Achieve the Best Possible Taxation Position for Estate Planning Clients

Updated: Aug 4

We regularly meet with clients who wish to leave a legacy with a tax advantaged position and full asset protection. The Solution in Action is to use a Testamentary Bloodline® Trust to distribute income to minors at adult rates.

Determining Trust Tax

Taxation of Trust income is determined in accordance with Division 6 (ITAA 1936).

Beneficiaries of a Trust will be liable for tax only on distributions they receive and will be taxed at their own marginal tax rate.

Where the beneficiary is under 18 years of age, the distribution will be subject to tax at punitive tax rates (where the distribution exceeds $416.00). The low income rebate is no longer available for these distributions.

However, there are exceptions to this general rule. The most relevant exemption applies for "excepted trust income" distributed to a beneficiary who is less than 18 years of age where the trust arises under a Will. Income allocated to a minor from a trust arising under a Will will be taxed at the ordinary adult rates of tax.

Testamentary (Bloodline®) Trusts

In the majority of Wills, the deceased leaves all of his or her assets to his or her spouse, and if the spouse predeceases the Will maker, then equally to their children.

This creates a taxation problem since the spouse will be liable for tax on all of the income from the estate assets.

For example, if Mary inherits a rental property that produces $100,000 income per annum, she pays $26,497 tax on the income (including Medicare Levy) based upon the rates for 2019/20.

Mary has four children under 18 years of age. If her husband had passed the asset to a Testamentary Bloodline® Trust, with Mary as the trustee, the income from the trust assets could have been distributed to Mary and her children equally.

The total amount of income tax payable by the family would be reduced to $1,620 (including Medicare) giving Mary an additional $24,877 per year.

Mary's children would be taxed at the adult rate of tax on the "excepted trust income" distributed to them.

The essential elements for S.102AG to apply are:

  • The trust must be created under a Will;

  • The income must be assessable income of that Trust;

  • The income must be sourced from assets originally "gifted" to the Trust by the testator.*

The use of a Cleary Hoare Bloodline® Trust provides additional protection to trust assets by limiting the flow of capital assets to the Will maker's bloodline.