The Post-Death Testamentary Trust

The testator has died leaving minor children but has not set up a testamentary trust in their Will. Are the tax concessions that would have applied to such a trust lost? Not necessarily – and not completely.

The so-called ‘children’s tax’ was introduced in 1980 to stop income splitting by taxpayers sharing income with their minor (under 18) children. Division 6AA applies a flat tax rate equal to the highest individual rate to all investment income of minor children. So, for example, a minor child can only earn a relatively small amount from a family trust before this penalty rate kicks in.

One of the exemptions to this children’s tax is income from a testamentary trust (s.102AG(2)(a)).

What to do if the testator fails to set up a testamentary trust for their minor children. Is that concessional tax treatment lost? No because further subsections of s.102AG also grant an exemption to the children’s tax for

property distributed from the estate within 3 years of death, and
property transferred to the trustee by another person who received it from a deceased estate within 3 years of its receipt by the transferor.

So if

the Will provided that the minor children could benefit immediately from the estate (an unusual situation as most testators don’t want to risk giving money to minors), or
the deceased was intestate (didn’t leave a valid Will) and so the children receive the money under the local State’s intestacy laws, or
the testator leaves their money to their spouse who then sets up a trust for the children,

then provided the 3-year time limit is met there will still be at least a partial exemption to the children’s tax.

There are some limitations but it is still worth remembering that if the deceased died leaving potential beneficiaries under 18 it is not too late to set up a post-death testamentary trust.