Review for Accountants & Financial Planners
July, 2016

Minimising tax...

Two minute scenarios...

Many clients are unaware that different types of Wills are available. For some, a standard Will is appropriate, whereas for others, a Will with testamentary trusts is preferable. The latter is chosen for a number of reasons, one of which is potential tax savings.

Scenario One... John & Liz ... and Sarah

Scenario: John died a few years ago, Liz has recently died. She left a $2m estate to their two children. Sarah is in paid employment, whereas Nicky is home looking after young children.

What's the issue? Liz had a standard Will that left everything equally to the children, in their own name. Sarah invests $1m and earns $40,000 p.a. in interest. She will pay over $15,000 extra tax because she is already earning $80,000.

Solutions: If Liz had a Will that allowed Sarah to take her inheritance in a testamentary trust, she could have distributed $20,000 each to her two young children, and they would have paid less than $400 tax each, a saving of over $14,000 per annum. A special provision in the Tax Act allows children to earn income from a testamentary trust, and be taxed at normal adult tax rates.

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Scenario Two... Nicky is not currently earning income

Scenario: Nicky also invests the $1m and earns $40,000.

What's the issue? Nicky will now have to pay just under $5000 in tax on her $40,000 interest income.

Solutions: Even though Nicky is not currently working, she can still save tax with the inheritance in a testamentary trust. She can distribute $18,200 to her child, and $21,800 to herself, so her total tax bill will be less than $800. That's still a saving of over $4000 in the one year.

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Scenario Three... and Sarah's partner?

Scenario: Sarah's partner has been retrenched.

What's the issue? Sarah wants to know if she can also distribute income to her partner from the testamentary trust, and further reduce the total tax payable.

Solutions: She can, as long as partners are included in the list of potential beneficiaries in the testamentary trust.

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Advisers looking to upskill in Estate Planning?

Details on our one-day workshops are available here Estate Planning Workshop. If you would like to know more please call 03 8621 9000 or email

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