Estate planning with beneficiary living overseas

The Covid19 pandemic has reminded me of the large number of people with family and friends who live overseas. Here is information that may be useful to you or a close friend.

Ordinarily, capital gains tax (CGT) will not apply to assets passing under your Will to a beneficiary. CGT would apply if they later dispose of the asset.

However, CGT will apply if the asset transfers under your Will to a foreign resident. There is a CGT event if your beneficiary resides overseas.

For example, if someone unexpectedly dies during a pandemic and a beneficiary under his Will was living overseas on the day of his death, CGT would apply to the asset transferred to that beneficiary.

Further, if the deceased had any net capital losses when they died these do not transfer to the beneficiary. Your beneficiary cannot use such losses to offset any capital gains.

Capital gains tax should be an estate planning consideration

Your Will should be drafted to protect your beneficiaries from paying CGT on inheriting assets you leave for them.  A basic Will cannot solve this for you. Where an asset passes directly to a foreign resident as would happen in a ‘simple’ or basic Will, a CGT event is triggered.

This is important. Even if all your beneficiaries currently live in Australia, one may live overseas in the future. Further, should something happen to a primary beneficiary, you may have substitute beneficiaries who live overseas.

Testamentary trust

That CGT event can be prevented by instead passing your assets into a testamentary discretionary trust with an Australian trustee under which the foreign resident is a beneficiary.  In other words, you need a sophisticated Will. One that creates a testamentary trust to receive and hold the asset in Australia for your beneficiary.

In a well drafted Will, should something happen to a child leaving behind spouse and/or children, they could become your beneficiaries by substitution (provided this is your intention). What if your grandchildren become beneficiaries under your Will and a grandchild lives overseas in the future?

What about Australians who work overseas and have taken their family to live in that country with them while they have assets in Australia?  It is likely that your spouse and children residing overseas with you are beneficiaries under your Will.

Doing nothing about it could cost your estate and beneficiary a lot in taxes.  A smarter Will would overcome this government tax.  Further, it would give your beneficiary options to reduce income taxes where you leave them an income generating asset.

Speak with your tax adviser. Find out if CGT would impact your circumstances and speak to us if you want to update your Will.

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