Worked example 2
Alice has an estate worth $900,000, which is mostly comprised of
her family home. She has two adult children, Sue and
Hank. Both Sue and Hank have 2 children each and all of their
children are under 18 years of age.
No testamentary trust
Alice makes her Will but is not informed about the potential
benefits of a testamentary trust. She leaves her estate to a
two children in equal shares. Both Sue and Hank invest their
inheritance. Each inheritance of $450,000 derives annual
income of $27,000.
If Sue is on income of $80,000, then the additional income she
receives will attract tax of $9,990. If Hank is on an income
of $40,000, then the additional income he receives will attract tax
of $8,100.
With testamentary trusts
Alice goes to another lawyer to reconsider her Will and after
receiving advice sets up two testamentary trusts in the Will.
She sets up one where the primary beneficiary is Sue and the other
beneficiaries are her two children. The second trust has the
primary beneficiary as Hank and the other beneficiaries are his two
children. Alice divides her estate equally between the two
trusts.
The trusts invest the inheritance and each inheritance of
$450,000 derives annual income of $27,000. In respect of the
first trust, Sue can distribute the income to her and it will
attract tax of $9,900. If she wishes, she can distribute the
income to her two children and this will attract tax of
$2250. This is a saving of $7,650 in the first
year. It is up to Sue what she wishes to do!
In respect of the second trust, Hank can distribute the income
to himself and it will attract tax of $8,100. If he wishes,
he can distribute income to his two children and this will attract
tax of $2250. This is a saving of $5,350 in the first
year. Once again, it is up to Hank what he wishes to
do.
Each year a decision can be made about how the income is to be
distributed.