Worked example 1
Tom dies leaving his estate to his wife, Lucy. The net
value of assets transferred is $900,000. These assets are
invested and in the first year of operation produce income of
$54,000.
Lucy is working and earns $80,000 per annum. She has three
children to support and their ages range from 7 to 15 years of
age.
No Testamentary Trust
Lucy has total income for the year of $134,000 which provides
for an amount of $96,500 after-tax to provide for herself and the
three children.
With a Testamentary Trust
If Tom had a Will which provided for a testamentary trust for
the benefit of his spouse and children, then the income from the
investments could be distributed equally to the children who are
all minors.
The effect would be that Lucy has an income of $80,000
attracting tax of $17,500. The investment income from the
trust is distributed equally to the children attracting a total tax
liability $5,400.
The total tax liability without the testamentary trust is
$37,500. The total tax liability with the testamentary trust
is $22,900. The tax saving is $14,600 in the first
year alone. The compounding effect of the tax saving
over a number of years becomes very significant indeed.