TAX & THE TESTAMENTARY TRUST
Jeff has a wife and three children aged 12, 15 and 17. When Jeff passes away he leaves an Estate valued at $1.5m which goes directly to his wife, Claire.
Claire already has an income of $120,000 a year and decides to invest her inheritance. In the first year the inheritance generates a $75,000 income for Claire.
As Claire already has a high income, the earnings from her inheritance are taxed at a higher rate. She pays around $30,750 in tax, depending on the current rate. That’s almost half the amount of money generated by the investment.
How a Testamentary Trust would have helped
If Jeff had established a Testamentary Trust, Claire could have distributed the $75,000 in Trust income equally between her three children. Each child would have received $25,000 income and paid only $1,428 in tax individually.
Claire and her family would have retained an additional $26,466 in the first year with the assistance of a Testamentary Trust.