Estate Planning: How to Minimise Taxes on Your Inheritance

Estate planning can be a challenging and delicate subject, yet it is crucial for securing the financial well-being of your family. A carefully crafted estate plan can minimise the tax burden on your beneficiaries, enabling them to receive greater benefits from your legacy. In Australia, although inheritance taxes are no longer in effect, it is important to account for various tax implications when outlining your estate to guarantee that your assets are distributed in a tax-efficient manner.

Here are some important tax considerations to guide your estate planning:

1. Understand Capital Gains Tax (CGT) Obligations on Inherited Assets

While Australia does not impose an inheritance tax, Capital Gains Tax (CGT) may be applicable when selling inherited assets like property, shares, or collectibles. Even though CGT is not due at the time of inheritance, beneficiaries might need to pay CGT when they sell the asset down the track. The CGT amount is determined by the asset’s value increase from the purchase date to the sale date.

To potentially reduce CGT, consider these factors:

• If the property inherited was the deceased’s main home and is sold within two years, it might be CGT exempt.
• If the deceased obtained the asset before 20 September 1985 (pre-CGT introduction), the gain in value from purchase to date of death is often CGT exempt. The beneficiary may be taxed on any value increase from date of death to sale.

If you own assets with significant unrealised gains, you might manage potential CGT by:

• Gifting assets during your lifetime instead of waiting until death
• Setting up a testamentary trust

2. Review Your Superannuation Death Benefits

A significant part of an individual’s estate typically consists of their superannuation. Upon death, the super benefits are commonly allocated to the deceased’s dependents, such as a spouse or children under 18, either as a lump sum or periodic payments. The tax implications differ depending on whether the recipient is considered a dependent for tax purposes.

• Dependants for Tax Purposes: Death benefits received by dependants (e.g., a spouse or minor child) are typically tax-free.
• Non-Dependants for Tax Purposes: In the case of non-dependants (e.g., an adult child), the taxable portion of the benefit might be taxed at rates of up to 17%.

By reviewing your superannuation beneficiaries and ensuring your nomination is current and in line with your estate planning strategy, you can minimise taxes and safeguard your legacy.

3. Consider Your Foreign Assets

If you own foreign assets, such as overseas property or investments, you may face different tax laws depending on the country in question. Some countries may impose inheritance taxes, potentially leading to double taxation. Fortunately, Australia has tax treaties with several countries to help alleviate these burdens. Professional guidance is crucial to navigate international tax rules and maximise the benefits for your beneficiaries.

Estate Planning Strategies

1. Setting up a Testamentary Trust

Creating a testamentary trust in your will can manage taxes and protect assets effectively. Testamentary trusts activate after your death and offer several tax advantages:

• Income Splitting: The trust allows you to distribute income from estate assets among beneficiaries in a tax-efficient way.
• Tax-Free Thresholds: Minor beneficiaries under a testamentary trust are eligible for adult tax-free thresholds, reducing the overall tax on estate income.

Additionally, testamentary trusts offer precise control over how assets are distributed, ensuring that your beneficiaries receive their inheritance according to their individual needs.

2. Timing When to Gift Assets (Before or After Death)

Although giving away assets before death seems a straightforward method to reduce potential taxes, it’s crucial to understand the implications. Capital gains tax may apply to asset transfers during your lifetime, and complexities may arise if you continue to benefit from the assets, such as ongoing property use. For instance, if you gift an investment property, capital gains tax applies on any profit calculated from the purchase date to the transfer date. Carefully plan and seek advice before proceeding to prevent unexpected tax obligations.

3. Consider Donating to Charities

By donating assets or a portion of your estate to charity, you can reduce the taxable value of your estate and claim tax deductions while you’re alive.

Bequests made to registered charities avoid Capital Gains Tax (CGT), offering the dual advantage of supporting a cause and reducing tax burdens.

4. Review Trust Structures

Regularly reviewing and updating your family or discretionary trusts ensures they maximise tax advantages for your beneficiaries. Trusts protect assets from creditors and enable tax-efficient distribution.

5. Review Superannuation Insurance Policies

Life insurance policies held within superannuation can improve tax efficiency, since death benefits paid to dependents from superannuation funds are usually tax-free. Regularly review your superannuation and insurance arrangements to keep them structured optimally.

6. Regularly Review Your Estate Plan

When it comes to your estate plan, this is not something you want to set and forget. It’s important to regularly review your estate plan to align it with any shifts in your personal circumstances, tax laws, and financial goals. Keeping your estate plan up to date helps prevent unforeseen tax liabilities and maximises benefits for your beneficiaries.

Professional Estate Planning Advice is Key

Estate planning, particularly for minimising taxes, can be complex. Seek guidance from legal and financial experts to create a tailored estate plan that ensures a smooth transfer of assets while avoiding unnecessary taxes.

At Lemonade Beach, we help you navigate the intricacies of estate planning. Contact us today to learn how we can assist you in protecting your assets and securing the best outcomes for your beneficiaries.