Estate assets passing to a testamentary charitable trust

It is becoming increasing common for Will makers to leave a portion of their estate assets in a testamentary charitable trust to continue supporting their favourite charities after their death. In doing this, it may cause potential unwanted CGT consequences.

Current at 1 November 2021

Estate assets passing to a testamentary charitable trust

It is becoming increasing common for Will makers to leave a portion of their estate assets in a testamentary charitable trust to continue supporting their favourite charities after their death. In doing this, it may cause potential unwanted CGT consequences.

Current at 1 November 2021

Let’s us consider a file that BNR recently came across.

Background:

  • Paul died in 2017.
  • Under his Will, Paul left his $5 million estate to a perpetual testamentary charitable trust to support the Salvation Army and the homeless.
  • The assets in the estate consist of:
    • $3 million residential property which Paul resided up to his death.
    • $1 million cash.
    • $1 million worth of shares.
  • During the administration of the estate, the executors sold the property but not the shares.
  • The charitable trust was endorsed by the ATO as an exempt entity.
  • The cash and shares of the estate were transferred to the charitable trust after the completion of the administration of the estate.

CGT bomb! On the passing of the shares to the charitable trust, a capital gains tax (CGT) event K3 was triggered. The time of the event is just before the deceased’s death.

In general, on the death of an individual, a capital gain or loss of a CGT asset that the deceased owned prior to death is disregarded, unless CGT event K3 applies. CGT event K3 happens if the CGT asset owned by the deceased passes to an exempt entity.

Accordingly, as the charitable trust is the sole beneficiary of Paul’s estate and an exempt entity from its commencement, CGT event K3 happens and the capital gain or loss is accounted for in the final income tax return of the deceased.

However, we note that any capital gain made as a result of CGT event K3 can be disregarded if the charitable trust is also endorsed as a deductible gift recipient.

Don’t hesitate to contact one of our team to discuss further should you encounter this situation in your client dealings.

 

 

Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.

 

 

This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning.  Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.