TAXING CHILDREN IN WILLS
Last week we looked at why our children pay a tax rate of 66% on unearned income. We also considered the “disabled children” exemption. This week we look at the “Last Will and Testament” exemption.
Division 6AA of the Income Tax Assessment Act 1936 taxes minors (anyone under 18 years of age) up to 66%. This is for passive (unearned) income.
Income from a Will (or an estate where there is no Will) is “excepted trust income”. Minors who get this income, don’t pay the high penalty tax found in Division 6AA. Instead, they get the more lenient adult tax rates: Section 102AG(2)(a).
Tax savvy Will makers don’t leave the wealth directly to their family. Instead, they leave “control” of the assest to their family. Under Australian tax rules, it is better to “control” money rather than own it. If you own money, then you personally pay tax as the owner. If you control the money, then often you can get someone else (on a lower tax rate) to pay the tax on the income.
Testamentary Trusts drafted into your Will achieve the holy grail of tax planning – control but no ownership. The best one is the “3 Generation Testimentary Trust”. It works for 3 generations of your family. It is also permissive – each of your children can set up none, one or many Testamentary Trusts each. Each of your children can make this descision with their accountant after you die. You build this Ferrari – known as a 3G Testamentary Trust – but your children get to drive it.
The wonderful exemption to the penalty tax rate is found in section 102AG(2)(a). Sadly, 102AG only applies to assets forming part of your estate. Many of your assets don’t get into your Will. If the asset doesn’t get inot your Will, then it is not protected by 102AG.