We do not have death duties on our property in Australia. However there are a number of taxes that do come into play, that with careful planning and Will drafting, can be avoided or minimised. These include the 17% flat tax on certain super death benefits (over 30% for the insurance component), capital gains tax implications of gifting certain assets to certain people, and generally providing favourably taxed vehicles to beneficiaries who receive an inheritance from you.
Estate planning strategies to minimise tax
Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes”. While this may be true, the good news is that there are a number of estate tax strategies to ensure that your assets can pass to your intended beneficiaries in a tax effective manner.
These estate tax planning strategies include:
Testamentary Trusts in your Will to provide tax planning flexibility for your beneficiaries. This effectively allows the trust to income split, which can result in significant tax savings each year, particularly for minors (for example, children or grandchildren) who under Australian law enjoy much greater tax concessions in the Testamentary Trust than in a Family Trust structure.
Considering the tax implications of your superannuation passing to non-dependent beneficiaries. Non-dependent beneficiaries pay 17% flat on the concessional component of the super death benefit and more on the insurance component. Certain beneficiaries are however tax exempt. We can talk you through alternative strategies that might have a significantly better tax outcome.
When certain assets are being left to foreign residents or non-deductible gift recipients, this can trigger capital gains tax. Some assets may be better to be sold, or not sold, by the estate. Again, we can talk you through the implications and suggest alternative gifting strategies in your Will that are available to you.
As you can see, there are a number of estate tax strategies available to reduce the amount of tax your beneficiaries and estate will pay.
Talk to the experts
One of our expert estate tax lawyers at Estate First can provide you with specialist advice on these strategies and more to ensure that your wishes are carried out in a way that are as tax effective as possible, meaning the inheritance you leave is not eroded by a significant tax bill.
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Certain components of your super (such as the concessional tax component and any life insurance component) currently attract tax in the hands of certain super dependants. These include your adult children who are no longer financially dependent on you. The concessional component is taxed at a flat 17% and any life insurance held within the super is taxed at over 30%.
Conversely, spouses and children under 18 years of age, along with persons (including children over 18) who are deemed to be interdependent or financially dependent on you (in accordance with the superannuation and taxation legislation) do not pay death benefit tax on the super proceeds that they receive. You should seek an estate tax specialist for further details on this issue and how it applies in your situation.
How are my life insurance proceeds taxed after my death?
If you hold a life insurance policy outside of superannuation, the beneficiaries of this policy will generally receive the benefit tax free. Please note that there are some limited exceptions to this, but they relate to life insurance in certain commercial transactions.
If your life insurance is held within super, it will be subject to tax depending on who the beneficiary is. If the beneficiary is a spouse, for example, the life proceeds will be tax exempt, however, if it is paid out to independent adult children, it will be taxed at over 30% flat. Seek legal advice from an estate planning lawyer on whether the death benefit tax would apply in your situation and strategies to minimise it.
Does a Family Trust have the same tax treatment as a Testamentary Trust?
No. In a Testamentary Discretionary Trust (TDT), when distributions are made to a minor beneficiary (such as a minor grandchild), they are taxed at adult rates. For a worked example showing the tax planning opportunities, please see our TDT Factsheet here. Under a Family Trust (such as a Trust you may set up for yourself and your family during your lifetime), the tax-free threshold for minor beneficiaries is much lower. Minor beneficiaries are only entitled to a $416 tax free threshold for income distributions from a Family Trust, with income over that amount taxed at the top marginal rate or even higher.
I have some shares that I wish to leave to someone in my Will. What are the tax implications?
If the person you wish to leave your shares to is an Australian resident for tax purposes, there won’t be any capital gains tax payable on the transfer of your shares to them under the terms of your Will. If the beneficiary subsequently sells the inherited shares down the track, capital gains tax may be payable by them at that point. Their cost base will depend on when you purchased the shares. If the person you wish to leave your shares to is a foreign resident for tax purposes, however, this gift on your death will trigger an immediate capital gains tax event and any capital gains tax will be payable by your estate. Conversely, as at 2024/25, a gift of shares to a deductible gift recipient is likely to result in the beneficiary not paying CGT when they later sell. This area is quite complex, and specialist advice from an estate tax advisor should be sought at the time. One of our estate tax lawyers will be able to advise on these issues at your initial consultation.
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