Estate planning consideration

Estate planning is a complex area which requires careful consideration of tax implications. Many issues that affect the distribution of assets to beneficiaries will need to be considered before an individual passes on to ensure undesirable tax consequences are avoided for both the individual and potential beneficiaries.

These include the timing on the transfer of the assets including property and investments, potential gifts, transfer duties, and the use of testamentary trusts. 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 have to pay CGT at the time of inheritance. Instead, CGT implications are deferred until the beneficiary decides to dispose of the asset. Generally, beneficiaries inherit the deceased's assets at their market value as of the date of death for pre-CGT assets, and at the deceased's cost base on the date of death for post-CGT assets. This then becomes the cost base for future CGT calculations when the asset is eventually sold. One important exemption to note is the main residence exemption, which can fully or partially shield the deceased's primary home from CGT, provided certain conditions are met. While gifts can be made as a part of estate planning before an individual passes, remember that if the gift is an asset (eg 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 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 CGT payable.

Another consideration in terms of the timing of transfers (in particular, of property) is the transfer duty involved at the State or Territory level. 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 differs so it is important to check the what the rules are. 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 of the deceased, including the appointment of trustees and beneficiaries and how the trust assets are to be managed and distributed.

The trust itself 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 and have a higher tax-free threshold. This only applies if they only receive excepted income or are 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 money on taxes, but also to ensure that significant issues are avoided in the future.