Writing a will with tax in mind: How to structure your estate efficiently

A well-written will is about more than just who gets what – it can also make a big difference when it comes to tax. Without the right advice, your loved ones could inherit a complicated tax headache instead of the legacy you intended.

Here are some key considerations for ensuring your estate is passed on in a tax-effective way.

When someone passes away, their assets don’t simply transfer to their beneficiaries tax-free. In some cases, depending on the asset type and the residency of the beneficiaries, a tax liability can be triggered – sometimes unexpectedly.

This is especially important in today’s world, where adult children or beneficiaries may live or work overseas. The tax outcomes can vary significantly depending on whether they are Australian residents for tax purposes at the time of inheritance.

It’s also important to understand that not all assets will automatically form part of your estate. Superannuation is one example – and similarly, assets held in trusts or companies are not part of your personal estate and cannot be distributed via your will. That means additional planning is needed to manage how control of those entities will pass on your death.

Under Australian tax law, certain capital gains tax (CGT) rollover provisions apply when a beneficiary inherits an asset. These typically allow the asset to pass to the beneficiary without triggering an immediate CGT event.

However, this rollover doesn’t apply if the beneficiary is a non-resident for tax purposes when they become entitled to the asset. In that case, CGT is calculated and payable in the deceased’s final tax return – and that tax bill is paid out of the estate. This can significantly reduce what’s left for the beneficiaries.

Assets like shares or managed fund units are especially impacted by this rule. If a child living overseas inherits these, it can cause an immediate CGT event.

Fortunately, there’s an exception. Australian real property – including residential and commercial land – is always treated as “taxable Australian property”, regardless of the beneficiary’s residency status. Because of this, the rollover provisions generally still apply, and any capital gain is deferred until the property is actually sold by the beneficiary.

This makes real estate a potentially more tax-effective asset to leave in your will, particularly if you have non-resident beneficiaries.

While many wills divide assets equally among children, the type of assets each child receives can have very different tax consequences. Equal in dollar value doesn’t always mean equal in after-tax benefit – especially when residency comes into play.

This is why it’s important to give your executor the flexibility to allocate specific assets to specific beneficiaries, rather than locking in set entitlements in your will. A testamentary trust structure can also help with this, providing ongoing control and flexibility for both tax and asset protection purposes.

Some additional strategies to think about include:

Tax law is complex, and estate planning is not a one-size-fits-all exercise. The most tax-effective wills are those that:

If you’re writing a will or thinking about updating one, now is the perfect time to seek tailored advice. Contact your Accru adviser to review your assets and make sure you don’t leave a complicated tax headache to your loved ones.