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Australia is on the brink of a significant economic shift as an estimated $3.5 trillion in assets is expected to be transferred from the Baby Boomer generation in the coming decades. This massive intergenerational wealth transfer is fraught with a range of tax risks. Minimising those risks within both the letter and the spirit of the law often requires careful consideration, which also can uncover opportunities.
Understanding these risks – and undertaking planning in advance – is crucial to ensure a smooth and efficient transfer of wealth.
One of the primary tax concerns in the transfer of wealth is CGT. A liability for CGT can arise upon the sale or transfer of assets such as property, shares, and other investments. When these assets are transferred as part of an inheritance, CGT is not usually triggered at that time, and the beneficiaries generally adopt the deceased’s original cost for the asset.
However, complexities and risks can arise the moment circumstances move beyond the basic scenario above. Examples include the extent to which the CGT exemption is preserved for assets like the family home or those acquired pre-September 1985.
A will can deal only with assets an individual personally owns. Thus, for example, assets held in a discretionary trust cannot be dealt with through an individual will. Rather, it is a matter of passing on control of the trust. For that to happen as intended, several factors need to be navigated, including succession of the Trustee (or, more commonly, succession of control of the trustee company) and succession of the trust’s Appointor.
Wealth held in a superannuation fund is also dealt with outside of a will, and planning is required ensure it is paid out to the desired beneficiaries and with known tax consequences.
Additionally, the use of testamentary trusts which are created through a will and come into effect upon the death of the individual can provide tax advantages. These include being able to appoint income to minor beneficiaries and be taxed under the normal schedule of tax rates. However, the terms must be carefully drafted and managed to ensure compliance with tax laws and to avoid potential disputes among beneficiaries.
Family dynamics play a crucial role in estate planning for significant wealth transfers. Differing viewpoints among family members can lead to disputes, especially when it comes to the distribution of assets and the management of trusts. Potential conflicts can arise over perceived fairness, control of trust entities, and the selection of executors or trustees. Clear communication, transparent decision-making, and involving neutral professionals can help mitigate these issues.
Careful drafting of wills and trusts, considering the unique needs and relationships within the family, is essential to ensure a harmonious transfer of wealth and to minimise the risk of straining family relations, or worse, litigation.
Max and Doris are in their 80s. They hold cash, properties and shares in their personal names as well as in several trusts, with a total value of about $20 million. They have two adult children – Bob and Helen.
Bob for many years has worked a farming property held in one of the trusts, and that property is to go to him. Also, Max and Doris have given differing amounts of money to each of Bob and Helen at different times over the years.
Through discussing the family history, Max and Doris’s desired outcomes, and those of the children, the following was agreed:
A year later, Max dies, followed by Doris several months later. Due to the arrangements that were planned and put in place, the assets and control of the trusts pass to Bob and Helen respectively as intended.
The intergenerational transfer of wealth presents both opportunities and challenges, as it comes with various tax risks that need careful consideration and planning. Although tax is a key factor, so too is the desire to ensure that disputes do not arise amongst your family.
Many families gain peace of mind in knowing their assets will be transferred in the most tax-efficient manner, and without any financial disputes among loved ones. This often requires coordinating with other professional advisors such as legal counsel and financial advisor.
We can assist with obtaining that peace of mind. Talk to your trusted Grant Thornton advisor about how we can help plan and implement the transfer of wealth to the next generation.
