TAX PLANNING FOR GRANDCHILDREN
Grandparents can arrange for their grandchildren to receive tax-free income once the grandparent has passed on. It works as follows. Normally, if a child receives investment income, a) it is taxed at a flat rate of anywhere between 47% and 66% and b) the child does not get the benefit of the first $5,400 being tax-free. However, all this changes if the investment income is received from a Trust set up by a deceased grandparent. In this case, the child will be taxed like an adult i.e. the first $5,400 will be tax-free and b) the amounts above $5,400 will be taxed at a sliding scale. Consequently, any grandparent preparing a Will should seriously contemplate leaving some of his/her estate to a Trust set up for the benefit of grandchildren. The tax-free income thus generated can be used to pay for the child's maintenance or school fees.
It is also possible to set up such a Trust within three years of the grandparent's death at the request of the surviving spouse.
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