Tax Tip 343: Tax Savings for Children with Testamentary Trusts

Children under 18 pay high rates of tax on unearned income. Their tax rate is generally a flat 45% if they earn more than $1,307 per year (as of 2021).


But with income received from a deceased estate, minor children can be taxed at adult rates.


Example

Bart is 15 years sold and receives $18,000 from the Simpson Family Trust, which is a discretionary trust set up by his father during his lifetime (i.e. not in the will).


Lisa is 15 years old and receives $18,000 from the Simpson Testamentary Discretionary Trust which was set up by her grandfather in his will with him dying a few years ago.


Bart would pay approx. $8,500 in tax

Lisa would pay no tax


This is why people are dying to establish testamentary trusts.

 

Dark humour.

As a throw away line ever thought of providing tips about Beneficiary Controlled Testamentary Trusts. Although my Will establishes them very little is written about them from my searching.

 

Generally the majority of testamentary trusts would be controlled by the primary beneficiary. That is how we draft them. A gift to X is a gift to the the trustee of a trust set up and controlled by X for example.

The only time you would not want a beneficiary controlled testy would be if the beneficiary had 'problems' such as being a gambler or even potential for a family law issue. But then you have to find someone else to control it, which may not be easy.

 

Its also worth understanding that the income tax scale is :

$ 0 - $416 Nil
$416 - $1307 66% and then
$1307+ is 45%

basically there is a penalty from $416 onwards for income that is not excepted.

There is also another strategy to avoid using a TT and which bypasses the tax issues for kids.

Insurance bonds. These are a policy that lasts a defined period until the child attains a specific age. You can also have one per child. It has some flaws eg if the child dies etc. Also some controls can be implemented eg a custodian / policy holder can be soemone who can limit the access until the specific age. The income is tax free after 10 years. It can also be added to. The insurer pays tax on the policy so income is reinvested and compounds. Tax free and NO CGT on maturity.

Investment Growth Bond - IGB - CommBank

 

Also the tt allows beneficiary classes similar to family trusts, right. So the benefit is not just to minor children or grandchildren at the time of death, but any minor descendants in the 80 years after death, including those not yet born?

 

Usually. Also consider excluded beneficiaries. Vesting date ? and what vesting is and isnt allowed. Limits on control eg bloodline etc. Limits on lending etc. Definately a more complex matter than attaching a vanilla disc trust deed to a TT will as many are.

 

It will depend on the terms of the will but potentially yes.