Ask Paul: Will our daughters be taxed on their inheritance?

Dear Paul,

My husband and I are updating our wills, as both our adult daughters are no longer dependants.

My question is about our principal place of residence. In the unfortunate event that both my husband and I die, we will leave our money to our two daughters through two testamentary trusts (each daughter will be a trustee of one).  

Our principal place of residence is by far our biggest asset.  

To keep the capital gains tax exemption at the date of death, is it best that this asset is excluded from the trust, as I understand if the home is transferred to the trust and is subsequently sold the cost base will be the price we bought the property at rather than what it was worth at our date of death, so our children will have a massive capital gain. Is this correct? - Sue

Hmm. I am not a tax expert, Sue, but I love the way you are thinking.

That is also Vicki's and my plan. We have three very adult kids and at death will pass our assets to them via our estate and three testamentary trusts.

Let me pause here, readers, if you are wondering what Sue and I are on about.

An estate plan passing assets at our inevitable death, not directly to the kids, but via a testamentary trust, gives parents an ability to protect their kids.

Is a large lump sum in one hit a good thing? A trust allows you to set the rules:  maybe you'd prefer the kids to get money from your estate in, say, three tranches at certain ages.

A trust also provides asset protection to your kids. It is not their money until they get it. Interested? Go talk to your estate planner/solicitor.

As to tax, I sort of get where you are coming from.

But why does a family home go into a testamentary trust and then is it owned, in your case, by two trusts? Sounds complex to me.

In our case, we will be keeping things simple. Our home will be sold tax free, within two years of our deaths. Then one third will go, tax free, into each of the three testamentary trusts.

If you are using testamentary trusts, you will have a solicitor advising you. I'd have a chat with them regarding tax, but the overriding point is that holding the family home across three testamentary trusts and potentially bringing tax into play would make zero sense to Vicki and me.

Certainly, our three kids and their kids can't share the house; it needs to go while no tax applies and proceeds to the trusts.

I would not exclude the family home. Testamentary trusts are a great idea.

Listen to your solicitors, but you'd want a good reason not to sell the house tax free and place the proceeds into the two trusts.

Get stories like this in our newsletters.