Most people spend decades building wealth. They establish careers, grow businesses, purchase homes, accumulate investments and contribute to superannuation with the intention of creating greater financial security for themselves and their families.
What is discussed far less often is whether those assets will ultimately translate into the outcomes they intend.
Many people can estimate the value of their estate with surprising accuracy, yet few have considered how much of that wealth their beneficiaries are likely to receive. The difference between those two figures can sometimes be significant.
While Australia does not impose an inheritance tax or estate tax[i], tax rules, superannuation death benefit legislation[ii] and ownership structures can all influence the way wealth passes between generations.
We have previously explored the specific tax treatment of assets such as the family home, investment portfolios and superannuation upon death. While understanding those technical rules remains important, a broader question deserves equal attention: why is there often a gap between the wealth people believe they are leaving behind and the amount their family ultimately receives?
Why Estate Planning Is About More Than a Will
A Will remains one of the most important documents in any estate planning strategy, but it is only one piece of a much larger puzzle. Some assets pass under the direction of a Will, while others may be governed by entirely different rules. Superannuation, family trusts, jointly owned assets and beneficiary nominations can all influence how wealth moves between generations.
As wealth accumulates and family circumstances evolve, arrangements that were entirely appropriate ten or fifteen years ago may no longer reflect current objectives.
Regular reviews can help identify whether an estate plan continues to reflect an individual’s intentions and family circumstances.
The Superannuation Tax Surprise Many Families Never See Coming
For many Australians, superannuation has become one of their largest sources of wealth. Yet despite its importance, it remains one of the most misunderstood aspects of estate planning.
Many people assume their superannuation automatically forms part of their estate and will be distributed according to their Will. In reality, superannuation is generally held in trust and distributed according to beneficiary nominations, trustee discretion and superannuation legislation. This is one reason beneficiary nominations warrant regular review as part of an overall estate planning strategy.
One of the most misunderstood aspects of estate planning is that there may be a significant difference between a beneficiary of an estate and a tax dependant under superannuation law. In other words, the person who receives the benefit and the person who receives it tax-free are not always the same thing.
Interestingly, an adult child may be considered a dependant for superannuation law purposes and therefore able to receive a death benefit, while simultaneously being treated as a non-tax dependant for tax purposes. This distinction is where many unexpected tax outcomes arise.
A spouse is generally considered a tax dependant and may be eligible to receive superannuation death benefits tax-free. However, financially independent adult children are generally considered non-tax dependants for superannuation tax purposes, despite being direct beneficiaries of the estate. As a result, the taxable component of a superannuation death benefit may be subject to tax when received by an adult child, even though they are a direct beneficiary of the estate.
Consider Michael, a widowed executive with a superannuation balance of $1 million. He has two children, one a minor and the other a financially independent adult, and wishes for them to receive equal shares of his estate. On paper, each child appears set to receive $500,000.
Yet the amount each ultimately receives may differ because superannuation death benefits can be taxed differently depending on the beneficiary’s circumstances and the composition of the benefit.
As superannuation balances continue to grow, understanding who receives your superannuation, and how those benefits may be taxed, can have a meaningful impact on the wealth ultimately transferred to future generations.
The Assets Your Children Inherit May Carry Hidden Tax Obligations
A second wealth transfer gap often emerges through investment assets.
. Generally, a capital gain or loss is disregarded when an asset passes from a deceased estate to a beneficiary. However, CGT may arise if the beneficiary later sells or otherwise disposes of the asset, unless an exemption applies.
Investment properties, share portfolios and other growth assets often carry substantial unrealised capital gains[iii]. Those gains are not necessarily removed upon death. Instead, beneficiaries often inherit the existing tax position associated with an asset, including its cost base in many circumstances.
This means beneficiaries may inherit more than an asset. They may also inherit a future tax liability*.
Consider a family investment property purchased many years ago that has increased significantly in value. While no immediate tax may arise when ownership transfers due to death, capital gains tax may become payable if the property is eventually sold. The same principle can apply to shares, managed funds and other investment assets.
Understanding the after-tax position can often provide a more meaningful picture of the legacy being transferred.
Structure Can Be Just as Important as the Assets Themselves
When families focus solely on asset values, they sometimes overlook the structures through which those assets are owned.
Superannuation beneficiary nominations, trust deeds, joint ownership arrangements and company structures may all influence the eventual outcome. In many cases, these arrangements were established years earlier and may not have been reviewed since.
As family circumstances and wealth levels change, individual strategies can become disconnected from one another. An outdated beneficiary nomination, a trust structure that no longer reflects current objectives, or an estate plan prepared before significant wealth was accumulated can all contribute to unintended outcomes.
The objective is not simply to have a Will, a trust or superannuation nomination in place. It is to consider how these arrangements interact and whether they remain aligned.
Closing the Wealth Transfer Gap
A well-drafted Will remains an essential starting point, but effective wealth transfer requires a broader understanding of superannuation, taxation, ownership structures and family circumstances.
The true measure of an estate plan is not the value of the estate itself, but how effectively that wealth reaches the people it was intended to benefit. Reviewing your estate planning arrangements, superannuation structures and beneficiary nominations can provide greater clarity around potential tax implications and help ensure your financial legacy aligns with your long-term objectives.
For more information, please contact Brett Cribb, Steve Nicholas, or James Marshall on +61 (0)7 3007 2007 or email info@stratusfinancialgroup.com.au.
Stratus Financial Group helps individuals, families, and retirees manage their complex financial affairs and coordinate their professional advisers.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation, or needs, so you should consider whether the advice is relevant to your circumstances. Read the relevant Product Disclosure Statements (PDS) before making any financial decisions.
This article provides general information only and does not constitute personal financial, legal or taxation advice. Estate planning, superannuation and taxation outcomes depend on individual circumstances and the applicable law at the relevant time. You should obtain advice from appropriately qualified financial, legal and taxation professionals before making decisions or changing your arrangements
*The applicable cost base and any available capital gains tax exemption will depend on factors including the type of asset, when it was acquired, how it was used and the circumstances in which it passes to the beneficiary
[i] If you are a beneficiary of a deceased estate | Australian Taxation Office
[ii] Superannuation death benefits | Australian Taxation Office
[iii] Inherited property and CGT | Australian Taxation Office