Estate planning trap no. 5 – the taxman

Your death is an opportunity!  You probably don’t see it that way, yet.

It’s an opportunity for your children to avail themselves of some big tax breaks that exist in the Australian taxation system.

Let’s imagine couple Harry and Sally and their two grown-up children, Adam and Beth.  Beth is happily married with three children; she has a good stable job on a very high income.  She and her husband own their own home, mortgage free, and the family enjoys a good lifestyle.

Under a simple Will, Harry and Sally leave everything to their two children equally. Beth gets about $500k, being her half.  Beth invests the money and earns income of, say, $40k per year.  The problem: Beth is already on a high income, paying tax at the highest rate.  Of the $40k income, about half goes to the taxman, every year.

How can Harry and Sally improve on this?

Instead of giving the money to Beth absolutely (under a simple Will), Harry and Sally make Wills that include a discretionary testamentary trust (DTT) for Beth’s share, of which Beth, her husband, her children and others are beneficiaries.

On the parents’ death, Beth’s inheritance is paid into the DTT.

Each year the income of the DTT is lawfully distributed between Beth and her family members, drastically reducing the tax burden.

We explain more about what DTT’s are and how they work in another blog article.


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