Estate planning
Estate planning is a complex area which requires careful consideration of the potential tax implications.
Many issues that affect the distribution of assets to beneficiaries will need to be considered before an individual dies in order to ensure undesirable tax consequences are avoided for both the individual and potential beneficiaries.
The potential issues include:
- the timing of the transfer of the assets including property and investments;
- potential gifts;
- transfer duties; and
- the use of testamentary trusts.
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Capital gains tax (CGT) implications
Typically, in terms of capital gains tax (CGT), the transfer of assets upon the death of an individual does not immediately trigger a CGT event; rather, a CGT “rollover” applies.
This means that the beneficiaries of the estate do not generate a capital gain at the time of inheritance.
Instead, CGT implications are deferred until the beneficiary decides to dispose of the asset they have inherited.
Generally, beneficiaries who inherit a CGT asset of the deceased are deemed to have a cost base for the inherited asset equal to the market value of the asset at the date of death.
This cost base is used in future CGT calculations when the asset is eventually sold by the beneficiary.
One important exemption to note is the main residence exemption, which can entirely or partially shield the deceased’s home from CGT, provided certain conditions are met.
Gifts
Although gifts can be made as a part of estate planning before an individual passes, if the gift is a CGT asset (e.g. property, crypto assets, shares etc), CGT will still apply.
For example, if an individual decides to gift a property to a relative before they pass on, the transaction would be treated the same as if the individual were selling the property.
This means that CGT will apply but the main residence exemption (if available) would also apply to reduce the amount of tax payable.
Transfer duty
Another consideration in terms of the timing of transfers (in particular, property) is State or Territory transfer duty.
For example, in NSW, if property is received from a deceased estate in accordance with the terms of a will, the beneficiary will pay transfer duty at a concessional rate of $100.
However, if the transfer occurs before an individual’s death or not in accordance with a will, normal rates of transfer duty will apply.
In that scenario, it would be better to wait to transfer the property.
The rules for each State and Territory differ.
Testamentary trusts
For individuals looking to exert more control after their passing, a testamentary trust may be one way of providing a flexible and tax-efficient way to manage and distribute the assets of the estate to beneficiaries.
Generally, the terms and conditions of the testamentary trust are outlined in the will, including the appointment of trustees and beneficiaries and how the trust assets are to be managed and distributed.
The trust itself only comes into existence upon the death of the person making the will and is separate from the deceased estate for legal and tax purposes.
A testamentary trust offers tax benefits such as income distributed to minor beneficiaries being taxed at adult individual income tax rates, together with a higher tax-free threshold. This only applies if the beneficiary receives excepted income or is an excepted person.
A testamentary trust also has the added advantage of asset protection in that assets held within the trust are out of reach from claims by creditors, legal actions, and in some cases, family law disputes.
However, it should be noted that establishing and managing testamentary trusts can involve significant costs with the requirement to carefully draft the trust deed to include clear instructions for the establishment and operation of the testamentary trust to avoid future disputes.
There may also be ongoing legal, accounting and administrative expenses, making testamentary trusts the most complex route to head down.
The specific tax implications can vary widely depending on individual circumstances and the State or Territory in which the individual lived.
This is a complex area where seeking professional advice tailored to the situation is crucial, not only to save on taxes, but also to ensure that significant and complex problems are avoided in the future.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.