Avoiding an unexpected tax risk when preparing your will

When someone prepares their will, they should consider both non-tax and tax issues. In the non-tax space, the individual and their advisors usually consider who the relevant family and other individuals they wish to provide for, what assets and liabilities might exist, whether the will might be subject to challenge. These examples don’t even include the many challenges regarding dealing with any superannuation balance.

In recent times there has been an increased awareness regarding the tax issues relating to any gifting of assets to non-resident individuals. A tax cost arises for assets which move out of the Australian tax net (for example where shares held in listed companies are bequeathed to a non-resident adult child who now lives overseas).

However, the tax residency of your chosen executor is also something to pay attention to. The key to understanding the issue starts with recognising that when an individual dies, their deceased estate is a trust (both generally and for tax purposes). If an individual chooses a single executor and at the time the individual dies that executor lives overseas, then the control of that trust is based overseas. This causes the trust that is created to be a non-resident trust for Australian tax purposes.

This can mean that the recently deceased individual has some deemed disposals of assets and resultant tax liabilities which will impact what is available to provide to their beneficiaries.  It can also mean that any income derived by the deceased estate could be taxed at non-resident rates. Where the asset is real property, and that land is later sold by the estate, then there are also problems in the estate accessing the general CGT discount and/or the main residence exemption as well.

To address this risk, individuals who are preparing their wills should consider (with their lawyer) whether having multiple executors could increase the likelihood of there being an Australian trustee who can take on the bulk of the administration of the deceased estate in order to retain the tax residency status of that estate here in Australia. Alternatively, it may be possible for a will to be drafted nominating executors but disqualifying any if they are not an Australian resident at the individual’s death. Such an approach might allow the will document to have a method of avoiding an adverse residency outcome.

Either way, the choice of executor is about more than just who will look after things once you are gone

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