Each Will is different: built to meet specific objectives and tailored around circumstances personal to each Willmaker. Some of the following issues need to be considered for even the simplest Wills:
A person must have a certain level of soundness of mind (called “legal capacity”) to make a Will. All that is required is for the person to:
- understand the nature of a Will and its effect;
- have some idea of the assets that they are leaving by Will; and
- be aware of their family members, and in particular understand who would ordinarily expect to benefit under their Will.
This is not a medical test.
In some circumstances, it may be an appropriate precaution to also do a medical test called a Mini-Metal State Exam to measure cognitive function.
If a beneficiary is receiving social security benefits that are asset tested, then those benefits may be displaced if they receive an inheritance.
For example, a couple may be eligible to each receive a pension as their combined assets are under the asset threshold. They make Wills leaving everything to each other. Upon the death of the first of them, the survivor inherits everything. As a result, the survivor’s assets exceed the asset threshold for a single person and they lose their pension.
If their Wills were structured differently, then the survivor could have maintained their eligibility for a pension.
Taxes on Superannuation
While there are no formal death taxes in Australia, a tax that may arise as a consequence of death relates to superannuation.
The following persons can receive a deceased’s superannuation death benefit tax free:
- the deceased’s spouse or de facto partner;
- minor children of the deceased; and
- any person financially dependant on, or interdependent with, the deceased.
If it is paid to any other person, then it will be subject to tax at either 15% or 30% (plus Medicare levy, if applicable) depending on the components.
Provisions in the Will should deal with superannuation separately, to ensure that it is treated as tax effectively as possible.
As a general rule, any capital gains tax triggered as a consequence of assets passing from a deceased person to their beneficiaries is disregarded. An exception arises where a beneficiary of the estate lives overseas.
If certain types of assets (for example, shares) pass to a non-resident beneficiary then CGT event K3 occurs. This essentially means that the estate will pay more tax, which may impact other beneficiaries too.
There are ways to structure a Will in anticipation of a potential K3 issue. For example:
- housing the foreign beneficiary’s inheritance in a trust controlled by an Australian trustee; or
- specifically gifting assets that do not trigger K3 (such as land) to the foreign beneficiary.
These strategies should not trigger CGT event K3.
No matter how simple the Will itself appears, the strategy behind the Will should be comprehensive and well-considered to ensure the best outcomes.