Heard about the little known tax concessions that save thousands?

Find out how this husband locked in a plan that would save his wife $23,964 per annum in tax (that’s $239,640 over 10 years) if he was to die suddenly from accident or illness.*

Did you know your beneficiaries, under your will, can save thousands of dollars after your death through little known special tax concessions?

A young family came to us, recommended by a financial planner. They wanted the best for each other and their children if either was to pass unexpectedly, so decided to organise their affairs, just in case.

Their background

Sue works part-time as an educator and Roger has a successful business in the construction industry. They have three young children.

Roger has seen serious injuries occur on job sites. Perhaps because of this, he has an uncommon grasp on his own mortality. Many of us seem to bury our heads in the sand or assume tragedy could never strike.

During their estate planning session, we learned if Roger was to die while the children were young, Sue would like to continue raising the children in their family home. Given the age of the kids, it would be difficult for Sue to work full-time.

Sue also wanted flexibility and freedom in managing the inheritance, should the worst ever occur. Likewise, Roger liked the option of spending more time with the kids, if Sue ever passed away before him.

We worked with them to create a plan. Here is how we did it.

Roger’s Estate

Roger had some investment properties with substantial equity and significant superannuation benefits, particularly when you include the life insurance proceeds that would apply. His total estate would be around $2.5 million if he died now.

Sue’s Estate

Sue had superannuation and life insurance that would amount to $1.8 million if she died now.

Our recommendation

We recommended that Roger and Sue each create wills incorporating specially taxed trusts, that reduce the tax paid on income derived from inherited assets. These special trusts required preparation of smarter wills. Although these wills are a little more complex, Roger and Sue could see there was good reason to take this approach. 

By way of example, as to how it works, the special trust we prepared in Roger’s will would create a gift that keeps giving, long after he is gone.

• Once his estate is administered, the sum of $2.5 million would have been gifted to Sue (if Roger had a standard will) but now instead is paid into a special trust (as per Roger’s smart will).
• The special trust is under Sue’s control and the proceeds invested however Sue decides.
• Sue is the ultimate controller of the special trust.
• Sue is the primary beneficiary of the trust and the three children are also beneficiaries.
• For this example, we assume the trust assets will generate an annual income of $125,000 (approximately) for Sue. This is money she has available to run the household and support the children.

Had Roger prepared a standard will (without the special trust)

An income stream of $125,000 received by Sue would be taxed at standard marginal tax rates and after paying tax of $36,382 (including Medicare levy) she would end up with $88,618 P.A. in the hand from the income.

With the special tax reduction trust included in Roger’s will

By taking advantage of special tax rules that apply to a discretionary trust specifically created under the terms of a person’s will, the tax liability applicable to this family is reduced. In the case of this family, Susan would have an opportunity to split income with her three children and the children are treated as adults for tax purposes. Susan would pay tax of $12,418 (including Medicare levy) and be left with a net amount of $112,582 P.A in her hands from the same annual income.

That is how this family locked in a plan that leaves an extra $23,964 annually in Sue’s hands if Roger passed away. Depending on factors that may vary from family to family and the number and age of applicable children, this type of planning may achieve substantial benefits. In Sue’s case, if Roger was to die tomorrow, she could receive a benefit of circa $239,640 over the next 10 years.

Young families know all about cost of living pressures. However, they fail to consider how much worse the pressure might be if their partner died unexpectantly. By taking simple measures and setting up a smart will, a will-maker can have an enormous impact on the lives of their loved ones, long after they are gone.

*Savings of a whopping $239,640 over 10 years assuming appropriate circumstances remain unchanged.

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