Richard Bull

The death of a taxpayer brings with it many consequences, not the least of which is administration of the deceased’s tax affairs – both before and after death.

When a taxpayer dies, the following chain of events is set in motion, all of which have income tax consequences for those involved:

  1. The deceased’s estate must be administered. The deceased estate consists of all assets owned by the deceased as at the date of death. Administration effectively involves the creation of a new taxpayer which must lodge tax returns as appropriate.
  2. The deceased’s death may trigger the payment of death benefits, either to the deceased’s estate or to someone else associated with the deceased (a dependant or a non-dependant).
  3. During administration of the deceased’s estate, distributions of the deceased’s property may be made to beneficiaries of the estate. Such distributions may have tax consequences for both the beneficiary and the estate.
  4. The terms of the deceased’s last will and testament (Will) may give rise to a new trust (a ‘testamentary trust’) which will require administration. A testamentary trust is separate and distinct from the deceased estate. A new trust may also arise where the deceased died intestate (without a valid Will).
  5. The taxpayer may wish to establish a Charitable Foundation or a Private Ancillary Fund which leaves part of their estate to a Charitable Trust so as to provide an on-going legacy to specific charitable causes. This Charitable Trust would need to comply with Australian Taxation Office format and would need to be administered by responsible trustees including at least one professional. Established only after Probate is granted on the estate this Charitable Trust may be used to minimise the ultimate tax payable in an estate.
  6. The deceased’s tax affairs must be concluded. This involves lodgement of a final tax return for the deceased.

As practitioners, we at LBW, are required to deal with the taxation consequences of the death of a client and therefore have an understanding of the income tax issues associated with the following:

  • The deceased’s final income tax return;
  • The deceased estate’s income tax obligations and liabilities;
  • The tax consequences for a beneficiary of becoming entitled to income or assets of a deceased’s estate; and
  • The tax treatment of ongoing legacies and life tenancy issues and the format of a tax compliant Charitable Foundation.

Death is unavoidable but we do still have some control of unforeseen tax consequences of ultimate distribution of our assets according to our wishes.

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