Although most people have good intentions about leaving their estate to loved ones when they die, few realise the tax burdens their relatives face if assets are not left or divided up appropriately.
Having a Will in place is a good start but it is also worthwhile seeking professional advice to work out how your estate is best broken up to ensure your beneficiaries have the optimum outcome for tax purposes.
Capital Gains Tax (CGT) is probably the biggest issue for beneficiaries. The amount of capital gains tax can depend on the type of asset, when it was originally acquired and how quickly it is sold. For example, a family home is CGT exempt if sold within two years after the owners’ death but after this time, CGT is applied at the full rate for the whole period. On the other hand, the tax rate on super is subject to dependency rules. But each individual situation really is unique.
And the complexities don’t end there. Certain beneficiaries may also attract penalty tax rates – particularly children under 18 year of age. Children aged under 18 year of age are taxed at up to 66% on any unearned income. However, certain strategies – such as using Testamentary Trusts, can alleviate this burden and provide substantial tax advantages.
When compared to receiving the funds outright, a Testamentary Trust allows a child to receive a maximum payout with minimum tax. In the case of a child their payout is taxed at adult rates, which means that they also receive the benefit of the $18,200 tax free threshold. This is a tax effective way to distribute your estate and gives freedom to the Trustee to provide for other beneficiaries, no matter how young.
It is important to know your superannuation fund is not controlled by your Will. So you need to consider superannuation as part of the overall estate planning process.
This may be as simple as the completion of a Binding Death Benefit Nomination (BDBN) Form but it is of great benefit to link your Superannuation Fund with your Will particularly where a Testamentary Trust is to be created.
However in more complex Superannuation Fund situations you may need to have a “SMSF Will” to address these issues to ensure the beneficiaries have the optimum outcome for tax regardless of the circumstances. A “SMSF Will” is a sophisticated death benefit direction and unlike a BDBN can be Lapsing or Non-lapsing and provide a combination of binding and non-binding elements. It can also provide for certain conditions to be met and cover contingencies such as reserve nominees as alternative beneficiaries.
Regardless of the size of your estate or how much you have in superannuation you should ensure your beneficiaries do not pay more tax than they need to and be sure the tax man does not eat away your estate.