This case demonstrates the considerable tax planning benefits and flexibility that can be gained from the use of a testamentary trust will.
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Edna died owning a residential property and four investment properties. The rental earned from the investment properties was $100,000 per year.
She only had a simple will that left everything outright to her only daughter Fran, who was married with three minor children.
Fran was employed as an accountant and earned a high income. She wished to retain the investment properties and continue to benefit from ongoing capital growth and rental income. Her husband was a school teacher on a lower income.
Unfortunately, Fran’s income level put her at the top marginal rate. All of the income from the rental properties will be taxed at the top marginal rate of 47.5% and will be taxed in Fran’s hands. Approximately half of the rental income will be paid in tax each year.
If Edna had been advised about the benefits of a testamentary trust, the situation would have been far more beneficial to Fran.
Further reading: why every parent should have a will
With a testamentary trust will, the investment properties could have passed on Edna’s death into a trust for the benefit of Fran. Income from the rental properties could then be split amongst Fran’s husband (who was on a lower marginal tax rate) and Fran’s three children who could have each received $18,200 tax-free. The additional savings would have gone a long way toward paying the children’s private school fees each year.
You might be thinking: how would this affect me?
With some planning, you could also help your loved ones get better tax benefits from creating a testamentary trust will.
