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Who gets the beach house – and all the other investment properties – when your parents die?
Who Gets The Beach House
Let’s talk about your parent’s beach house and other investment properties. Should they go to you and your siblings in individual names or should they go to a testamentary trust?
This is the question Amanda Morton of Morton Legal Consulting and Paul Goldin of Vectigal Legal will discuss with you in this episode.
Here is what we learned but please listen in as Amanda and Paul explain all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Who Gets The Beach House
Whenever you transfer or dispose a capital asset, you trigger CGT (CGT Event A1) per s104-10 ITAA 1997 unless an exemption applies.
Exemptions
There are exemptions for specific assets as well as for specific events. Assets exempt from CGT are for example:
- Main Residence
- Granny Flat
- Private Cars and Motorcycles
- Personal Use Assets if purchased for less than AUD 10,000
- Collectables if purchased for less than AUD 500
(You can’t claim any capital losses from personal use assets, not even against capital gains from personal use assets. You can claim a loss from collectables, but only against capital gains from collectables.)
And then there are certain events that are CGT exempt, for example:
- Marriage breakdown (Subdiv 126-A ITAA 1997)
- Small businesses CGT concessions
- Transfer to Legal Personal Representative of a Deceased Estate as well as Transfer to a will beneficiary per s128-15 ITAA 1997
And it is this last one that will be relevant to your parent’s beach house. The transfer of the house to you or a testamentary trust won’t trigger CGT – neither when it goes into the estate nor when it comes out – as long as you follow the directions of the will (or a court order or a family directive) to the dot.
And that is why it is so important that your parents have a well drafted will.
Advantages of a Testamentary Trust
Moving the beach house into a testamentary trust has four advantages and four disadvantages. The four advantages are:
# 1 – Easy To Transfer
The house stays within the trust and the shares in the corporate trustee are just passed from generation to generation.
# 2 – Protected from Prodigal Offspring
If you want the beach house to stay within the family for a long time to come, the trust will protect it from a fire sale by a rogue descendant.
# 3 – Protected from Family Breakdown
It is near impossible (never say never) for your spouse to claim the beach house in a divorce settlement when the trust is controlled not just by you but by your siblings as well.
If you hold the beach house in your individual name or as a joint tenant, your share goes into the family asset pool that is up for grabs in your divorce settlement.
But if you are just a co-trustee or trustee director of the trust, then you individually have no control of the trust, and hence the beach house will most likely not go into the family asset pool you need to share.
# 4 – Protected from Creditors
Fortunes turn quickly. You might be really well off right now. But nothing is certain in life. You might be dealt a really tough hand in life and it all goes to bust.
But creditors coming after your personal assets can’t touch the beach house sitting in a testamentary trust that you don’t control since you have at least one other siblings, ideally at least two other siblings controlling the trust.
Disadvantages of a Testamentary Trust
But moving the beach house into a testamentary trust also has disadvantages – at least four.
# 1 – No Control
The house is protected – also from you. So you can’t sell it. It might turn into a pain – maintenance your siblings don’t want to pay for – the kids hate the spiders in the house – the teenagers want to be with their friends where you live – and so on. Whatever it is, you are stuck with the beach house.
# 2 – Foreign Trust
The details depend on where in Australia the property is. But in all states and territories you will incur additional surcharge land tax if certain beneficiaries are considered foreign persons.
# 3 – Cash Flow
The testamentary trust might be asset rich but cash poor. So if the beach house requires some major upkeep to keep it safe but the trust has no money, the buck will stay with you and your siblings.
# 4 – Extra Admin Costs
The testamentary trust needs an accountant and the corporate trustee needs an ASIC registration. Neither come free. So you face additional costs.
Asset Protection v Control
Paul Goldin says something very important in this episode,
“The more control you have,
The less asset protection you got.”
That was a light bulb moment for us. Of course, in a testamentary trust, you lose control, but you get asset protection in return.
Summary
So this was just a quick overview. Paul Goldin and Amanda Morton share a lot more in this episode, so please listen in.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 06 September 2021
