Finance
Aussie lawyer warns of ‘middle class’ family battles after budget introduces ‘backdoor death tax’
Australians are expected to pass on trillions of dollars in assets in the coming years as the grey tsunami of wealthy baby boomers crashes across the economy. But some of those expecting the windfall could be more likely to find themselves in a potential dispute with their loved ones as tax changes introduced to trusts commonly used in estate planning increase the likelihood of conflict.
Lawyers who deal with contested wills and estates foresee issues of conflict more likely to arise if the proposed changes go ahead. Alun Hill is the national director of the contested estates division of Armstrong Legal and believes there will be more reasons for discontent and for wills to be challenged due to the increased tax take being slipped in.
“It widens the battleground,” he told Yahoo Finance. “It just creates more reason why there might be someone who wants to contest a will.”
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Under the changes in Labor’s controversial budget, the unprecedented 30 per cent minimum level of capital gains tax will apply to the most common form of estate planning trust, known as a the testamentary discretionary trust.
While the government says its legislation pertaining to tax changes for trusts will be brought before parliament later this year, the slated changes would come into effect from July 1, 2028, and only specifically exclude fixed testamentary trusts. Fixed trusts are different from discretionary trusts as trustees don’t have the discretion to change the proportion of income a beneficiary is entitled to.
“Discretionary trusts aren’t just used as a tax minimisation vehicle,” Hill said. “Traditionally they’ve been used to provide the trustee with the ability to do what’s necessary to carry out the intentions of the testator (the person who wrote the will).”
While the finer details remain to be seen, the new tax floor regardless of the income of beneficiaries and the overall higher CGT on assets, will mean beneficiaries will see less passed on than previously expected – and that can be grounds for a challenge.
“What this really does is create the potential for claims being made against the estate by the spouse or by whoever the intended beneficiary is, who is no longer receiving adequate provision or appropriate provision under the testamentary trust,” Hill said.
While tax accountants, financial planners and business and property valuers are all expected to be kept extremely busy due to the added complexity being introduced by Labor’s new tax regime, family lawyers might also need to be braced for more work in the years ahead.
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Hill believes that regular Australian families will likely be the ones mostly captured by the new rules while the wealthiest individuals will continue to find workarounds and exotic structures to minimise their tax.
“They’re already talking to their financial planners and their estate planners about what to do. There’s no doubt they’ll be the ones who find a way through,” he said of the wealthiest Australians.
“The ones who won’t are probably the middle class. People who leave an estate with one or two properties, some shares in a portfolio and some money in a term deposit – those are the ones who are probably not going to undergo complex estate planning.
“Unfortunately it means that what may result is the testator’s intentions may not be carried through for a multitude of reasons,” Hill claimed.
He gave an example of someone who has two children who they want to provide equally for. If they had $2 million in shares and $2 million in property and they decide to give one child the home and the other the shares, it’s likely the shares will be taxed more heavily.
“One child receives an asset class that is heavily taxed in the new system and they actually receive a lot less in their hand, so they’re going to feel they’ve been shorted, and they’re probably going to want to contest,” Hill said.
“Although the changes are drastic… [in these cases] it widens the potential battleground for wills and the categories of people who would otherwise not be thinking about claiming against an estate, because it just changes the nature and value of estates.”
So-called ‘death tax’ could accelerate ‘living inheritance’ trend
The expected changes have some in the industry expecting more retired Aussies to pass on their wealth while they’re still alive. Findex financial adviser Jonathan Scholes told Yahoo Finance he thinks it will accelerate the ‘living inheritance’ trend he is already seeing among clients.
“If that change goes through, I think it’s going to trigger every client, basically, who’s got some wealth behind them, reviewing their estate plan and saying: Is this something we do before we leave the planet or something we do after we leave the planet?” he said.
“And I think there’s going to be a lot of people that are going to start thinking about going; ‘let’s do it earlier’.”
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