minimise tax

Minimizing tax when that inheritance rolls in

Paying tax on money inherited sucks. But by using trusts there is a way to minimise that tax bill and here's how.

3117 0

In the decades to come women are set to inherit around $2.4 trillion in Australia’s wealth, this makes minimizing tax a must. But how do you do it?

Chances are that over the next 25 years, many women will be at the receiving end of an inheritance which reflects much of Australian’s property wealth, according to ING Direct and the Australian Bureau of Statistics.

This might come as good news for some but it also means that tax bills exceeding $10,000 per year may become the norm for many recipients if they earn income from their inheritance.

The average wealth of households between 65 and 75 exceeds $1 million most of which is wrapped up in the value of their family home.

So what can you do about this?

Let’s map this out with an example: Myra and Gina have left their two children an inheritance of $1,200,000 or $600,000 each.

Those kids – meet Sylvia and Michael, are both working and earning more than $35,000 per annum.

If Sylvia were to invest her inheritance in property or shares and earned an income of 5 per cent she would be receiving $30,000 pa on which she would pay 34.5 per cent tax, or even more, which is $10,350 per annum.

What Can She Do?

Sylvia asks her accountant whether she could put her inheritance in her children’s, age 12 and 14, name for tax reasons only to discover that the ATO taxes “unearned” child income at penalty rates between 49 per cent and 66 per cent.

She could put the money into her super fund where the tax rate rates are lower but at 38 years old Sylvia won’t be seeing the money until she reaches 60 years of age.

A Solution – trusts

Had her parents created discretionary trusts in their will (testamentary trusts) Sylvia would have been able to take advantage of one of the last great tax planning tools left for families – income paid to children from testamentary trusts is taxed at adult rates not penalty rates.

In this example Sylvia, as trustee, could have elected to pay each child $15,000 from the trust which would be received tax free and used for their education or other purposes.  The tax saving to the family would be $10,350 per annum.

Subscribe to Financy®

Get your Financy fortnightly fix with Financy Rewards, content and more. Plus each quarter you'll receive the latest Financy Women's Index, helping you keep pace with women's financial progress.

In this article