Tax Tip 338: Take into account Potential CGT when preparing Wills

Discussion in 'Accounting & Tax' started by Terry_w, 21st Feb, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Not many people think about how CGT can change the outcome of their inheritance plans.



    Example

    Homer is a sole parent dad with 2 properties, both paid off and both worth about $1mil.

    Homer has 2 daughters, and he asks them which property they like best. Daughter A likes property 1 and Daughter B likes property 2.

    Great Homer thinks so he drafts his will so that Daughter A gets property 1 and Daughter B gets property 2.

    Sadly Homer is hit by a low flying pigeon while coming back from his lawyers. He trips and falls on the train track. Luckily the train stops in time but Homer has broken his neck and is dead.


    About 6 months pass and the daughters receive their inheritance.

    Daughter A sells her property and uses the $1mil to fund her drug habit.

    Daughter B sells her property and finds out there is a whopping amount of tax to pay because property 2 was an investment property.

    The cost base of the property is very difficult to work out because of the lack of records left by Homer, but it is $400,000 – the purchase price by Doug plus a few cost element costs – let’s say $500,000. As the property is sold for $1mil that means a $500,000 gain which is reduced to $250,000 after the 50% discount. The tax on this may be $100,000 for Daughter B.


    Unfair she thinks so she considers a family provision application to court to try to make it fair. It’s the principal she says as she leaves the barrister’s office. The barrister thinks I like clients with ‘principals and deep pockets’.



    Later she realises that it is not worth fighting over as the legal fees will eat into most of the money she missed out on and her sister has probably already spent the money on drugs anyway. She never speaks to her sister again due to the burning resentment in her.



    Good old Homer has made a mess of the tax situation and cause a relationship break down between his children.



    It all could have been avoided by realising there would be CGT payable on investment properties and taking this income account in the will – perhaps leaving everything to them 50/50 and/or providing for an adjustment clause which allows the executor to adjust gifts to take into account the tax consequences – daughter B could still get the property 2 but get extra cash or super benefits to compensate (but the super would need to be planned jointly with this).
     
  2. Lacrim

    Lacrim Well-Known Member

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    Probably not enforceable but you could always stipulate that the properties are not to be sold within say, 20 years and they have to live off the rents thus kicking the CGT can down the road.

    On contemplation, unless you have like minded, resi investor kids, it does get messy with passing on properties unless they're identically located with identical values etc (will never happen).

    It's no wonder people sell properties before death or if passed on, the kids dissolve the assets and do what they wish with the proceeds.
     
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  3. Trainee

    Trainee Well-Known Member

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    Testamentary trust? But there is a tradeoff between flexibility and control. Costs, too. Though that may make sense for beneficiaries unable to manage the assets.

    Just put in the adjustment clause and allow the executor to mix and match other assets so the after tax values are the same. If beneficiaries don't agree, sell the assets in the estate first.

    The easy way may not be the best way. Plan it well and you might end up with two properties that have a cost base around the market value at time of death.
     
  4. RiMo

    RiMo Well-Known Member

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    I know you're not answering tax-related questions in the forum anymore, Terry. But I'm gonna try my luck and ask you anyway. :oops:

    From the above example, it seems to me that it is only the deceased person who needs to have owned the asset for 12 months to get the 50% CGT discount - i.e. the beneficiary herself does NOT need to hold the inherited assets for at least 12 months to get the 50% discount.

    Is that correct, Terry?
     
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  5. Millie

    Millie Well-Known Member

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    Who’s Doug? :)
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Good pick up. Should be Homer.

    This is Doug, soon to appear in a future episode of the Tax Tips:
    Doug (nerd)
     
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