How Testamentary Trusts can Save Heaps of Tax

Testamentary Discretionary Trusts (TDT) set up in a person’s will can save the family a fortune in tax as well as give other benefits.

These benefits include the general benefits of a discretionary trust such as the ability to stream the income to the lower tax payers in the family. The trust itself doesn’t pay any tax if the income of the trust is distributed. The recipients of the income will pay tax at their marginal tax rates.

But with trusts set up under a will there are extra tax benefits because the income can be distributed to minor children who are then taxed as adults would be. This benefit is not available with trust set up during a person’s lifetime because children will pay penalty tax rates of up to 66%.

The tax saving can be demonstrated by a simple example comparing 2 situations of a family – with a TDT and without a TDT in the will.

Example:

Bob dies with a large number of investment properties. Rental income is $80,000 per year after expenses. Bob is married and has 4 kids.

Situation A: Bob dies with a will giving everything to his spouse –

The spouse will receive the rental income going forward and it will be taxed by adding it to the other income of the spouse.

If the spouse was on the top rate of tax, the tax payable each year would be $37,600.

A huge amount of tax!

Situation B: Bob dies with a will leaving everything in a testamentary trust with Spouse in control –

The trustee of the TDT will receive the rental income going forward. This could be the spouse or a company controlled by the spouse.

The trustee could then distribute the income of the trust to the 4 kids – $20,000 each.

Each kid will be taxed as an adult would and can get the tax free threshold and the low income tax offset so no tax would be payable at all.

This family could save $37,600 per year in tax!

Not to mention the tax savings on CGT when or if a property is ever sold. Additionally there are great asset protection benefits if the spouse would re-partner and/or if any of the beneficiaries became bankrupt or incapacitated.

Written by Terry Waugh, solicitor at www.structuringlawyers.com.au

How to Set Up a Testamentary Trust

Firstly the downside – unfortunately someone has to die to set up a testamentary trust!

A testamentary trust is just a trust set up under a person’s will. It could be a unit trust, fixed trust, hybrid trust, bare trust or a discretionary trust.

The trust is set up as part of the will. The testator will instruct their executor to pass specified property to the trustee of the trust with the trustee nominated and the terms of the trust outlined in the will.

All of your property could be left to the trust or just specific property with other property going directly to people. Property here means not just houses, but any asset.

Example:

I give any vehicle that I own at my death to my children.

I leave the remainder of my estate to the trustee of the ABC trust to be held on the terms outlined in part B below.

The terms of the trust would run many pages and would outline who the appointor is, who the trustee is, who the primary beneficiaries are and who the other beneficiaries are. The powers of the trustee will be outlined and they can be broad or restrictive. The trustee could be restricted to invest only in certain areas and prohibited to invest in other areas – such options trading.

The first trustee of the trust would generally be the primary beneficiary. But the trust would be drafted so that the primary beneficiary should have the power to change the trustee to a company. This saves having to set up a company now and incur ASIC fees.

Since the trust is set up under the will, if the will is invalid for whatever reason, not properly witnessed for example, then the trust will not eventuate. Therefore it is of critical importance you set one up correctly.

Written by Terry Waugh, solicitor at www.structuringlawyers.com.au

Who will look after your children if you die?

What happens when both parents die early and minor children are left behind?

The children must come under the care of a guardian. You can appoint such a guardian by your will. In NSW section 14 Guardianship of Infants Act 1916 (NSW) gives this power and there would be similar legislation in other states.

If there is no guardian appointed under a will then someone, perhaps grandparents or other relatives, will need to apply to a tribunal to be appointed guardians of the kids. Sometimes there may disputes between different family members about who will be guardians – two sides of a family fighting it out for example and this would necessitate the tribunal or court to make a decision.

Some of what to consider when appointing a guardian:

  • Will the guardians likely accept the role?
  • Where does the guardian live?
  • Should they be compensated (via your will)?
  • Is their accommodation suitable?
    • Should they be allowed to use some of the children’s money to extend their house? (a court has said yes and allowed renovations in at least one case under specific circumstances);
  • How old are they?
  • What If they die?
    • Before you, or
    • Before your kids become 18.
  • Do they get on with your children now?
  • Do they follow the wrong religion?
  • Could they handle all of your children’s care?
  • Are they connected with a circus? (considerations of lifestyle)

This is another reason to consider making a will even if you do not have any assets.

Written by Terry Waugh, solicitor at www.structuringlawyers.com.au

 

Posted: 24 Jan 2018
Forum Discussion: https://www.propertychat.com.au/community/threads/legal-tip-172-who-will-look-after-your-minor-children-if-you-die.28950/
Topics: Minor Children; Death