An improved understanding of the balance between legacy and liability, and the important tax consequences that emanate from estate planning.
More than a legal formality or a financial checklist, or deciding who inherits what assets, estate planning exists to protect a lifetime of achievements and ensure each client’s legacy is passed on according to their wishes. This article, proudly sponsored by Allianz Retire, explores the importance of tax considerations in estate planning.
Estate planning. It represents the culmination of a lifetime of work, the chance to protect assets and the opportunity to pass on wealth. At its core, estate planning is about leaving a legacy that reflects each client – who they are and what matters to them.
Yet even the most thoughtful estate plan can be undermined by tax implications if they are not carefully managed. From capital gains and inheritance considerations to the complexities of superannuation and trusts, tax plays a central role in how wealth is preserved and transferred.
Properly structured, an estate plan can help individuals and families navigate the complexities of wealth transfer, minimise tax payable by beneficiaries, consider any social security impact and create outcomes that reflect both their values and their intentions.
Estate planning is equally important for businesses as it is for individuals. Without structured tax planning, a considerable portion of an estate — whether personal or commercial — may be eroded by taxation, leaving beneficiaries with less than the client intended.
When guiding clients through estate planning, advisers should keep several important factors in mind:
- Jurisdictional differences – estate planning legislation varies by state, making it essential to understand and apply the rules specific to each client’s circumstances.
- Specialist input – encourage your clients to engage professionals early as collaboration between financial advisers, accountants and estate lawyers will ensure all aspects of estate planning are addressed.
- Philanthropy – directing part of an estate to charities can provide tax relief while also reflecting your client’s personal values.
- Ongoing review – estate plans are not set and forget. Life events such as marriage, divorce, the acquisition or sale of a business, or changes in family structure (births and deaths) can significantly alter the client’s intentions and tax position. Regular reviews are necessary to maintain alignment with current circumstances.
Ultimately, a well-constructed estate plan can secure the orderly transfer of assets, minimise tax liabilities and strengthen the client’s position should legal challenges arise. For advisers, ensuring clients adopt a proactive and regularly updated approach is fundamental to preserving wealth and intent across generations.
Tax matters and estate planning
The aim of estate planning is simple: to ensure that assets are distributed according to an individual’s wishes in the most efficient and equitable way. However, tax can significantly affect this outcome. Every dollar lost to unnecessary tax is a dollar less available to beneficiaries.
For example, a property that has grown substantially in value may trigger a large capital gains tax bill when sold after death, reducing the inheritance for children. Similarly, superannuation benefits may be taxed differently depending on whether they are left to dependants or non-dependants. Without careful planning, families can face unexpected liabilities, disputes, and even the forced sale of assets. Tax should never be treated as an afterthought. It is central to the design of any effective estate plan.
Capital Gains Tax
Capital Gains Tax (CGT) is often the most significant tax issue in estate planning. Assets such as real estate, shares and investment portfolios may have appreciated substantially over time. While the transfer of assets to beneficiaries on death does not immediately trigger CGT, the eventual sale by the beneficiary does. The cost base of the asset is carried over, meaning that substantial gains prior to the inheritance of an asset can still lead to large tax liabilities in the future.
Certain exemptions exist, most notably for the family home. However, these rules are complex and vary depending on how long the property is held after death. Therefore, good record keeping is essential. For example:
- Knowing what assets were acquired pre-CGT and which may attract capital gains tax.
- Is the family home a pre- or post-CGT asset and would it be wholly or partly covered by the main residence CGT exemption?
- Most clients can reduce taxable capital gains by claiming expenses but require records to substantiate any such claims.
- Assets acquired pre-CGT (prior to 20 September 1985) may not be subject to capital gains, however your client needs records to prove the asset is a pre-CGT asset.
- Changes to holdings in shares and managed funds that might arise because of dividend reinvestment, merger and acquisition activity, bonus issues and so on. Again, knowing which pre- and post-CGT holdings is important.
Key components of an estate plan
A comprehensive estate plan encompasses several elements to ensure your client’s wishes are honoured and their assets effectively managed:
- The Will – the Will is the foundation of any estate plan and details how a client’s assets should be distributed after death. It also designates an executor responsible for administering the client’s estate according to their specified wishes.
- Super – clients should make binding death nominations for super. The allocation of super is managed by each fund’s trustees and can’t be distributed via a client’s will. Binding and non-binding super beneficiaries will receive any unspent super money from the trustee.
- Power of Attorney (POA) – this allows your client to appoint a trusted individual to manage their financial and legal affairs in the event they become unable to do so themselves. An Enduring Power of Attorney is a specific type of POA that remains in effect if the client becomes incapacitated or unable to make decisions.
- Enduring Guardianship – in some jurisdictions, a medical Power of Attorney is granted, in others, an Enduring Guardianship grants a designated person the authority to make decisions regarding your client’s health and lifestyle should they become unable to do so.
- Advanced Care Directive – sometimes referred to as a Living Will, this document enables your client to outline their preferences for medical treatment and end-of-life care in situations they are unable to communicate their wishes.
- Trusts – a legal arrangement in which a trustee manages assets on behalf of beneficiaries, with distribution/s occurring at a predetermined time. Trusts can offer tax advantages and protect assets; an example is the establishment of a trust for a child that becomes accessible at a specific milestone birthday or other point in time.
All legal documents are best created by an estate lawyer. There are also a range of legal implications to consider:
- All estate planning documents must meet the legal requirements for validity. This includes compliance with relevant legislation, which varies by state or territory.
- Understanding the tax consequences of asset transfers is essential; you need to consider capital gains tax, stamp duty and income tax, each of which can significantly impact the value of assets passed to beneficiaries.
- Legal capacity is important to avoid potential challenges to the Will in the future. Your clients need to create a Will at a time they have the legal capacity to do so. No-one expects to lose capacity, but steadily increasing dementia rates means that statistically, it’s likely it will affect some of your clients (note: it is estimated that more than 433,300 Australians are living with dementia in 2025, a figure estimated to rise over the coming years[1].
The Will
The Will is the cornerstone of estate planning. It serves as the primary legal document that outlines how a client’s assets should be distributed upon death, or in some cases, permanent incapacitation. Importantly, a Will ensures that your client’s wishes are clearly stated and legally enforceable, helping to avoid potential disputes among beneficiaries.
The functions of a Will include:
- Simplified estate administration – a valid will streamlines the process of handling your client’s estate after death. This expediates the process and reduces complications for all involved
- Asset distribution – a Will specifies who receives the client’s property, money, and personal belongings after death, ensuring their assets go to their chosen beneficiaries.
- Guardianship for minors – clients can name a guardian to care for their dependent children and make important decisions about their education, health and wellbeing
- Appointment of an executor – a will appoints an executor (or representative) who is responsible for managing the client’s estate; this includes securing assets, paying debts and distributing property according to your client’s instructions
- Establishment of trusts – as discussed later in this article, the Will can create testamentary trusts, which allow you to control how and when beneficiaries receive their inheritance
- Prevent disputes – by specifying who receives what, a client’s Will can prevent arguments and confusion among family members regarding the division of their estate
A Will plays other important roles. It revokes or cancels earlier Wills, enables clients to appoint a guardian for minor children and make specific bequests to individuals or charities. By formalising these decisions in a Will, your client takes control of their legacy.
Clients may hold two types of assets: estate assets and non-estate assets. The former includes any asset the client owns in their own name. Non-estate assets include those owned as a joint tenant, in a trust or in superannuation. Life insurance is also generally disposed of according to specific rules and not distributed via the client’s Will.
Without a Will, a client’s estate may be distributed according to state intestacy laws. This may not align with your client’s preferences and there’s the very real risk that the undocumented intentions of your client in relation to their estate may not be acted on. Further, depending on the marginal tax rates of the beneficiaries, intestacy can lead to an imbalance in the distribution of an estate due to higher rates of tax payable by some beneficiaries.
Intestacy can also reduce the size of your client’s estate thanks to other charges; for example, the administration of an estate is more expensive when outside parties are involved and compensated for their services. The family can generally expect to pay the government more revenue, in the form of legal and other fees, capital gains tax and income tax.
Powers of Attorney
While a POA won’t impact the tax implications of estate planning, it’s good form for clients to nominate a power of attorney while they are preparing their Will. As with the Will, each state has its own legislation in respect to POAs.
A POA is a separate legal document that enables your client to appoint one or more people to manage their financial and legal decisions on their behalf while they are alive. A POA ceases upon death.
An Enduring Power of Attorney (EPA) can be used to make decisions for your client in the situation they are unable to do so, if for example, they lose capacity. An attorney is legally required to act in your client’s best interests; therefore, the appointment of a trusted person to as POA should ensure your client’s affairs are managed as they would like them to be in the event they become incapacitated before death.
An EPA is of particular importance to those clients within a self-managed super fund. Regulations require all members of an SMSF to be trustees, but a person without capacity is prohibited from being a trustee. In the situation where a trustee of an SMSF loses capacity – whether your client or a non-client member of a client’s SMSF – decisions about the SMSF would have to be made by a tribunal if there is no EPA in place for that member. It’s good form to ensure that all SMSF clients have EPAs in place – and that all members of their SMSFs do too.
Superannuation
According to recent headlines, at least 6.5 million Australians will not have a say in who inherits their superannuation, according to research from Super Consumers Australia[2]. The research found that just one quarter of those surveyed were sure they had made a legally binding nomination for who they want to receive their super after they die, while 36 percent had made no nomination at all.
Binding death nominations are important because as a non-estate asset, superannuation is treated differently to other investments. Because it’s managed by the trustee of your client’s fund, it can’t be incorporated into or distributed by their will.
There are four important considerations when estate planning for client’s superannuation[3].
- When a super fund’s member dies, the money is paid out of the fund
- Only certain people (i.e. nominated beneficiaries) are eligible to directly receive a superannuation death benefit
- Insurance proceeds inside a super fund may be heavily taxed on the member’s death
- In some circumstances, there can be a death tax on super; there are strategies to minimise this or for beneficiaries to avoid becoming eligible to pay it.
Each client needs to nominate superannuation beneficiaries who will receive any remaining super once they pass away. There are two types of beneficiaries: binding and non-binding beneficiaries.
A binding death benefit nomination is a written declaration your client provides to their fund. This provides a legal obligation for the trustee to distribute your super to those people nominated by the client. Binding nominations are generally required to be validated every three years.
A non-binding nomination is the preferred choice of beneficiary that your client selects, the difference being that the super trustee is not obligated to follow this nomination. When distributing your remaining super, the trustee will take your non-binding nomination into account, along with the claims of other dependants.
In both cases, trustees must follow the relevant super laws. Beneficiary nominations are made available so clients can legally ensure their chosen beneficiaries receive payment, even where there may be claims over your client’s estate after their death.
Superannuation is also an area where tax plays a major role. Whether superannuation balances are distributed through the estate or directly to beneficiaries via a binding death benefit nomination, the tax treatment depends on the relationship between the deceased and the beneficiary.
It is important to know which beneficiaries are SIS-dependent beneficiaries and which are tax-dependent beneficiaries. In super law, this defines who can receive death benefits; in tax law, it defines if and how a recipient will be taxed.
Dependants for tax purposes, such as a spouse or minor children, generally receive superannuation benefits tax-free. However, adult children who are not financially dependent may face significant tax on lump-sum payments. This can create tension where parents wish to treat children equally, but the tax outcomes are not the same. Proactive strategies, such as using recontribution strategies, can help reduce tax burdens on beneficiaries.
A client can nominate an eligible dependant, such as their spouse, to continue receiving an income stream rather than a lump sum payment. This is called a reversionary pension and only applies to super savings already in pension mode.
From a tax perspective, there are several benefits to a reversionary pension:
- A super pension is generally tax free or in some cases, concessionally taxed, depending on your client’s age and the age of their beneficiary. Consequently, there may be tax benefits for the reversionary beneficiary.
- Because the assets supporting the pension payments remain within the super system, they continue to benefit from super’s lower tax environment.
- When the reversionary pension reverts to the beneficiary, the taxable and tax-free components that were calculated when the pension first started are preserved.
Where life insurance is held within super, any proceeds are paid as part of the superannuation death benefit to beneficiaries. As such, tax will be payable by those beneficiaries who are not tax-dependents.
Trusts
Using a trust in estate planning can provide tax efficiency (particularly for minors), asset protection (against divorce, creditors and disputes), and control (over how wealth is distributed across generations). A trust can help to preserve wealth and ensure it is both used tax-effectively and transferred in line with family intentions, rather than being exposed to erosion through tax, disputes or poor financial decisions.
Discretionary Trusts
Discretionary trusts – which includes family trusts – can be a powerful tool for estate planning. One of the key benefits is that trust assets fall outside the deceased estate and therefore bypass the probate process. This means distributions to beneficiaries can occur without the delays, costs or potential challenges associated with probate. Trust structures also provide stronger protection against family disputes and claims from creditors.
Another advantage is the control and flexibility a trust provides in managing intergenerational wealth. Trustees can adapt distributions to suit beneficiaries’ circumstances, and new family members can be added as beneficiaries without having to amend the trust deed.
Finally, because control of the trust can be transferred to a new appointor or to directors of a corporate trustee, a discretionary trust has the capacity to preserve and grow family wealth across multiple generations.
Testamentary Trusts
A testamentary trust can play a major role in the estate planning process and is usually written into the client’s Will and is dormant until the client’s death.
Administered by a trustee, a testamentary trust enables your client to leave money to beneficiaries who have use of that money – often subject to certain conditions – but it’s not their own property. This is a strategy commonly used to provide protection against relationship breakdowns, creditors, poor decision making and potential legal issues.
Clients may consider a testamentary trust in circumstances such as:
- They wish to protect their assets for future generations. For example, your client’s beneficiaries can benefit from assets such as an investment portfolio or family business, while the trustee controls how they’re managed. In this scenario, the assets are protected from potential legal action or actions of individual beneficiaries that could otherwise impact them.
- A client has a blended or complex family structure. Numerous scenarios can be modelled by the trustee to preserve assets or to ensure the relevant beneficiaries can access assets in the trust if others pass away.
- Your client needs to protect vulnerable beneficiaries, such as a disabled child. A trust can ensure they don’t lose this inheritance to creditors or that funds are used in their best interests. For those with young children, a trust can hold assets and/or manage assets until the children are old enough to do so themselves.
- Depending on assets held, a testamentary trust can provide tax benefits for your beneficiaries.
From a tax perspective, income generated by a testamentary trust is taxed at the marginal tax rate of the beneficiary of that trust. A testamentary trust also facilitates income splitting, where a beneficiary can allocate trust income to other beneficiaries. This strategy enables beneficiaries with lower marginal tax rates to receive income and pay tax at their lower rate.
Further, minors who receive ‘unearned income’ are generally taxed at the highest marginal tax rate (although the first $416 is tax free). This is not the case with income received from a testamentary trust. Tax law provides that income and capital gains derived by children under age 18 from assets received from a testamentary trust are ‘excepted trust income’ and taxed at normal adult marginal rates.
This means a minor receiving income from a testamentary trust has a tax-free threshold of $18,200 before being taxed at the usual adult marginal rate, depending on the level of income. Imputation credits relating to franked dividends received can be used by the minor.
One of the main advantages of using a testamentary trust for bequeathed assets is that income, capital gains and franked dividends can be distributed among your client’s family beneficiaries each year in the most tax-efficient way.
One of the most delicate aspects of estate planning is balancing fairness with tax efficiency. A client may wish to divide their estate equally among children, but tax treatment can make this challenging. For instance, leaving an investment property to one child and cash to another may seem equal in value, but the property may carry future CGT liabilities that the cash inheritance does not.
Estate planning is a vital process that goes beyond simply dictating the distribution of assets after death; it plays a critical role in tax management, asset protection and ensures that your clients’ wishes are fully honoured. By carefully considering the various components of an estate plan, your clients can ensure that their financial legacy is preserved, tax liabilities are minimised and their loved ones provided for according to their intentions.
The ethical and emotional dimensions of fairness often intersect with the financial realities of tax. Advisers play a key role in helping clients understand the implications of their decisions, the importance of clear documentation, and where appropriate, communicating intentions to beneficiaries to prevent misunderstandings.
Take the FAAA accredited quiz to earn 0.5 CPD hour:
CPD Quiz
The following CPD quiz is accredited by the FAAA at 0.5 hour.
Legislated CPD Area: Technical Competence (0.25 hrs) and Tax (Financial) Advice (0.25 hrs)
ASIC Knowledge Requirements: Estate Planning (0.5 hrs)
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Notes:
[1] https://www.dementia.org.au/about-dementia/dementia-facts-and-figures
[2] https://www.abc.net.au/news/2025-08-26/who-gets-your-superannuation-when-you-die-binding-death-benefits/105678326
[3] Wills, death and taxes made simple, Noel Whittaker, 2024
CPD Quiz
The following CPD quiz is accredited by the FAAA at 0.5 hour.
Legislated CPD Area: Technical Competence (0.25 hrs) and Tax (Financial) Advice (0.25 hrs)
ASIC Knowledge Requirements: Estate Planning (0.5 hrs)
please log in to start this quiz
