Estate planning involves developing a strategy to deal with your assets after you die – the legal instruments and structures, such as a will, you put in place to transfer your assets in the event of death.
Tax is a major consideration in estate planning, and strong governance relating to the tax aspects of estate administration can help manage the risks.
Ensure you or your staff have sufficient knowledge and skills to meet your responsibilities. Be prepared to seek assistance from external advisers on more complex tax issues.
Developing an effective strategy
Estate planning may be considered as part of your overall succession plan for your business. You may need to seek specialist advice on the most appropriate estate planning strategy.
Have a process in place to periodically review your strategy in conjunction with your advisers, including your legal, tax, superannuation and financial advisers.
Beware of schemes that claim to have estate planning purposes but are merely tax avoidance arrangements. An effective tax governance framework includes processes for evaluating various arrangements and the tax risks involved.
Preparing a valid will
If someone dies without a valid will, this is called ‘dying intestate’, and their assets are distributed according to the inheritance laws of the states and territories of Australia. In this case there is a risk that the undocumented intentions of the deceased person in relation to their estate may not be fully acted on.
Depending on the marginal tax rates of different beneficiaries, intestacy could potentially lead to an overall imbalance in the distribution of an estate due to higher rates of tax payable by some beneficiaries.
Planning ahead can avoid this result. When preparing a will, the will maker and their advisers can assess opportunities to manage the tax implications for beneficiaries.
Administering a deceased estate
As executor of a deceased estate, you need to understand your tax obligations, including:
- notifying us that you’ve been appointed as executor
- lodging a final return, and any outstanding prior-year returns, for the deceased person
- lodging any trust tax returns for the deceased estate
- providing beneficiaries with the information they need to include distributions in their own returns and, in certain cases, paying tax on their behalf
- paying tax on the income of the deceased estate.
A testamentary trust is a trust established under a valid will, but it’s not the same trust as the deceased estate. A testamentary trust functions in a similar way to a discretionary family trust, with certain provisions of the will operating like a trust deed.
Like any trust, a trustee of a well-governed testamentary trust will:
- properly understand the tax profile of potential beneficiaries in the light of intended tax outcomes
- lodge a tax return for every financial year that it is in existence
- maintain proper trust account records (such as trustee resolutions, detailed financial statements and reconciliations), especially where a trustee is streaming capital gains or franked dividends
- fully document capital gains tax events, cost bases, and rollovers and other concessions claimed.
Depending on who is appointed as the trustee and appointor of the testamentary trust, there may need to be a high level of co-operation between family members to ensure that necessary tax, financial and other information is shared for the trust to operate effectively.
A well governed testamentary trust will ensure that tax outcomes are achieved and, more importantly, complex family or legal disputes can be prevented.
Capital gains tax
Special capital gains tax (CGT) rules apply to the transfer of any CGT assets from a deceased estate. You should seek specialist advice in relation to the CGT implications of passing on or disposing of the assets of a deceased estate.
Keep complete records of CGT assets. These will be needed by the executor and any beneficiary who receives a CGT asset from the estate.
Superannuation and death benefits
Ensure you understand the tax issues around estate planning and superannuation.
For example, the tax impact of distributions made under a binding death nomination is usually one of the major considerations in estate planning.
Assets held by a person in their superannuation fund are not automatically included in their estate. In the absence of a binding death benefit nomination, the trustee has the discretion to pay the benefits of the deceased to any of their superannuation dependents instead of the estate (rather than according to the will, which only deals with the estate assets), and of deferring tax consequences. Where a nomination is in place, the benefits will be paid to the nominated beneficiaries.
It’s good practice to regularly review the need for any nominations to ensure your superannuation benefits will be passed on to your nominated beneficiaries, and that the nominations are valid and effective. Seek advice on the tax implications.
Example: Reviewing your strategy as circumstances change
As part of your estate planning strategy, you make a binding death nomination to provide for your under-age children who would receive the benefit tax free. You get advice to ensure that the nomination is valid and effective.
You provide for your older children, who would be taxed on receipt of superannuation death benefits, in your will.
After some years, when all of your children are older, you review your strategy and make a new nomination that better suits your family’s tax situation.
End of example
Because your personal circumstances change from time to time, it’s important that you regularly review the estate planning and income tax consequences when it comes to the distribution of your superannuation assets to your beneficiaries. Areas that warrant attention include:
- the distinction between a ‘superannuation dependent’ and a ‘tax dependent’
- interaction with testamentary trusts
- effecting the reversion of a pension to spouse
- realising fund assets for payment to beneficiaries
Seek professional advice where necessary.
Australian Taxation Office