Testamentary Trusts – Tax

Education can be expensive – school uniforms, fees, excursions, book lists etc.

If you are a parent or grandparent, a testamentary trust in your Will may assist your spouse with your children or grandchildren’s education costs.

Consider the following:

Adam dies leaving an estate comprising an investment portfolio valued at $1m.

Adam leaves his whole estate to his widow, Eve, who already earns $120,000 per annum. Eve is glad that Adam left her the investment portfolio which she will use to look after their 3 children, aged between 8 and 14.

In the first year of Adam’s death, Eve receives income of $60,000 from the investment portfolio.

As she already has income of $120,000, the tax that Eve will pay on the $60,000 will be approximately $22,200.

If Adam had established a testamentary trust instead, Eve could have distributed the $60,000 trust income in that first year equally between her 3 children – that is, each child would have received $20,000 income. As each child would be taxed as an adult, the tax payable per child could be said to be:

Tax on $20,000 = 0 (including low income tax offset)

The tax saving would be $22,200 in one year alone.

That means Eve can distribute $20,000 to each child per year to fund their expenses, including education.

Example adapted from “Estate & Business Succession Planning”, 7th edition, Bernie O’Sullivan, Para 5-110.

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