When people make a will one of their priorities is usually to ensure that their wealth is fully transferred to chosen beneficiaries when they pass away.

But this doesn’t always happen in practice, and a common reason why is that many people – both lay people and even some accountants – are unaware of the tax implications of some of the decisions enshrined in the will.

Ben Greenwell CA is national manager tax and finance at Australian Unity Trustees, and works alongside legal colleagues to plan and structure the estates of clients.

He says one of the major pitfalls he’s seen concerns inheritance of superannuation, particularly when it is left to non-dependent family members.

Ben Greenwell CA.

Different tax treatments for property and superannuation

To leave property to a spouse and superannuation to adult children is a common approach, says Greenwell, but it can have unforeseen tax implications in Australia.

“There was one case with a client whose father had remarried and left his superannuation to his two daughters and his house to his second wife,” says Greenwell.

“Both of these assets were of roughly equal value. The house went to the wife as the main residence and there was no capital gains tax paid, but the super going to the two adult daughters was taxable. They had to declare the taxable superannuation in their personal income tax returns and incur the tax liability.”

Putting aside the practicalities of the man’s wife remaining in the family home, the daughters would have been better off tax-wise if their father had left them the house – on which no immediate tax would be paid – while his wife received the superannuation. As she was legally deemed a financial dependant of the deceased, the wife would have been exempt from paying tax on the super.

What’s a tax-effective approach to superannuation in estate planning?

Greenwell says there are two ways to approach superannuation in estate planning. It can be left directly to beneficiaries via a binding death benefit nomination within the super fund, or it can be directed to the estate (via the legal personal representative) along with other assets, allowing some flexibility as to how it can be disbursed.

One approach, used in about 90% of wills drafted by the legal and estate planning team Greenwell works alongside, is to create the option for one or more testamentary trusts within the will to hold assets on behalf of a beneficiary.

Clauses to create a trust must be contained in the will, but it can be left up to the beneficiaries whether they keep that trust structure after the death of the willmaker.

In the case of superannuation, the full balance of a deceased person’s super can be transferred into a testamentary trust. While there may still be initial tax implications with superannuation being distributed to non-tax dependants, the income distributed from the testamentary trust can then be distributed in a more tax-effective way.

For example, as minors are taxed at adult concessional tax rates for any income distributed to them from a testamentary trust, child beneficiaries of the estate could receive a distribution up to the tax-free threshold (currently A$18,200) without incurring a tax liability.

This is particularly useful if younger generations of the family are studying, as a distribution from the trust could help support them while they study and potentially remove the need to work part-time over that period.

As trusts in most states in Australia, other than South Australia, have a perpetuity period of 80 years, assets could also remain in the trust for a significant period, earning income, which could then be distributed as required at the discretion of beneficiaries.

How trusts can help protect assets

Anna Hacker, Australian Unity Trustees’ national manager estate planning, says testamentary trusts are also useful in protecting assets in situations where that may be necessary.

“If there is a beneficiary who is a bankrupt, for example, having assets go into a trust gives them some amount of protection,” she says.

“If there is a beneficiary who is a bankrupt, for example, having assets go into a trust gives them some amount of protection.”

“Also, in the event of a relationship breakdown – for example, between a beneficiary and an ex-spouse – the Family Court may not view assets in a testamentary trust in the same way as assets in a person’s own name. It will likely be seen as a resource and won’t automatically go into the ‘pot’ for division.”

In general, Greenwell recommends that people involve both accountants and lawyers in their estate planning to deliver the optimal result.

“[You need to] make sure there is all the relevant documentation on assets, consider the tax benefits and think about whether the structure of the estate will deliver the best outcome,” he says. “That way people can avoid the pitfalls, and do the best they can for their beneficiaries.”

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