Simply yes. As Identified in the case study below, the income tax paid on the proceeds of an estate after one year, when a person dies with a simple Will is $28,800 compared to the tax paid on the proceeds when the deceased had a testamentary trust Will, is $5,244. A huge difference. It does however vary depending on a person’s circumstances.
A testamentary trust is created by a Will. It only operates when the person dies and the terms of the trust are usually in the Will.
Joe and Missie have been married for 10 years. They have two young children Harriett, aged 2 and Harvey, aged 5. Missie runs a successful accounting business and works from home.
Joe is 15 years older than Missie and has a significant investment ASX share portfolio, partly from an inheritance he received when his father died.
Joe and Missie have been careful to have ample life insurance as Joe’s father died when he was 60 from a heart attack.
Joe had prepared a simple Will not long after his marriage to Missie and was later convinced by his financial planner to update his Will after Harriett was born to include a testamentary trust.
Unfortunately, Joe ended up having a fatal heart attack at age 59.
Below is a comparison between the income tax outcome if Joe’s simple Will had been his last Will and Joe’s testamentary trust Will he signed a few years before he died.
The main assets of Joe’s estate are:
Life Insurance $1,000,000
ASX share portfolio $2,500,000
Half share of family home
(owned as joint tenants) $1,000,000
Simple Will (legal cost to prepare approx. $350)
Missie to receive everything.
Rate of tax
45% – being Missie’s marginal tax rate.
Income tax liability*
Testamentary trust Will (legal cost to prepare approx. $1,500 – $2,500)
- Missie – family home
- Testamentary trust – share portfolio and the rest of the life insurance after payment of mortgage.
Rate of Tax**
Threshold of $18,200 and then 19% – for each child.
Income tax liability*
*to pay on income derived from estate assets after one year from distribution.
**low tax rate as beneficiaries are minor children and all distributions to them can be used by Missie for their care and maintenance.
For a more detailed analysis of the comparison, please see the attached chart:
The case study is a simplistic view and looks at the income tax benefits only. It does not address other benefits such as protection from non family members and other tax related issues.
Note: This article is general in nature and is not intended to form legal advice of any kind.