Securing your legacy – a practical guide to tax and estate planning

It can be all too easy to avoid estate planning. No one likes to think about death, complicated family relationships can make planning tricky, and it can be distressing to contemplate a time when others control all you have worked for.

But effective estate planning can make sure that your legacy is safe and that your family’s future is cared for, while letting you control decisions about how your accomplishments and assets are dealt with.

Importantly, a well-crafted estate plan can also lessen the tax burdens associated with transferring wealth, preserving more of your wealth for your loved ones and ensuring they are well-supported. 

Tax implications of estate planning

While Australia has no direct inheritance taxes, a range of taxes can affect your beneficiaries depending on the nature and value of the assets inherited.1

Superannuation taxes

Superannuation does not automatically form part of your estate but instead passes to a nominated beneficiary.2  That payment – known as a super death benefit – may be liable for tax.

Taxation implications vary based on whether the beneficiary was dependent on the deceased, if the payment was a lump sum or income stream, whether the super fund had already paid tax on the taxable component, and the age of both the deceased and the beneficiary.

  • Death benefits paid as a lump sum to your dependants – for example, a child under 18 or a spouse – are not taxable.3
  • Death benefits paid to someone who is not a dependant must be made as a lump sum. The taxed element of the payment is subject to a maximum tax rate of 15 per cent plus the Medicare levy, while the untaxed element is taxed at a maximum rate of 30 per cent plus the Medicare levy.
  • If the death benefit is paid as an income stream and either the deceased or the beneficiary (dependant or non-dependant) is aged 60 or over, the taxed element of the payment is not taxable and any untaxed element is taxed at the recipient’s marginal rate less a 10 per cent tax offset.
  • If the death benefit is paid as an income stream and both the deceased and the beneficiary (dependant or non-dependant) are under age 60, the taxed element of the payment is taxed at the recipient’s marginal rate less a 15 per cent tax offset and any untaxed element is taxed at the recipient’s marginal rate.

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Capital gains tax

Capital gains tax (CGT) is the tax paid on the earnings from selling an asset. CGT is not triggered by death but may apply when your assets are sold or transferred. The interplay between death and CGT is important to understand as it can result in tax becoming payable on assets that would normally not be subject to CGT, including your main residence.

For your main residence, exemption from CGT revolves around a few key conditions linked to the property’s use, ownership dates, and the residency status of both the inheritor and deceased.4

In summary, a property is eligible for the main residence exemption to CGT if it was the deceased’s main residence and it was not used to produce income, both the deceased and the beneficiary are Australian residents, and the property is sold within two years of death. It can stay exempt if it becomes the main residence of the deceased’s spouse, a beneficiary or someone who has a right to live there under the deceased’s will.

Properties bought before the CGT regime started on 20 September 1985 are also exempt.

Transfer duties

Although transfers due to death typically qualify for duty concessions, poor estate planning can result in significant duties being payable. This is particularly the case when asset ownership requires restructuring after your death or when beneficiaries or the estate need to sell property to settle the estate. Probate, the legal process of validating a will and administering the estate, can also impact transfer duties, although carefully structured asset ownership (see below) can help reduce tax consequences.

Better planning can reduce tax

Proper planning can significantly reduce or even eliminate the financial burden of taxes that arise upon death.

Consider a testamentary trust

Testamentary trusts are created by your will and activated upon your death to manage your assets for the benefit of your beneficiaries.

Income distributed to minor beneficiaries from testamentary trusts is taxed at standard adult rates rather than the punitive rates typically applied to children’s unearned income. For adults, income can be distributed to take advantage of lower tax brackets among the beneficiaries, minimising the overall tax burden.

Assets held in a trust are generally not considered personal assets of the beneficiaries, which means they are often shielded from legal claims against individual beneficiaries.

Review asset ownership

Properly structured asset ownership can help reduce tax consequences. For example, joint tenancy – a form of property ownership where people have an equal share in an asset – allows property to pass directly to the surviving owner without being part of the estate, potentially avoiding transfer duties and CGT.5  Withdrawing money from superannuation can mean that it forms part of your estate when you die and does not get treated as taxable super death benefit.

Gifting and lending money

In Australia, gifts are generally not considered income and do not attract income tax.6  But gifting can affect your eligibility for the Age Pension and may come with other tax implications like capital gains tax or stamp duty.

Taxation implications of gifting

Capital gains tax: if you give away an asset that is subject to CGT, such as shares or property, you are deemed to have disposed of it at its market value which can result in a CGT bill.

Transfer duty: if you transfer property as a gift, duty may be payable based on the market value of the property.7

Lending money

Loans can be a powerful way to assist family members, but it can be worthwhile documenting your agreement to protect your rights and avoid disputes. Documentation can include details such as the amount, the interest rate, the repayment schedule, and the consequences of default. Proper documentation clarifies the terms of the loan and can ensure the loan is treated as an asset of the estate, which helps ensure the loan is repaid and properly distributed according to your wishes.

Pensions, social security, and gifting

If you are the recipient of government benefits, there are strict rules about giving away and lending money. Generally, if you or your partner gift money, income, or assets, government agencies will assess the gift in income and assets tests.8

To be sure, you can give away as much as you like – just be aware that there may be implications for your government payments if the total value of your gifts is more than the value of the ‘gifting free area’9, which allows you to gift up to $10,000 per financial year, or up to $30,000 over five financial years, before counting towards assets and income tests.

Do you have enough?

One important and sometimes overlooked part of gifting or lending to family is the consideration of whether you can do without the money. Sometimes, loans are not repaid, and this can have consequences on your standard of living if you were relying on the money.

So, before you seek to help your family, take a careful look at your own needs and be conservative about assumptions for potential investment returns and future spending requirements.

Intergenerational wealth

Some $3.5 trillion in assets are expected to change hands over the next two decades, meaning planning how this wealth is transferred is more important than ever.

Some are concerned about how these transfers might affect social dynamics and economic disparities, but recent research from the Productivity Commission shows that, contrary to common perceptions, wealth transfers generally help reduce inequality.11

However, it is important to ensure your heirs are prepared to handle their inheritances responsibly.

Here are some things you can do:

Plan early

Discussing financial matters with your family can help prepare them for the responsibilities that come with inheriting wealth. This includes ensuring that your family understands how you want your legacy to be handled.

Check beneficiaries

When you die, your super gets paid to your nominated beneficiary. It is important to check from time to time that your nomination still reflects your wishes.

Provide guidance

Help your children and grandchildren learn about money management, financial literacy, and personal finance by sharing your wisdom and referring them to reliable sources. The federal government’s Moneysmart website is a good place to start.

Financial advice

Engage with financial advisers and legal professionals to ensure your wealth transfer strategies are appropriate.

Consider a gradual transfer

Slowly assisting your family while you are still around can help them make best use of their inheritance and assist a smooth transition.

Review and update

Keep your plans – and your Will – up to date with changing circumstances. Milestones like marriage, divorce, and the birth of children are all opportunities to review your plan.

Ask for advice

Finally, as you go through this guide, keep in mind that you don’t have to do it alone.

These can be complicated matters and a financial adviser can work with you to help you plan the best way to ensure your legacy is safe and unnecessary taxes are minimised.

If you have started considering what retirement might mean for you or if you are working on a plan for a great future, we can help you to understand what you need to think about.
Fully embracing the opportunities of retirement means maintaining good mental and physical health.
Retirement marks a pivotal shift in your financial management – from focusing on earning and saving money to utilising your savings to support your income needs.

6 Similar provisions apply in other states and territories.
10 Brimble, M; Hunt, K; Johnson, D; MacDonald, K, Intergenerational Wealth Transfer: The Opportunity of Gen X & Y in Australia, 2017, pp. 1-61

Things you should know

The article was prepared by BT. BT is a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 1 July 2024. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any tax considerations outlined in this publication are general statements, based on an interpretation of the current tax law, and do not constitute tax advice.  The tax implications of super investments can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser.