The Private Practice eZine Winter 2013 Page 55

The Private Practice

Autumn 2013

ESTATE PLANNING

If you would like to review your asset-protection strategies, please contact Donal Griffin on 02 9101 7018
or

dgriffin@degroots.com.au

TAXATION ADVANTAGES

Although the above features are in
themselves good reasons to consider
a Testamentary Trust in your will,
the basis of their popularity is the
considerable tax savings that can arise
under Section 102AG of the Income
TaxAssessmentAct1936(ITAA).

The effect of this section is that

children under the age of 18 years who
receive income from a Testamentary
Trust are taxed on that income as
an adult, and therefore enjoy the
normal tax-free threshold of $18,200
(2013/14)or$20,542ifthelow-
income tax offset applies and
marginal tax rates that apply to adults.

Without this special provision

of the ITAA, trust distributions to
minors may only access a tax-free
threshold of $416 and thereafter
the effective tax rate applied to the
minor'sincomeis66%ofincomeup
to$1307and45%after$1308,onthe
entire amount of income (excluding
the Medicare levy).

With the tax-free threshold of

$18,200in2013/14,thismakes
Testamentary Trusts even better
vehicles for clients.

DRAWING COMPARISONS

The following example illustrates
the advantages of establishing a
Testamentary Trust compared with a
traditional will provision.

Assume a husband dies leaving a

dependant wife and three infant children.
His estate is valued at $1,000,000.
If this were invested at, for instance, 8%,
it would generate an income of $80,000.

Example 1: The husband's will leaves
everything to his wife or he has no will.
Her tax position is therefore:

In example 2, there is a tax saving of
$17,547 when compared to example 1,
which shows what happens if no trusts
are used. It is important to remember
that this level of saving is annual and
may be possible for many years.

Note: Tax calculations based on

rateseffectiveasat1July2013.
Medicare levy is not considered for
these purposes. Although the income
amounts in example 2 are above the
tax-free threshold of $18,200, no tax
would apply as a result of the low-
income tax offset.

A WORD OF WARNING

Even though a testamentary trust
may be considered by a will-maker

to be a prudent provision for family
members, like all provisions of a
will it may be attacked by certain
`eligible applicants' under a Family
Provision application.

The surviving spouse, children

and certain dependants have the
right to challenge a will in this way.
While there are strategies that may
be used to frustrate or restrict Family
Provision claims, they are unlikely to
result in the same benefits provided
by a Testamentary Trust.

NEW TRENDS

Increasingly, the traditional

husband and wife will i.e. each to each
other and then to the children
is being replaced by a Testamentary
Trust controlled by the surviving
spouse, under which the spouse and
children are potential beneficiaries. If
the funds in the trust justify it, wills
along these lines can provide that, upon
death of the spouse, sub-trusts come
into existence for the benefit of each
child and that child's family, and would
be controlled by the child concerned at
a particular age.

Another trend increasing in

popularity is where grandparents are
providing education trusts for their
grandchildren, which have the added
advantage of maximising the tax-free
income that can be applied for the
grandchild's benefit.

While largely promoted as a tax-

saving mechanism, Testamentary
Trusts have many other advantages
and their inherent flexibility makes
them worthy for consideration in your
overall estate-planning strategies.

Beneficiary

Income

Tax

Wife

$80,000

$17,547

Example 2: The husband's will establishes
a Testamentary Trust controlled by his
wife and providing for his wife and three
children to be beneficiaries. The family's
tax position might be:

Beneficiary

Income

Tax

Wife

$20,000

$ nil

Child 1

$20,000

$ nil

Child 2

$20,000

$ nil

Child 3

$20,000

$ nil

Total

$ nil