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An opportunity exists to provide children with the equivalent tax benefits of a testamentary trust, even when no provision was made for one in the parent’s will.  The tax law allows for the establishment of a similar type of trust for children after a parent’s death.  The trusts can provide the children with substantial tax benefits that will last, depending upon their ages, for many years.

Testamentary trusts (BRW, February 23) are provided for in wills and come into existence upon the death of the benefactor.  The benefactor’s will specifies that assets or money be transferred into a testamentary trust to produce income for the children.  Income from a testamentary trust is taxed at asult rates instead of the hugh rates that generally apply to the so-called unearned income of children.

The unearned income of minors, which includes most types of trust and investment income, is generally taxed at the top marginal rate of 48.5% with a tax-free threshold of just $416 (which may effectively increase to $722 with the low-income rebate).

By contrast, income distributed to them from a testamentary trust has the advantage of the adult tax-free threshold of $6000 as well as the standard adult marginal rates.

A senior lawyer with Harwwod Andrews Lawyers in Melbourne, John Ciardulli, says the beneficiary of a deceased’s estate has three years from the benefactor’s death to transfer assets into a special trust for children.  This will enable the children to recieve the identical tax treatment of a testamentary trust.

Writing in Taxation in Australia, published by the Taxation Institute of Australia, Ciardulli gives the example of an executive who dies suddenly without allowing in his will for a testamentary trust or trusts for his three children, aged between two and seve.  Instead, all of the deceased’s assets are left to his spouse.

In this case study, the surviving spouse establishes a trust for the couple’s children, with herself as the trustee, and then transfers some assets from her husband’s estate into the trust.

Importantly, the trust deed provided that the assets in the trust will eventually vest in the children.  The three children can recieve a total tax-free income each year of $18,000, based on the $6000 tax-free threshold for adults.

Ciardulli says the law restricts the amount of income from one of these trusts that can benefit from adult tax rates instead of the usual high rates on the unearned income of the children.  The maximum for concessional tax treatment is the amount of income the children would have derived from property recieved by them had the parent died intestate.  Generally, children are entitled to a substantial share of an asset when one of their parents dies intestate.

Grandchildren, however, do not normally have an entitlement to a deceased’s estate if one of their grandparents dies intestate.  This is particularly unfortunate because grandparents often want to help their grandchildren by providing them with tax-effective incomes to finance their education.

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