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Grandparents – A Flexible Will “Saves Tax”

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:

IssueBettyMartha
WillBetty 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 EstateAdam 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 earningsAdam received a return of 10% on the investment – $18,000 paThe trust’s investment also earned 10% a year – $18,000 pa
The tax stingThe 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.
BalanceThe 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.
ResultOver 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.

Ross Mason
Author:
Ross Mason

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