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I am UK born in Australia, recently divorced with 2 children aged 11 and 9. Children and Ex born in Australia.
I am trying to write my will in case of my death so the children are provided for throughout childhood and have a start up nest egg going into their adult life
I have 1.8M in life insurance, 500k in super (both of which I could do a binding death nomination), 3 properties worth 2.2M total (inc PPOR) with around 700K equity and around 70K cash in offset
I would like to
a). Avoid child tax rates
b). Protect money for kids for kids, not to be blown by ex/their dad, but also allow him to use the money to provide a good lifestyle as they are growing
c). My ideal executor would be my sister but she is in the UK. If my ex were to die prior my sister would also take the children
Is there a way I can achieve this? I have been advised by lawyer making my sister executor will create massive tax bills
Answer
If your sister is your executor the estate becomes a non resident and that in all probability will mean more tax payable than if the estate had an Australian executor. Having said that my experience with professional organisations that manage estates held for the benefit of children can be even more costly than the ATO and maybe your ex is the least expensive option.
It is not for me to advise on your will, just the tax consequences. I suggest you talk to your solicitor about having two Australian executors so they can keep an eye on each other. Or maybe your ex and your solicitor so your ex can do most of the management and save some money but the solicitor just watch that his fiduciary duty is not breached.
What would you want to happen to your assets if you die? Would you want the properties sold? Looks like your life insurance will be enough to pay back the bank. I am looking for ways your wealth can be held until your children reach 18 that is not a complex arrangement and definitely not have to be managed by expensive and overly bureaucratic trustee organisations. I hear you. But please don’t be talked into Trustee organisations. They can sell up your assets and put them in their managed funds, returning as low as 2% and still take fees out of that!
There is no need to set up a complex testamentary trust to avoid child tax rates. A child is taxed at adult tax rates on earnings on funds they have inherited. But for a child to “own” anything they will need an adult to act as trustee, that is the way I understand it, again I am treading on your solicitor’s territory. If that trustee is your sister it will be a non resident trust.
Investment bonds, education bonds and insurance bonds are also tax inefficient.
As per my earlier email I have made some enquiries about the tax treatment of bare trusts with a non resident trustee. A bare trust can only have one beneficiary. So what I am toying with here is that your will instructs your executor to set up a bare trust for each of your children with your sister as trustee. The law is very clear that that a non resident trustee would make it a non resident trust and that is the risk area. But section 106-50 https://www.ato.gov.au/law/view/document?docid=PAC/19970038/106-50 makes it very clear that the beneficiary of a bare trust is the one that is taxed on any capital gain. Further in the case of taxable Australian property there is no CGT event triggered when it transfers to a non resident estate as would be the case with cash from your super etc. The trap is the wide powers of 99B when the money comes back.
With a bare trust the ATO as a convention ignores the trustee and taxes the beneficiary. Unfortunately, that is only enshrined in the law regarding capital gains tax. Regarding the taxing of income of a bare trust it is more a case of that is the way we have always done it which is not conducive to estate planning.
If you really can’t think of someone in Australia that is suitable for the role of executor then I think it is worth considering having your will set up two bare trusts but you need more specialised advice on your whole circumstances.
This is such high level advice that I am hesitant to answer your question at all considering I don’t know your full circumstances and I am not able to look into your affairs with your solicitor. Please only take what I am saying here as food for thought, that it is worth investing in advice from a tax lawyer specialising in estate matters. Asking them to look into the tax consequences of making your sister executor but her only job being to pay off the mortgages and transfer all your assets (no sales) equally into 2 bare trusts with her as trustee. I would be interested in knowing what they have to say.
You also need to consider how the loans for the houses would be paid out if you do a binding death nomination to your children on your life insurance. Binding death nomination will direct the funds straight to your children not to the estate which means the estate cannot use the money to clear the mortgages on the properties.
