Article of Interest on Wills & Estates

REMEMBER THE TAXMAN

Taxation liabilities need to be carefully considered when making estate plans.

Peter and Linda had 4 adult children. It was the intent of Peter and Linda to put in place an estate plan which provided equally for each child.

The major assets owned by Peter and Linda were their home in a leafy suburb of the city and a factory in an industrial estate. The home was now valued at $1 million. It had been purchased 20 years ago in 1990. The factory had been purchased in 1980 and was also valued at $1 million.

The home purchased after 1985 was a capital gains tax asset, but was exempt from capital gains tax as it continued to be the primary residence. The factory was a pre-capital gains tax asset and attracted no tax liability. Both assets, if sold by Peter and Linda, would be exempt from capital gains tax.

Peter and Linda planned to give the home to Darren and Carl and for the factory to be given to Rebecca and Thea.

Peter died in 2012 and the whole of his estate passed to Linda exempt from capital gains tax. Linda died in 2020 and the estate plan for the children came into action.

Rebecca and Thea inherited the home. They sold it and divided the proceeds equally between them exempt from any capital gains tax. Rebecca and Thea retained the factory until 2025 when they then decided to sell the factory.

Rebecca and Thea expected to receive the proceeds of the sale of the factory exempt from capital gains tax as it had been purchased by their parents at a time prior to the capital gains tax trigger. They were wrong. The gain was calculated using two different formulae.

Peter died in 2012 and this became the relevant cost base date for one half of the factory property. The gain in 2025 was calculated using the value of one half of the property at 2012.

The gain calculated on the other half of the property was calculated from 2020 being the date Linda died.

The reality of a capital gains tax liability shocked Rebecca and Thea. The result was they received less than Darren and Carl and weren’t happy.

Everybody had forgotten about the complexity of capital gains tax. What looked equal wasn’t equal.

Taxation needs to be considered when making plans.

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