Estate Tax Implication
The RMB Wills and Estate division explains the tax implications for executors of estates, who may be under pressure to finalise distributions to beneficiaries:
An important responsibility for executors is ensuring that all outstanding tax affairs are finalised with the estate.
Executors need to consult an accountant before distributing funds to beneficiaries, so that they are not held personally liable for any estate tax debt.
Given the risk of being held personally liable if an executor distributes an estate prior to obtaining taxation advice, we highly recommend care be taken to identify any potential liability before funds are passed to beneficiaries.
An accountant should be able to provide an estimate as to any likely tax liability, allowing the executor to decide whether it is worthwhile to partly distribute the remaining funds to the beneficiaries before the tax is paid.
Two of the more significant tax obligations to consider when administering an estate are Capital Gains Tax (CGT) and Superannuation Death Benefits Tax (SDBT).
CGT may become payable by an estate where certain assets such as shares and property are disposed of. The disposal of these assets triggers CGT. Tax will normally not be payable if these assets are transferred to beneficiaries, however if those beneficiaries subsequently sell these assets they will be responsible for the CGT in their own personal tax returns.
The major CGT exemption applies to a deceased’s principal place of residence. If the residence is sold within two years of death, no CGT need be paid by the estate. If the property is sold outside of this period however, CGT will be payable.
Likewise, the property will lose the exemption if it is transferred out of the estate and then sold by the beneficiaries. For this reason, if there is a chance that the principal place of residence will be sold within two years, it is probably advisable that an executor does not transmit the property to the beneficiaries before it is sold.
Superannuation death benefits will often not form part of an estate if the trustee of the fund determines to make payment to one or more dependants directly. If superannuation moneys are paid to an estate however, the executor should ensure that an estate tax return is attended to.
Where these super moneys pass to a beneficiary that does not qualify as a tax dependent under the Income Tax Assessment Act, the estate will face a SDBT liability.