TAX TIP #18: | TESTAMENTARY TRUSTS | EDUCATION FUND

Facts

Mum and Dad have a combined estate worth $2,000,000. They have two teenage children whom they wish to make their beneficiaries, however, are concerned that their children will not be sufficiently mature to use their inheritance responsibly. Mum and Dad wish to establish an education fund to ensure that the children are encouraged to further their education, but are also adequately provided for during their developing years.

Tax Tip

1. Mum and Dad can prepare Wills directing that 20% of each child's inheritance will be held in a separate testamentary trust for each child for the purposes of an education fund on the following terms:

   1. until each child turns 30, their access to the income and capital of their trust is limited to specified purposes, such as:

      1. education expenses, including HECS liabilities;

      2. hospital and medical expenses;

      3. rent or accommodation charges;

      4. electricity, gas and other utility payments; and

      5. maintenance and income support.

2. During the financiaL year, income and capital are distributed to the children to the extent required for the approved purposes. Any remaining income is either accumulated within the trusts or distributed to other beneficiaries, as directed by the Will.

3. If a specified level of tertiary education has been completed by the age of 30, the children will be given full control of their trusts at the time of attaining the education level, with the ability to either continue the trust for tax planning purposes or terminate it.

4. If a child does not attain the required level of education by the age of 30, the remaining balance of their trust will be distributed amongst the other beneficiaries in the parents' Wills or held on trust for the education of those beneficiaries (or their descendants).

5. The establishment of the trusts will ensure that each child is adequately supported, but also given an incentive to further their education.

6. The testamentary trust can also provide the same incentives for grandchildren.

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