adult tax free threshold). This means your spouse can save several thousands of dollars in each year in tax.
Under current tax laws, income streamed via minors can save more than $18,000 a year in tax per child!
These trusts are excellent vehicles for reducing tax, and are generally completely flexible so that your spouse is not locked into anything - if it’s not appropriate to use it, they don’t have to, but it is there as an option.
DTTs may also offer other benefits, such as protection against claims from creditors and some possible protection in family law claims, depending on how the control is structured.
The only drawback of these trusts is the increased costs associated with setting them up and running them after your death. However, these costs are usually well and truly offset by the tax savings afforded by a DTT.
If you do not include a DTT in your Will, there is no equivalent option for your spouse or other beneficiaries after you pass away - it is up to you to give your loved ones the very best range of options!