Inheritance tax on estates looms in great wealth transfer

Words by Julie-anne Sprague for The Australian

Australia’s status as one of the last developed nations without a death tax is on borrowed time, according to a leading estate lawyer, who warns the trillions of dollars shifting from Baby Boomers to their children make it too tempting a target for governments grappling with an ageing population and a shrinking taxpayer base.

Morgan Solomon, director of Solomon Hollett Lawyers and a 25-year veteran of estate planning, says the political appetite for an inheritance tax will eventually outweigh the backlash, as the costs of caring for older Australians climb faster than the tax revenue needed to fund it.

“I do think a tax is inevitable at some point,” Solomon told The Australian’s The Money Puzzle podcast.

The question is not if but how high the threshold will be set before wealthier estates are forced to hand back a share to the government.

“Australia is really one of the last developed countries in the world that does not have an inheritance tax,” he said.

“We are living longer than humans have ever before … as we age, we are of course not generating income in the traditional sense to pay income taxes, and the costs of healthcare and looking after the elderly are growing at an exponential rate.”

It would not be a popular move. The Albanese government was forced to backtrack on taxing testamentary trusts, which in effect created a death tax for estate beneficiaries, after a huge outcry.

How much could they tax?

But an inheritance tax is only a matter time, according to Solomon, who said it would likely follow a similar move to increase taxes for people with very high superannuation balances. The Albanese government has hiked the tax on superannuation balances above $3m.

“The whispers have been that it might be estates over $5m,” Solomon said.

“I’ve also heard some people describe that as ultra-rich, which is nonsense. It’s not that large anymore, especially when you take into account that a significant portion of that is likely to be the family home, and the potential that it needs to be carved up among a whole raft of beneficiaries.

“Five million dollars to one person, that’s pretty good. Spread around five children, each of whom has their own dependent children, and all of whom have millions of dollars of debt, (it) will be evaporated in a New York minute.

“I think if there is a prospect toward taxing these estates, it has to be a much larger number, $10m-plus.”

Solomon Hollett Lawyers director Morgan Solomon thinks the great wealth transfer will be too irresistible for governments to tax.Pic as appeared in The Australian

Solomon said the government of the day may favour the British model, where spouses could directly inherit estates without paying inheritance tax but once it moved through the generations, tax was applied. In Britain, no inheritance tax is paid if the value of the estate is below £325,000 ($614,000), with a sliding tax scale used thereafter.

Estimates for the amount of wealth changing hands over the next two decades vary between $3.5 trillion and $6.2 trillion. Globally, UBS estimates that over the next two to three decades, roughly US$83tn ($118tn) in private wealth will change hands, marking the largest wealth transfer in recent history.

Will disputes on the rise

The scale of the wealth being passed down is triggering a rise in legal action by descendants who feel they have been unfairly treated.

“The main form of challenge, the one that is absolutely clogging our courts, is what’s called a family provision challenge,” Solomon said.

It can involve one sibling left less, or nothing, by their dead parent.

“These are red-hot claims. They are running at a million miles an hour. Our courts are absolutely consumed by them, and they are a function of, on the one hand, these greater estates,” Solomon said.

“The size of the prize is larger. Millions of dollars are at stake.”

He said while everyone had the right to carve up their assets how they please, family members could seek provisions if they are dependent on the deceased in any way or have specific needs.

“You need to mount your claim based on whether the will has made adequate and proper provision for you, and that is a question of ‘what is your financial position?’,” Solomon said.

“If I come to a claim as a multimillionaire and I don’t really need much, the court’s going to laugh me out. If I come to the claim as a pauper, manifestly dependent on the deceased and in desperate need, the court is going to find me victorious.”

The rise of testamentary trusts

Solomon said complicated family arrangements had increased the amount of wills using testamentary trusts, which were caught up in the Labor government’s wealth tax crackdown. The government later backtracked, moving to exempt testamentary trusts, but in doing so has forced millions of Australians to rewrite their wills in order to escape a minimum 30% tax.

Solomon said it was “unfair” that testamentary trusts were swept up in the crackdown.

“One of the myths of testamentary trusts is that these are fat-cat instruments used only by the ultra-rich. They’re really not,” he said.

“They are an absolutely standard mechanism now for families at every level, even those with relatively modest assets. The idea of holding assets in a testamentary trust is a critical component of modern estate planning.

“The whole purpose of a testamentary trust is to make provision for family, especially needy family, needy beneficiaries, children, minor children, elderly people, children with vulnerable risk factors.”

People who don’t have a will

Solomon said about 40% of Australians had no will.

“Without a will, you simply have no say. You have no direction, and it is a fixed formula (how your assets are carved by the courts).

“Often that works out okay. I’ve never seen it work out well, but I’ve seen it work out okay. The worst cases are where you have a spouse and children, and the children are under 18. They will pick up a share, but of course they can’t own a share until they reach adulthood.

“It’s just a disaster. Don’t die without a will.”

This article first appeared in The Australian as Death tax: why an inheritance tax on estates looms in great wealth transfer.

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