Tax Effective Wills

There are concessions in the Tax Act which permit very substantial benefits to your surviving family from a properly drawn Will. While leaving everything to your spouse or your children may seem attractive, there may be more tax effective ways of providing for your family.

The problem arises because, after your death, all of your income will come to be assessed as taxable income in the hands of your surviving spouse. Unfortunately the tax rate applicable to that income in her hands will be much higher than it was when it was received by you. This is because, in your hands, the first $6,000.00 is tax free, and income thereafter up to $24,000.00 is only taxed at 15%. If your spouse already has income over say $34,000, most of the extra income received after your death will be assessed in a higher tax bracket.

Example 1

Assume:

your surviving spouse already has an income of $34,000.00
the value of your estate will be $200,000.00
that $200,000.00 will earn 7% return ie $14,000 per year

If you leave all of your estate to your spouse, that $14,000.00, will push her into a higher tax bracket. Effectively your surviving family will pay tax on that $14,000.00 of $4,200.00, each and every year. Your surviving family’s net income from your estate is under $9,800.00.

The Tax Act specifically allows children to receive income from a deceased estate which can dramatically reduce your surviving families tax burden. In the example given above, if you have three children, the income could be completely tax free, ensuring your family receives the full $14,000.00 to which they are lawfully entitled. If you have only two children the tax is still dramatically reduced to $640.00.

The benefits are even more pronounced for higher wealth families.

Example 2

Assume:

your surviving spouse already has an income of $80,000.00
the value of your estate will be $500,000.00
that $500,000.00 will earn 7% return ie $35,000 per year

If you leave all of your estate to your spouse, that $35,000.00, will be taxed at the rate of 40%. Effectively your surviving family will pay tax on that $35,000.00 of $14,000.00, each and every year. Your surviving family’s net income from your estate is under $21,000.00.

This can be substantially reduced by using a Testamentary Trust. If you have three children, the total tax would be $3,760.00, ensuring your family receives over $31,000.00 to which they are lawfully entitled each and every year. For two children the tax is still dramatically reduced to $2,550.00, leaving over $32,000 after tax each year. This represents a tax saving of $11,000 every year indefinitely.

What’s more, your surviving spouse can still retain control of all of the funds, ensuring they are invested wisely, and applied for the maintenance, and education of your children.

Tax Effective Wills – Testamentary Trusts for Grandparents

A similar rationale will apply to income producing assets that are left to your adult children. We find that for many of our more mature client’s wish to ensure that their grandchildren are adequately provided for, not only for food and shelter, but also to set up an education fund to cover private school fees, and/or university education. The use of a Testamentary Trust is an ideal vehicle to achieve that objective.

The examples above show the advantages that arise from a Testamentary Trust, particularly for a family with young children, but the same rationale applies for you leaving gifts to your children for the benefit of your grandchildren. See the example below.

You should note that if you try to make these gifts while you are alive the tax rates applying to your grandchildren are very high. They effectively preclude any lifetime provision for your grandchildren. However upon your death, you can leave a substantial amount of money to your children as Trustee for their children (your grandchildren) with directives as to how those funds are to be applied for the children’s benefit and education. This may also protect those funds from claims by your children’s creditors in bankruptcy or their spouses in matrimonial break up and other possible claims.

It is even possible for you to include your child as a beneficiary of this discretionary Trust so that they too can share in the income and capital of the Trust Estate if they wish to.

This provides the benefit that your children will have complete control of the assets, while not being burdened with the income tax which comes from the income from those assets. That income tax can be effectively eliminated by carefully allocating the income towards maintenance support and education of your grandchildren.

Example

Assume:

that you have $500,000.00 that you may wish to leave to your child:
that child already has an income of $80,000.00
that $500,000.00 will earn 7% return ie $35,000 per year

If you leave all of your estate to your child, that $35,000.00 will be taxed at the rate of 40%. Effectively your children will pay tax on that $35,000.00 of $14,000.00, each and every year. Your surviving family\’s net income from your estate is $21,000.00.

This can be substantially reduced by using a Testamentary Trust. If your child has three children, the total tax would be $2,549.00, ensuring that family receives over $33,000.00 to which they are lawfully entitled each and every year. This represents a tax saving of $12,000 every year indefinitely.

If you have more than one child with children of their own, the effects are multiplied dramatically.

What’s more, your child can maintain control of all of these funds, ensuring they are invested wisely, and applied for the maintenance, and education of your grandchildren.

The Tax preferred nature of the trust should ensure the trust is preserved for many years, ensuring your legacy lasts a long time.

Please call Peter Lee or Graham Knight on 3435 4200 or email peter@plee.com.au if you have any enquiries.

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