The war against tax does not end when you die - the answer? - Estate Planning

A 3 Generation Testamentary Trust is an effective weapon to put in your Will to dampen the effects of Capital Gains Tax (CGT) and Stamp Duty. The States and the Commonwealth all abolished Death Duties by 1980. However, in 1985 the Federal Government introduced Capital Gains Tax. CGT now earns the government more money on deceased estates than death duties ever did.

Capital Gains Tax and Stamp Duty also often apply to your family home when you die.

A 3 Generation Testamentary Trust is simply a trust put in your Will to give your beneficiaries flexibility in dealing with your gifts to them.

This is an example of a Will without a 3 Generation Testamentary Trust:

Tom’s Will made the tax man rich

Tom always wanted to build his retirement home on the Mandurah canals. Tom eventually purchased a block. Unfortunately, Tom died before he realised his dream.

As a dutiful husband Tom’s Will left everything to his much loved wife Jenny.

Little did Tom know but Jenny never shared Tom’s vision to live in Mandurah. Their 2 children did share their Dad’s vision and Jenny decided to give the children the block of land. After all, it was now interfering with her aged pension entitlements.

The gift made the children excited. The block had increased in value to $175,000. However, the children had a fit when they got a stamp duty bill of $4,337.50.

The problem becomes even worse when Jenny gets a notice from the Tax Office to pay capital gains tax of $28,000.

The nightmare continues when the Department of Social Security advises Jenny that the gift reduces her aged pension because of the rule of Non-Abandonment.

Tom and Jenny could have protected the family by seeking Estate Planning advice from their Adviser, Accountant and Tax Lawyer.

How could a 3 Generation Testamentary Trust have stopped Tom's assets going to the tax man?

Tom should have spoken to his Adviser, Accountant and Tax Lawyer about Estate Planning. Tom could have put a 3 Generation Testamentary Trust into his Will. If he had done so Tom’s Will then leaves everything to HIS WIFE, CHILDREN AND EXTENDED FAMILY. Tom also makes his wife trustee of the 3 Generation Testamentary Trust.

Hey, hang on a minute. Does that mean that Tom’s estate goes to Tom’s mother in law and Uncle Harry twice removed? Do the children have control over what Jenny does with her husband’s estate?

No, to both questions.

Jenny has full control of who gets what from the estate. With a 3 Generation Testamentary Trust Jenny can give everything to herself or give some things to the children, grandchildren or any of the extended family as she so wishes. Now that is flexibility!

How does the flexibility from the 3 Generation Testamentary Trust help?

In the above case Jenny could have merely distributed the Mandurah block to her children through Tom’s Will. The transfer is direct from Tom to his children. Therefore:

  • No stamp duty is payable because Jenny does not OWN the land - she merely CONTROLLED the land via the 3 Generation Testamentary Trust.
  • There is no "disposal" of the land and therefore Jenny does not have a Capital Gains Tax bill (This is called "Generation Skipping")
  • Jenny never owns the Mandurah block - she only controls it via the 3 Generation Testamentary Trust. Therefore the passing of the land from Tom to the children generally does not effect Jenny’s Social Security entitlements.

In short, Jenny has CONTROL of Tom’s assets but for tax purposes does not OWN the assets.

With a 3 Generation Testamentary Trust Jenny is at liberty to transfer any or all assets into her name - such as the family home and Tom’s 4 wheel drive RAV 4!

Paul Keating told me in 1985 that my home was exempt from Capital Gains Tax

How times have changed. A lot has happened in a fifteen years.

Within one generation, every asset in Australia falls within the Capital Gains Tax regime. Even the family home is not exempt. The government has printed 2 booklets: Capital Gains Tax and the assets of a deceased estate and Capital Gains Tax and the family home. If you would like copies of these books ring the Tax Office.

Unfortunately the books don't tell you how to reduce Capital Gains Tax on your home or your deceased estate. They just give you advice on how the government collects its money on your home and estate when you die! Estate Planning carried out by your Adviser, Accountant and Tax Lawyer seeks to reduce these taxes.

Children under 18 years of age

3 Generation Testamentary Trusts have many other benefits.

The tax man only allows children under 18 years of age to earn $416 per year. The minor then has to pay tax at the highest marginal tax rate. This is a penalty tax on minors.

This is not the case with a 3 Generation Testamentary Trust. A 3 Generation Testamentary Trust operates through your Will only at death. A 3 Generation Testamentary Trust offers the benefits of tax effective income splitting without attracting the penalty tax. Minors benefiting under a 3 Generation Testamentary Trust get the same tax concessions as adults. For example, the first $6,000 of income is completely tax free.

If a beneficiary has children or grandchildren under 18 years of age massive tax savings are available.

Superannuation Death Payments and Deferred Annuities

Depending on their status as a "family member" and their income, your nominated beneficiaries may have to pay tax on your Superannuation and Annuities when you die. Others in your family may have paid no tax on the same Superannuation.

The laws are continually changing and your family members’ income and status can change. Therefore, it is better to leave the Superannuation via your Will (and in the 3 Generation Testamentary Trust). Your Accountant and Adviser can then advise your family on who is best to receive the Superannuation for tax purposes after you die.

Your Adviser can arrange for you to "request" that your Superannuation be paid into your Will. Some Superannuation Funds allow you to do more than a request, via a nomination. They may allow you to do a "binding nomination". If you renew this every 3 years and follow the other requirements then the Super Fund has no choice other than to pay the Super when you die to the persons you nominate. Then your family may be able to take the Superannuation - tax free.

For non-binding nominations the institution controlling your Superannuation has the discretion to pay out your Superannuation as it sees fit. However, most institutions will comply with your request to have the Superannuation dealt with in your Will. If it saves your family tax why wouldn't they do it?

Which beneficiaries can benefit from a 3 Generation Testamentary Trust?

A 3 Generation Testamentary Trust is not limited to just the family. Both family and friends can benefit under a 3 Generation Testamentary Trust. Charities can also benefit if that is you want.

Who should have a 3 Generation Testamentary Trust in their Will?

The only people who don't require 3 Generation Testamentary Trusts in their Wills are people who feel guilty for not paying enough tax throughout their life!

Even if you only own a family home and some money in the bank advantages can be gained from 3 Generation Testamentary Trusts.

Of all the people who paid Capital Gains Tax in 1997/98 - 80% earned income of less than $35 000.

Estate Planning is not for the rich. It is for people who don't like paying these taxes.

Can my family set up a 3 Generation Testamentary Trust after I die?

If there is no 3 Generation Testamentary Trust in your Will then you can still set up a Post Testamentary Trust (PTT) but only if you leave orphan children under 18 years of age.

A 3 Generation Testamentary Trust in your Will provides greater protection than a PTT. A Post Testamentary Trust is a second best position.

Estate Planning

You have worked hard to protect your family. You have paid tax throughout your life. With proper Estate Planning, including Testamentary Trusts, you can reduce your family’s obligation to pay unnecessary taxes after you die.

To gain maximum advantage you should have your Accountant, Financial Planner, Life Agent and Lawyer working together. Depending on your circumstances it may be beneficial if all of the above met with you for a few hours to discuss your and your family’s Estate Planning needs.

The cost of attending to your Estate Planning needs is less if the above professionals already have up to date knowledge of your financial position.

Please have your Accountant, Adviser or Lawyer call our Practice Manager from Civic Legal: 08 9460 5000. Civic Legal is a private law firm and is unavailable to clients off the street.

For every asset (shares, real estate) you should maintain a CGT Asset Register. Even a pre-1985 family home should have its own CGT Asset Register - this is because it is possible (and becoming more so) that your home is subject to the CGT regime.

More information

For more information speak to your Accountant and Adviser and see:

Mutual Power of Attorney & Cascading Power of Attorney

Keep the government from meddling in your affairs

Post Testamentary Trusts

This shows part of the mess you leave behind if you don't have proper Estate Planning

Inheritance Tax Planner

These are some of the questions that we need to address for your Estate Planning

Strategies to Boost Will Power

Gillian Bullock's comprehensive look at modern Estate Planning as published in The Australian, 20 April 2005.

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