Death and taxes

It pays to plan ahead

PETER FREEMAN

The federal government abolished death duties almost 35 years ago, with the last state to impose them, South Australia, doing the same shortly afterwards. Yet while the assets of deceased estates are no longer subject to specific death duties, there are still a number of tax challenges faced by executors.

One is the way superannuation inherited by nondependent beneficiaries can be hit by tax, usually at a rate of 15%.

Another risk is the possibility of a deceased estate being hit by a large capital gains tax bill when the investments are sold.

Fortunately, with forward planning it is sometimes possible to reduce the impact of this tax. For the elderly who pay little or no tax there is the option of gradually selling assets in advance. By doing this, any realised capital gains may end up being tax free or, at least, taxed at a relatively low marginal rate.

Another strategy is to ensure the executor has the flexibility to allocate the estate’s annual earnings, including realised capital gains, to beneficiaries, who will then pay tax at their marginal tax rates. Since the tax paid by a deceased estate is calculated using the standard income tax scale, distributing gains to beneficiaries on low marginal rates may generate worthwhile savings. This strategy, however, can be used only if your will allows the executor to make such distributions.

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