People often provide gifts in their wills without having regard to the taxation consequences that their beneficiaries may face. For example, where your partner dies and leaves you an income producing asset, like a rental property, your income tax may be significantly increased especially where you are already earning an income. Luckily, if you have minor children, the tax payable may be hugely reduced by spreading that income between yourself and the children by setting up an estate proceeds trust.

 

An estate proceeds trust exists where a person receives a gift under a will and transfers part or all of the property represented by that gift to a trust for the benefit of a minor. Income flowing to a minor from such a trust is ‘excepted trust income’ and is separately taxed in the same way as an adult.

 

There are 3 requirements for such a trust to be valid:

1. the trust must be set up within 3 years of the death of the testator;

2. the amount transferred to the trust must not be more than the child would have received from the estate if there was no will (ie, had the deceased died intestate); and

3. the child must be entitled to the assets of the trust when the child turns 18 (ie, it is not a discretionary trust).

 

In regards to the second requirement, the amount of money that can be transferred to the trust varies between states. In New South Wales, the surviving spouse in the case of an intestacy generally receives the first $200,000 and 50% of the balance of the estate and the remainder falls to the children equally. If more than the maximum amount is transferred, the excess will not be ‘excepted’ income and will be taxed at the higher rate. It is important to note that if assets other than money are transferred to such a trust, that transfer can attract stamp duty.

 

Whilst it would be ideal for everyone to consider the possible taxation consequences when drafting their will, it is also important to seek legal and financial advice upon receiving part of an estate as a beneficiary.