Testamentary trust tax advantages explained
The big tax benefit of testamentary trusts: income to minors taxed at adult rates. Here's how it works, with numbers.
The headline tax benefit of a testamentary trust is that income distributed to minor beneficiaries is taxed at adult marginal rates, rather than the penalty rates that apply to other minor-beneficiary income. For inherited assets earning $50,000+ per year, this typically saves $10,000-$25,000 per year in tax per minor beneficiary.
The penalty rate problem
Income received by minors from most sources is taxed at Australia's minor rates – effectively 66% on amounts over $416 per year. This was designed to stop income-splitting to children. But it also catches inherited income, which wasn't the original target.
The testamentary trust exception
Income distributed to minors through a testamentary trust is taxed at the ordinary adult marginal rates. A minor beneficiary receiving $30,000 of inherited income through a testamentary trust pays tax as if an adult – effectively the tax-free threshold plus low rates apply. Tax is typically under $2,500 on that amount.
The savings in numbers
Inherited portfolio earning $50,000/year, distributed to two minor children. Without testamentary trust: penalty rate on most of the income, total tax around $30,000. With testamentary trust: adult rates apply, total tax around $3,000-$6,000. Annual saving: $24,000+. Over 10 years of the children's minority: $240,000+ in tax saved.
Capital gains
Capital gains within a testamentary trust can also qualify for the 50% CGT discount, same as an individual. This is another material tax advantage.
The flip side
Testamentary trusts do add complexity. Trustee must lodge annual tax returns, meet trustee compliance obligations, and potentially pay professional fees for accounting. For small estates, the tax benefit may not outweigh the ongoing cost.
Summary
The big tax benefit of testamentary trusts: income to minors taxed at adult rates. Here's how it works, with numbers.
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Related reading
- Benefits of a testamentary trust
- How to set up a testamentary trust in your will
- Testamentary trusts service
Disclaimer: This article is general information only and does not constitute legal advice. Estate planning is deeply personal - every family's circumstances are different. For advice specific to your situation, please contact Rosewood Succession Solicitors.