Why Estate Planning Is Important

Testamentary Trusts

Although most people think that Death Duty or Probate Duty has long been abolished, they fail to realise that Capital Gains Tax (CGT) has application to assets passing on death and that it is a proven fact that CGT now earns the Government much more revenue than death duties ever did.

One way to plan your estate and help minimise tax liabilities is to establish a Testamentary Trust in your will.  These are quite simply a trust created in you will and funded by assets of your estate on death or by payments to the estate in consequence of your death (eg superannuation death benefits and insurance proceeds).

They are usually discretionary in nature giving flexibility to your beneficiaries.  A major income tax advantage occurs when income from a Testamentary Trust is distributed to benefit a child, grandchild or great-grandchild under the age of 18.  This is because this income is ‘excepted’ under Section 102AG of the Income Tax Assessment Act from the normally higher rates of tax that children otherwise pay. (Children normally earn $416 tax free but after that they tax at the highest marginal rate).  However, under a Testamentary Trust children get the same tax treatment as adults.  That means the first $18,200 of income tax is free, $18,200 to $37,000 is taxed at 20.75% and so on.

Let’s look at an example:

Dad leaves in his will an income-earning asset (eg a warehouse) getting $60,000 income per annum, to his son John who is married with three children aged 3, 6 and 9. John is a successful businessman earning $180,000 a year. Without a Testamentary Trust, John would receive the income of $60,000 to be added to his other income and he would pay tax at the highest marginal rate of 46.75% and thereby would lose $28,050 in tax every year.

If instead Dad had established a discretionary Testamentary Trust with John as trustee and John, his wife and three children as potential beneficiaries, John could evenly distribute the $60,000 income to this three children ($20,000 each) and they could pay tax at adult rates which means they can earn up to $20,542 after low income tax offset and pay NO tax. A saving of $28,050 EVERY YEAR!  Any capital gain on disposal of the asset would similarly be distributed at John’s discretion (because he controls the trust) to minimise Capital Gains Tax payable.

This is just one of the many advantages of Testamentary Trusts.  So why send much of your hard-earned estate dollars to Canberra when using a Testamentary Trust can help increase the benefits to your family and loved ones.  Don’t delay, act today!

Contact us to arrange a consultation with one of our experienced and dedicated lawyers.