%20(1).png){kind=small}
How do trusts deal with tax?
Income Tax
Testamentary trusts give a beneficiary the option to reduce personal income tax by splitting income from the investment of the inheritance between a range of family members on low tax rates. The trustee of the testamentary trust (normally the primary beneficiary) has complete discretion to determine who receives the income of the trust. Tax is paid on the income of the trust at the marginal tax rate of the beneficiaries who receive it.
Therefore, by selecting beneficiaries on low marginal tax rates, the trustee can minimise the tax liability of the trust. The trustee can choose to distribute income to minor beneficiaries of the trust with each beneficiary being able to receive over $18,200 of income tax-free to pay for education and living expenses.
Capital Gains Tax
Testamentary trusts also provide the opportunity for beneficiaries to minimise Capital Gains Tax which arises from the sale of assets. Capital Gains Tax is not triggered when an asset belonging to you passes via your Will to your executor or the trustee of a testamentary trust. Also, there is no Capital Gains Tax when your assets are transferred from the trustee of a testamentary trust to a beneficiary. As with the income of the trust, the trustee can select which of the beneficiaries of the testamentary trust should take the capital gain.
By choosing to distribute the capital gain to a beneficiary on a low or nil income, the capital gains tax liability can be significantly reduced. Holding the assets of an estate within a trust offers the beneficiaries an opportunity to defer the need for the sale of assets (and therefore capital gains tax) until later when more numerous beneficiaries come into existence. Tax deferred is tax saved.
Normally penalty rates of tax apply to income derived from trusts which is paid to children under age 18.
The Tax Act allows children under age 18 who receive income from a testamentary trust to be treated as adults for tax purposes. This could mean significant tax savings for beneficiaries who can “split income” with their minor children. Over 10 years this could be mean hundreds of thousands of dollars for your family rather than the ATO.
Stamp Duty
Stamp duty is not payable on the transfer of assets into a testamentary trust, unlike the transfer of assets to a trust during your lifetime.
What are the tax rates on trusts?
The income tax rates on income earned from assets in a testamentary trust are the same as personal income tax rates.
However, the ATO allows income earned from assets in a testamentary trust to be distributed to family members on lower tax rates. This provides an incredibly valuable opportunity to potentially save hundreds of thousands of dollars of income over time.
Capital Gains Tax is not triggered when an asset belonging to you passes via your Will to the executor or the trustee of a testamentary trust. Furthermore, there is no Capital Gains Tax when your assets are transferred from the trustee of a testamentary trust to a beneficiary.
The trustee of a testamentary trust can select which of the beneficiaries of the testamentary trust should take the capital gain such as a beneficiary on a low or nil income.
This strategy allows the capital gains tax liability to be significantly reduced.
Holding inherited assets within a Will Wizard testamentary trust offers beneficiaries an opportunity to defer the need for the sale of assets (and therefore capital gains tax) until later when more numerous beneficiaries come into existence. Tax deferred is tax saved.
Is stamp duty payable on a testamentary trust?
Stamp duty is not payable on the transfer of assets into a testamentary trust, unlike the transfer of assets to a trust during your lifetime.
Capital Gains Tax is also not payable on the transfer of assets into a testamentary trust.
Are super & life insurance inherited into a trust subject to tax?
Depending on who receives the proceeds, superannuation and life insurance proceeds inherited into a testamentary trust can be subject to tax. It is important to seek independent financial advice regarding death benefit nominations as it all depends on your personal circumstances.
Is there a CGT event when assets are placed in a testamentary trust?
Capital Gains Tax is also not payable on the transfer of assets into a testamentary trust. Stamp duty is also not payable on the transfer of assets into a testamentary trust, unlike the transfer of assets to a trust during your lifetime.
