Comparison Between a Simple Will & Testamentary Trust

Date: Jul 11, 2009
Document Type: Article

THE PROBLEMS

The tax problem: On a person’s death, the situation under the usual 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 $6,000;
 
·         children’s individual tax free threshold (without low income rebate) is $750 each; and,
 
·         the spouse invests the assets and “distributes” income in the most effective way.
 
In effect, this means that without a testamentary trust, and assuming three children in the family, a maximum of $8,250 income per annum can be earned without paying tax.
 
The asset protection problem: Under a simple Will, assets are often distributed to the deceased's children who then own those assets. If such a child is involved in a family law dispute those assets are exposed to claims by the spouse and may even be shared by the spouse's children from another relationship. Creditors can also claim against your former assets if they are owned outright by the beneficiary, so for example they would be available to a trustee in bankruptcy. If a beneficiary is bankrupt at the time of the inheritance, the inheritance would go to the trustee in bankruptcy to pay out the claims of creditors.
 
It means therefore that you are not protecting your own children from the common problems in life.
 
THE SIMPLE WILL

Assets in Estate
 ↓
Surviving Spouse - Sole Beneficiary
 ↓
Income from Invested Estate Assets
Spouse
$6,000
Child 1
$750
Child 2
$750
Child 3
$750
 
TAX FREE INCOME: $8,250 per annum
 
 WHAT DOES THIS MEAN?

This means that, without proper planning, a family is left with a tax-free threshold of $8,250 and pays tax on the excess. This equates to only $158.65 tax-free per week for this family.

By not putting in place a testamentary trust, the Australian Tax Office would in effect become a major beneficiary of your estate at the expense of your family.
 
ONE SOLUTION - TESTAMENTARY TRUST
 
However, by putting in place a testamentary trust, a maximum of $24,000 can be earned without paying tax (using threshold rates effective 1 July 2008).
 
Assets in Estate
 ↓
Testamentary Trust in Will
 ↓
Income from Invested Estate Assets
in Testamentary Trust
 ↓
Spouse
$6,000
Child 1
$6,000
Child 2
$6,000
Child 3
$6,000
 
TAX FREE INCOME: $24,000 per annum
 
In this example, the introduction of a Testamentary Trust provides the family with an additional $15,750 per annum tax free or an extra $302.88 a week tax-free.
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