Let the tax man pay for your children’s and grandchildren’s education.

Ever wondered how you could save tens of thousands of dollars on your children’s or grandchildren’s private education? Well the answer is quite simple, completely legal, and better still the tax man pays it for you!

The tax savings are achieved through a Testamentary Discretionary Trust or TDT. A TDT is a trust set up in a person’s Will and establishes on their death. TDT’s are funded by deceased estate assets, such as real estate, life insurance payouts or superannuation benefits.

A TDT is controlled by the trustee who is usually also the primary beneficiary. That is, the person who controls the trust also enjoys its benefits. TDT’s generally include children and grandchildren of the Will maker as beneficiaries.
TDT’s have a wide range of benefits and are designed to protect a beneficiary’s creditors and predators. A beneficiary’s creditor can include the ATO.

Proceeds of a TDT must be distributed to the nominated beneficiaries such as the Will maker’s children or grandchildren. The relevant tax law applying to TDT’s means children under 18 years are taxed as adults. This is different tax treatment under a
family trust where children taxed at extremely high rates.

The potential tax savings when income from a TDT is distributed to benefit a child or grandchild under 18 is significant. If the child’s parent is a high income earner and pays a high rate of tax, then TDT income paid to children under 18 years is very tax effective.

For example; Fred Smith’s mother died leaving him an inheritance of $1.5M and a TDT was setup in her Will. Fred is a doctor. Heearns $250,000.00 a year and pays the highest marginal rate of tax of 49%*. Fred has 3 children, Peter, Paul and Mary all under the age of 18 years.

The TDT receives income of $75,000 per annum from its investments. Fred, as the TDT trustee, distributes $25,000.00 to each of Peter, Paul and Mary. The first $18,200.00 is tax free. The other $6,800.00 is taxed at 19% or about $1,300.00 per child. Had this $75,000.00 been added to Fred’s $250,000.00 annual income, Fred would have paid $36,750.00 in extra tax. The total tax saving to the Smith family is $32,850.00 per year. Multiplying this tax saving by the average 15 years of private education (including university) potentially saves the Smith family nearly $500,000.00.

The moral of the story is through proper estate planning, setting upa TDT can create a completely legitimate tax-effective way to pay for your children’s and grandchildren’s education and lifestyle instead of seeing your hard earned dollars end up in the tax man’s pocket. To find out more on TDT’s and other estate planning strategies, speak with Richard Dawson, Partner and Estate Planning Manager at O’Keefe Mahoney Bennett Solicitors, phone 07 5555 0000.

*As at 1/7/2015 including Temporary Budget Repair Levy of 2% andMedicare Levy of 2%. Tax rates are subject to change and may be varied by the Income Tax Assessment Act.

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