When a family member passes away, the executor of the estate is tasked with the administration of the estate in an efficient and respectful manner, but at the same time needs to be aware of the tax consequences of when and how assets and income are distributed, as it can be costly to the beneficiaries.
It’s a question of being ‘presently entitled’
On a number of occasions we have seen executors distributing the income and assets of the estate to the beneficiaries (making them presently entitled) pre-maturely, only to find out later when lodging their tax returns that it resulted in a much larger tax bill for the beneficiaries.
The administration of an estate starts from the date of death (subject to probate being granted) and has no definite end date. However the tax treatment within the first three years differs from the fourth year onward.
The three year period
In the first three years of administration, the estate is taxed at individual marginal rates. Beneficiaries on high incomes may benefit from not being made presently entitled and not winding up the estate for 3 years and have the income of the estate taxed at marginal rates in the estate instead.
Planning is important
Every estate is different and it therefore important to seek advice early.