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CREATING a testamentary trust can save your heirs and your estate thousands of dollars in tax every year. A testamentary trust is a trust created by a Will. Rather than bequeathing assets to your beneficiaries directly, your Will sets up a trust, and nominates your beneficiaries as a beneficiaries of the trust.
One of the great advantages of a testamentary trust is that it allows income, capital gains and franked dividends to be divided among your beneficiaries in the most tax-effective way.
If you have concerns about your Will fill in this form and we will respond.
If you don’t set up a testamentary trust, and you leave assets directly to someone who earns more than $50,000 a year, any income and capital gains from those assets is taxed at the highest marginal tax rate of 48.7 per cent. Your direct beneficiary could also end up with a hefty provisional tax liability in the first year.
It is much more effective to set up a testamentary trust in your Will, and leave your assets to your beneficiaries through the trust. The income and capital gains from the trust can then be split among the beneficiary’s family, and taxed at lower marginal tax rates.
Let’s consider an example of a family with three children, where the husband earns $60,000 a year and the wife and children have no other income. If a Will directs assets to the husband directly, all future income from the assets will be taxed at 48.7 per cent.
A much more effective estate planning strategy is for the Will to create a testamentary trust. Income from the trust can be directed to the wife and the three children, rather than to the husband.
The first $5400 paid to the wife and each of the children each year would be tax-free, that’s combined $21,600 tax-free every year. And their combined income between $21,600 and $82,800 is taxed at only 20 per cent.
Capital gains on inherited assets can also be distributed more tax-effectively using a testamentary trust. Using the above family as an example, a good strategy would be to allocate the capital gain to one of the children, and then not give that child any other income from the trust that year. This maximizes the averaging concession that applies to capital gains. If the child doesn’t receive any other income that year, he or she can have a tax-free capital gain of up to $27,000.
The tax concessions don’t just apply to income and capital gains from the originally inherited assets. They also apply to any income and capital gains the trust derives from reinvesting the inheritance.
Effective estate planning is very technical, and you really need your solicitor to work closely with your financial adviser when drafting your will.
If you have concerns about your Will fill in this form and we will respond.
