Money
The inheritance tax trap and how to look after your family
Australia might not have an inheritance tax, but that doesn’t mean your estate is off the hook. Here’s how to protect your legacy – and your loved ones – from hidden costs.
By Carolyn Tate
I don’t know about you, but thinking about my own death isn’t high on my to-do list. I’ve had “call lawyer to book will discussion” on my to-do list for about a year now – and I still haven’t made that call. For most of us, planning out what happens after we’re gone is probably right up there with root canal treatment and tax audits.
While sticking your head in the sand may be an effective short-term plan, it’s important to know there are some fees and charges that can mean the money and property you leave to loved ones in your will can be depleted – and some of that is avoidable.
Australia doesn't have inheritance tax like some other countries, but there are still several hidden costs that can catch families off guard when they're settling an estate. So, as uncomfortable as it may feel, setting aside some time to make sure you’re doing what you can is a great act of kindness. With some planning, you can reduce potential tax burdens and make sure more of your hard-earned wealth goes to the people you care about.
Read this too: Estate matters: an essential guide to probate
The sneaky costs that can bite
When I started looking into this, I was surprised by just how many different ways your estate can have tax-sized chunks bitten out of it. Carrie Payne, Special Counsel at Nurture Law in Brisbane, explains that while we don’t have to worry about inheritance tax, there are still "several potential hidden costs that people need to consider when designing their estate plan."
These can include:
- Tax that is payable if you leave your taxable superannuation benefits to ‘non dependents’. More on this here
- Capital Gains Tax (CGT) that might apply if relevant assets are sold by the executor of estate
- CGT liabilities that your beneficiaries inherit when they receive an asset that will be liable for CGT when it is subsequently transferred
- Land Tax that may be payable if your beneficiaries receive a relevant asset that pushes them over the State’s threshold for paying land tax
- CGT and Stamp Duty that may apply where you own real property (or other ‘illiquid’ assets) through your self-managed superannuation fund
- Costs associated with foreign person ownership of certain types of Australian assets
- Costs associated with litigating an estate challenge by disgruntled beneficiaries
The superannuation surprise
Here's where things get really interesting – and potentially expensive. Most people assume their super will flow through to their kids tax-free, but that's not always the case.
Payne explains there are "a couple of concepts to understand" around how your super is taxed when it passes on, starting with how your super balance is divided up.
“The 'tax-free' component is the part of your superannuation that you contributed by yourself or by your spouse for which you haven't claimed a tax deduction," Payne explains. "This can, however, also include government co-contributions or government payments from the low-income super tax offset."
The taxable component is "the part of your superannuation that's left after subtracting the tax-free component from the total value of your super. It can come from contributions from your employer as a part of your wage, personal contributions that you've claimed as tax deductions, contributions from salary sacrificing, and investment earnings."
But, while any tax-free amounts of your super will be received tax free, no matter who the ultimate recipient is, the taxable amounts are a different story. Payne says these "will incur 17% tax (which includes a 2% Medicare Levy) if directed to a non-dependent beneficiary. If directed to your estate (and those funds ultimately land in the hands of non-dependents), this will include a tax of 15% (excluding any Medicare Levy)."
When you think about how much most of us have in super these days, we're potentially talking about tens of thousands of dollars that could disappear in tax.
Smart moves to protect what you've built
There are ways to minimise these costs, and Payne is clear about where to start: "There is no replacement for good advice,” she says. “You should always draft your estate plan in collaboration with an estate planning lawyer and, as relevant, your financial advisory team."
Payne says some specific strategies that could help reduce some of your costs include:
- Using testamentary discretionary trusts that allow for tax planning strategies to be employed by your intended beneficiaries
- Purposeful direction of your superannuation benefits – including the use of superannuation specific trust structures – and proactive steps – such as recontribution methods – to minimise the tax payable on your superannuation benefits if they are to ultimately pass to non-dependents
- Appropriate consideration and planning around foreign person issues within the federal and state government regimes
- Strategic steps to reduce the chances of a successful claim by any parties that may be unhappy with the terms of your estate plan.
Getting the balance right
Of course, there's no one-size-fits-all solution. "Each family is different," Payne points out. "The above isn't advice: it's a calling to those in our community that don't have an up-to-date estate plan."
She also notes that this is not a time to cut corners: "The whole point of an estate plan is to reduce the 'white noise' that can occur when someone dies. It shouldn't be a race to the bottom for the cheapest solution as those solutions can often have unexpected, adverse outcomes from a cost perspective."
Why it's worth tackling the uncomfortable stuff
Estate planning isn't exactly riveting dinner party conversation, and it’s an uncomfortable reminder that our time here is limited. But carving out some time to sort this out now can be an act of love that makes a significant difference to your family's financial future.
You can use the strategies available today to help ensure that more of what you've worked hard to build actually reaches the people you want to benefit. Estate planning isn't just about minimising tax – it's about creating clarity and reducing stress for your loved ones during what's already going to be a difficult time.
With the right professional guidance, you can create a plan that protects your family's future and gives you genuine peace of mind. And you might even sleep a bit better knowing you've taken care of the people you love most.
Now, if you'll excuse me, I think it’s time I actually book that meeting with my lawyer.
Feature image: iStock/Drazen Zigic
This article contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their financial circumstances, objectives and needs.
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