Tax Considerations When Drafting A Will

If you only deal with tax at the end of the  financial year, it may come as a surprise to you that inheriting all or part of an estate can have tax implications for the beneficiaries. When drafting or updating your Will there are some tax implications  you should consider so that you understand the impact on your estate and how this could affect your spouse, children or other loved ones who benefit from your estate.

Here are some of the common tax considerations you should make when it comes to drafting or updating your Will.

Income tax

It is the role of the executor or administrator of the estate to lodge a final income tax return for the deceased for the financial year in which they passed away and pay any existing tax liabilities owed by the deceased. Those preparing or updating their will should be mindful to keep their financial records in order and in an accessible place so this task is undertaken and completed seamlessly at the right time.

Capital gains tax

Capital gains tax may be payable on the sale of assets, including houses or units. Further, income produced by the estate assets from the date of the deceased’s death until the estate has been completely administered, that income is taxable and the executors will be required to lodge a tax return on behalf of the estate It is always wise for beneficiaries to seek professional advice before selling any assets so that they are aware of how they may be financially impacted.

You should assume that assets of significant value are not exempt from capital gains tax unless they are a ‘personal use asset.’ An example of a personal use asset would be a property which the deceased used as their principal place of residence. Assets of this nature will not attract capital gains tax so long as they are sold within 24 months of the date the deceased passed.

Capital gains tax can be payable even if:

• the asset is sold by the person who is administering the estate; or
• a taxable asset (that is not money) is bequeathed to a charity, some super funds or a beneficiary who is a foreign resident.

Superannuation

Superannuation should be one of the top considerations when drafting a will. Many are shocked that superannuation does not automatically form part of the estate and it can be a complex, time-consuming and frustrating process for the balance to be distributed to beneficiaries if the deceased has not been prudent in preparation of this.

A person’s superannuation balance is not money held in a bank account, it is held by a trust. When a person passes away, the trustee of superannuation has the discretion to distribute the funds to the deceased’s personal representative or dependant(s), as defined under s 10(1) of the Superannuation Industry (Supervision) Act 1993. Under these rules, dependents must be able to prove their financial dependence on the deceased.

If the balance of the superannuation is distributed to a personal representative of the deceased, it would then become an asset of the estate and could be dealt with in the same manner as any other asset.

The alternative to this is if the deceased has provided a valid binding death benefit nomination, which compels the trustee to pay the superannuation to the deceased’s nominees. A binding death benefit nomination gives the deceased power to decide how their superannuation is distributed (in which portions and when) and to whom (individual beneficiaries or a trust). Due to this certainty of outcome, and the fact that a binding death nomination is paid to beneficiaries directly and in a relatively timely manner, Will makers are generally encouraged to make a binding death nomination with their superfund. However, be aware that binding death nominations lapse every few years (depending on the fund) and need to be renewed. Because of this, it is important that revisit your nomination at least once per year or ensure that you make what’s called a non-lapsing nomination,

Inheriting superannuation can trigger a tax event, depending on how the superannuation is distributed. Beneficiaries should seek independent legal and tax advice to understand how their personal circumstances may impact the outcome. For more information, speak to an expert lawyer at Cairns Wills & Estates Lawyers today.