Do your kids live abroad? How will that affect your Estate Planning?
Do you have children living in a foreign country?
Do you have children living overseas? If so, have you discussed the potential tax and Foreign Investment Review Board (FIRB) impacts on your estate with your estate planning lawyer? It is important to ensure your estate is structured in a way that will minimize any potential tax or FIRB implications for your family. Taking the time to consider these potential impacts now can help you ensure that your family is best prepared for the future.
Tax Implications
Creating an estate plan should be a top priority for everyone, as it is important to ensure that the right assets are passed on to the right individuals at the right time – and in the most tax and cost-effective way possible. With this friendly reminder, let’s make sure that our estate plans are up-to-date and in line with our wishes.
When dealing with a beneficiary who lives overseas, there are two key issues that should be considered: the Capital Gains Tax (CGT) event ‘K3’ and the FIRB regime. Fortunately, the simplest solution for both of these issues is the same – the best asset to give to a beneficiary living overseas is cash. This can be easily achieved in an estate, as long as all the necessary factors are taken into account.
Foreign Beneficiaries
Ensure your children living overseas can benefit from their share of your estate by providing them with flexibility. Give them the gift of choice and provide them with the freedom to decide how their inheritance is invested, used, and distributed in a way that works best for them. Make sure they can take advantage of the greatest assistance you can give them: the flexibility to make their own decisions about their future.
Types of Gifts
With your will, you can pass your estate to your beneficiaries in two ways:
- Direct Gift – This is the traditional and most popular way to gift property or assets to a beneficiary. For example, “I give my shares in ABC Pty Ltd to Dean”.
- Testamentary Discretionary Trust – The Dean Estate Trust is a testamentary trust established under your will for the benefit of Dean and her family. For example “I give my shares in ABC Pty Ltd to the Dean Estate Trust”. This trust provides long-term financial security and peace of mind by protecting the primary beneficiary and their family’s interests. With the Dean Estate Trust, you can be sure that your loved ones will be provided for both now and in the future.
Changing circumstances
It is impossible to know your children’s circumstances at the time of your death. Which of the above gifting options (i.e. direct gift or a testamentary discretionary trust) works best for your children will depend on the assets of the estate, the child’s living situation and personal circumstances at the relevant time. Often the key to future planning is flexibility.
CGT EVENT K3 – In summary, when an estate asset passes to a foreign resident, it is treated as a disposal and the estate is required to pay capital gains tax. If the estate is liable for this tax, there must be sufficient cash available to cover the liability. This should be taken into account when considering the estate’s liabilities, both fortuitously and carefully.
FIRB ISSUES – There are a variety of solutions available to those looking to transfer property to a foreign resident beneficiary. These include applying for FIRB approval and paying the relevant application fee (which can be costly). Alternatives such as gifting other assets in place of the property, or selling the property and gifting the remaining cash (after tax) to the foreign resident beneficiary, can also be explored. Ultimately, the best solution depends on the agreement between the involved beneficiaries.
For foreign residents, the new regulations mean that acquiring an interest in Australian property gifted to them under a Will now requires FIRB approval. However, there are some specific exemptions that should be noted. Australian citizens, for example, do not need FIRB approval when acquiring Australian land but may require it for other property, such as businesses and entities. It is important to understand these exemptions and seek appropriate advice when making transactions involving foreign residents and Australian property.
For a FIRB application, the fee should typically be paid by the beneficiary receiving the property. There is, however, a chance that FIRB approval may not be granted. To ensure that all outcomes are taken into consideration, it is important to have a well-drafted Will in place. This will provide the necessary security for all parties involved.
At HazeLegal, we provide our clients with greater flexibility in their estate plans through the use of testamentary discretionary trusts which have an ‘opt-out’ option. This means that the children of the estate, even if they are living overseas, are given the choice to either accept their share of the estate directly or through the trust or a combination of the two. With this, they can make an informed decision at the time of their inheritance.