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A Testamentary Trust is a trust in a will which may provide significant asset protection with potential tax advantages for your beneficiaries.
The concept arises from Section 102AG of the Income Tax Assessment Act 1936 (incorporated in the 1997 Act). This section removes the penalty rates of tax on unearned income (interest, investment dividends, etc) for children and allows ordinary tax rates to apply where the income is distributed from a trust estate created under a will; hence the name “Testamentary Trust”.
The tax problem: On a person’s death, the “usual” situation under a “simple” will is that:
- all assets are left to the surviving spouse and on the spouse’s death, to the children;
- the spouse’s tax free threshold is $18,200;
- in the simple will, children have no entitlement until the surviving spouse dies; and
- the spouse invests the assets and receives the investment income on which tax is calculated.
In effect, this means that in a “simple” will, a maximum of $18,200 income per annum can be earned tax free.
The asset protection problem: Under a “simple” will assets are often distributed to the deceased’s children who then own those assets. If a child is involved in a family law property dispute, that child’s assets are exposed to the claim. Creditors can also claim against your child’s assets (which include your former assets) – as to which see further Asset Protection.
|The “Simple Will”|
|Assets in Estate|
|Surviving Spouse – Sole Beneficiary|
|Income from Invested Estate Assets|
Tax Free Income: $18,200 p/annum
What Does This Mean?
Without proper planning, a family is left with a tax-free threshold of $18,200 and pays tax on the excess. This equates to only $350 tax-free per week for this family.
By not putting in place a Testamentary Trust, a major beneficiary of your estate may be the Australian Tax Office at the expense of your family.
One Solution – Testamentary Trust
However, using a Testamentary Trust increases the family’s tax free income (using tax-free threshold rates effective from 1 July 2016).
|Assets in Estate|
|Testamentary Trust in Will|
|Income from Invested Estate Assets in Testamentary Trust|
Tax Free Income: $72,800 p/annum
In this example, the introduction of a Testamentary Trust provides the family with three times the tax free income than in a “standard” will, (i.e., an additional $54,600 per annum tax free or an extra $1,050 a week tax-free).
Your children may also “blow” their inheritance for which you worked so hard. But if your estate is in a Testamentary Trust it will be protected and conserved.
If your assets are gifted to your children so that your children own them, third parties (creditors) may claim against those assets.
If, however, assets are gifted to a testamentary trust over which your spouse or your surviving children have control (not ownership), then because the trust owns the assets and not the children, third parties may not be able to access the assets.
In the will you may impose conditions on how and when the trust makes distributions to the trust beneficiaries (who may be your spouse and/or children) which your spouse and/or children themselves may control or you may appoint others to this position.
A standard will gives none of these protections; a will with a testamentary trust gives control of the assets in the trust to your appointed trustee (surviving spouse or surviving children) but does not gift assets to them so that these assets may be protected from third party claims.
|Tax Rates 2016-17|
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $80,000||$3,572 plus 32.5c for each $1 over $37,000|
|$80,001 – $180,000||$17,547 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,547 plus 45c for each $1 over $180,000|
Why you should Contact Us
We have 5 conveniently located offices in Perth, Jindalee, Joondalup, South Lake and Rockingham to deal with your case. You do not need to come into town to see us! We are in your local area for your convenience!
We have a dedicated team of people experienced in testamentary trusts in Perth who love their involvement in law and providing good quality legal services at a competitive price to members of the public of Western Australia, which we have been doing since 1989.