A testamentary trust is a trust created by a will. It is generally a discretionary trust – one where the Trustee has full discretion about who benefits, and to what extent, under the trust. Each child has a tax-free threshold of $6,000 (or $6,880 if the low income rebate is taken into account).
Testamentary discretionary trusts are becoming increasingly common in Wills and succession planning. The increase in the 2012 Budget of the tax free threshold from $6,000.00 to $18,200.00 makes the use of testamentary discretionary trusts even more attractive.
Without this trust situation, such minors would have a tax free threshold of only around $416.00 (or in some circumstances $643.00) and then the highest marginal rate of tax would apply. Thus if a testamentary trust in suitable terms, is incorporated in a Will...
By taking advantage of the higher tax free thresholds and lower marginal rates applicable to income earned by children from testamentary trusts, significant tax savings can be achieved (see ‘How does a testamentary trust save tax?’).