Testamentary Trusts.

The only two things in life that are certain – taxes and death. However, there is a way to reduce the exposure to tax for beneficiaries by establishing a Testamentary Trust.

Testamentary Trusts are established by a will and only come into effect when the person passes.

Reasons we may wish to consider a testamentary trust include, but are not limited to

• provide for education costs for grandchildren tax effectively

• protect the inheritance of children with issues such as gambling or drug addition

• protect a beneficiaries share of inheritance during a divorce

• protect inheritance from creditor claims

Testamentary trusts have the potential for significant tax savings where income from the testamentary trust is distributed to a child or grandchild under 18 years of age as it is deemed ‘excepted’ income.

Example: Mary passes away leaving behind her husband John and two children under 18.  John is on the highest marginal tax rate.

Mary left behind cash of $300,000.  If John were to invest in his personal name, assuming a return of 4%, he would generate income of $12,000.  After tax, being 47% (45% plus 2% Medicare levy), he would be left with $6,360.

If, however, a testamentary trust was established by Mary’s will, John could distribute the income to the minor children, utilise their tax-free threshold and pay no tax.

This results in a net saving of $5,640.

There are both advantages and disadvantages to a testamentary trust and your individual circumstances need to be considered.  If you would like to discuss the tax benefits further, please reach out to our office.