Beneficiaries under 18 – a Flexible Will “Saves Tax”
Where there are children or grandchildren under 18, there are potential tax savings to be made from a Flexible Will.
A Flexible Will incorporating a testamentary trust is a more flexible structure for the beneficiary. Each beneficiary can choose, at the time of your death, whether or not they want to take advantage of the more flexible option. If a beneficiary chooses not to take advantage of the more flexible structure, then the Flexible Will simply operates just like a traditional will.
The tax benefits of a Flexible Will for beneficiaries under 18 are highlighted in the following example.
Betty and Martha did everything together. They both die leaving one child each.
Both their children are:
- Aged 40 years.
- Married with three children (aged 5, 7 and 11).
- Earned about $35,000 a year and had wives earning $30,000 a year.
- Had homes with $400,000 with mortgages of $220,000.
Betty and Martha both left estates worth $400,000.
The following occurred:
| Issue | Betty | Martha |
| Will | Betty did a Traditional Will. Under her will, she left everything to her son Adam. | Martha left a Flexible Will, in which she established a testamentary trust for her son Ralph. |
| Allocation of Estate | Adam repaid his mortgage with the funds from the estate. The balance then remaining ($180,000) was invested in Adam’s name. | Ralph also repaid his mortgage with the funds from the estate. The balance then remaining ($180,000) was invested in the name of the testamentary trust. |
| Income earnings | Adam received a return of 10% on the investment – $18,000 pa | The trust’s investment also earned 10% a year – $18,000 pa |
| The tax sting | The income was taxed in Adam’s hands – Adam paid $5,400 (30%) tax. | For tax purposes, $6,000 was treated as income of each child. No tax was paid. |
| Balance | The balance of $12,600 was then used to feed, clothe and educate Adam’s children. | The whole $18,000 was available to feed, clothe and educate Ralph’s children. |
| Result | Over the next 10 years, Adam paid a total of $54,000 tax. | Over the next 10 years, no tax was paid by the trust. |
To find out more about whether a Flexible Will is right for you, contact us.
