Citizenship and residency Estate planning issues

Inherit’s legal bot collects information about a client’s citizenship and residency. This article briefly discusses the relevance and importance of a client’s citizenship and residency for estate planning purposes.

For tax purposes, deceased estates are taxed as trusts, and the estate executor is deemed to be the trustee of the trust. A resident trust attracts favourable tax treatment and beneficiaries of the trust are not assessed on the income of the estate trust until the estate administration is complete. However, if the estate is regarded as a non-resident trust, additional taxes are imposed. These taxes include:

- foreign resident capital gains tax withholding on property sales
- loss of the 50% capital gains tax discount
- exposure to higher rates of tax
- loss of the tax-free threshold and marginal individual tax rates which apply to deceased estates

The estate will only be a resident trust if the nominated executor is a resident for Australian tax purposes or otherwise if the central management and control of the estate is in Australia. If the executor is resident in Australia for tax purposes as well as another jurisdiction, it is possible for a double taxation liability to arise to the estate (eg. US estates tax).

It is, therefore important for clients to appoint an executor who is a resident for Australian tax purposes, particularly if the first appointment is their spouse who may not be a resident or, by virtue of their citizenship, may be subject to tax in another country. In these circumstances, the Inherit panel lawyer will most likely recommend another co-executor who is resident for tax purposes to avoid the estate being declared as a non-resident estate.

A beneficiary’s residency and citizenship are relevant to identifying whether withholding tax applies to payments from a deceased estate as well as whether other tax applies a virtue of their citizenship in another jurisdiction. For example, a beneficiary who is US citizen living in New Jersey, at the time of the Will maker’s death, may be subject to state-based inheritance tax of up to 18% and a Federal US tax of up to 40% where the value of the estate is in excess of US $12 million.

Further, a deceased person’s citizenship is also important as, for example, US inheritance tax is calculated or determined based on their worldwide assets.

Collecting information about a client’s citizenship and residency is important to properly prepare and manage the tax consequences that arise upon death- another area where Inherit can help you eliminate the guesswork and brief an appropriately skilled Inherit panel lawyer.