Deceased Estates encompass all of the property and belongings that hold monetary value, owned in the sole name of a person who has died. Most people are familiar with the concept of deceased estates as containing valuable items to be distributed to beneficiaries. It is perhaps less well understood that when someone dies, the debts and liabilities that they held during life often continue and must be discharged out of the estate. In this post, we will outline the general rules of deceased estates and what is and is not included.
When a person dies, everything they solely own forms their estate. This may include:
Some types of income can also form part of the deceased estate. However, some assets will not be included because the deceased may have made other arrangements to distribute them. For example, assets that are jointly owned are not part of the estate and will pass to the surviving owner.
Deceased estates hold the assets of the deceased in trust, from the time of the death of the person concerned, until the transfer of the property and/or assets to their beneficiaries as nominated in their Will.
It is administered by either:
If there is a valid Will, the person named as Executor in the Will is responsible for the distribution of the deceased estate according to the testamentary wishes as expressed in the Will.
A Grant of Probate is required before an Executor can administer a person’s estate and distribute the assets to the beneficiaries. This means the Supreme Court of Victoria issues/grants a document confirming that the will is valid. It also confirms the appointment of the executor. It’s officially called a grant of representation. There are two types of these grants:
A grant of representation gives a person the legal right to administer the estate of the deceased. Some small estates (valued at less than $50,000.00 gross value) may not need a grant of representation.
After probate the executor collects all of the deceased’s probate assets, settles their debts, and ensures that the remaining assets are distributed to the nominated beneficiaries.
If someone dies without a valid will, they are said to die intestate, and the result is a more complicated process of having the estate distributed according to the law in accordance with the Administration and Probate Act 1958. Without a nominated executor in a will, the deceased is not able to decide who will take responsibility for administering their deceased estate, it is usually the next-of-kind who will need to apply for a grant of representation, or if no next-of-kin, the person who is next entitled to benefit from the estate in accordance with the legislation.
Administering an estate involves finalising everything relating to the assets of the deceased person’s estate.
This includes managing all the financial and legal issues, closing bank accounts, selling/transferring shares, dealing with the Superannuation benefits, and making sure all debts are paid and assets accounted for. It also means being responsible for making sure the beneficiaries named in the Will receive their inheritance. The Executor or Administrator (this information applies equally to both) is responsible for administering the deceased estate in the best interest of the beneficiaries nominated in the Will (or if no will exists, the deceased person’s next of kin or another person according to a state or territory law).
Tasks usually performed by an executor may include:
If you have been appointed as an Executor or Administrator of the deceased estate, you will also be responsible for managing the deceased estate’s tax affairs. This includes:
There are generally no death duties in Australia. However, tax may be payable on certain income or capital transactions that arise as a consequence of a person’s death.
Any tax liability that may be generated from your role as Executor is separate from your own personal tax liability. Therefore don’t include any of the income of the deceased person or deceased estate in your own personal tax return (except for any trust income you may receive as a beneficiary).
Another item that may potentially have to be declared is any fee charged to the estate for executor services performed.
When the assets of a deceased estate are distributed, a special rule applies that allows any capital gain or loss made on a CGT asset to be disregarded if the asset passes:
However, if an Executor sells an asset of the deceased estate after two years after the date of death and then distributes the proceeds to the beneficiaries, the sale is subject to CGT applies and only a partial exemption to CGT may apply.
In most cases, the transfer of CGT assets into a deceased estate and then out to their beneficiaries will not incur an income tax liability.
In most cases, when a person dies, their superannuation fund will pay their remaining super to their nominated beneficiary, which is called a Superannuation Death Benefit.
If there are no binding death nominations, then the Trustee of the super fund will decide how the benefit will be paid. Depending upon the trust deed of the superannuation fund, and rules and regulations operating for superannuation, the trustee may pay it to the deceased estate, and it will be distributed in accordance with the terms of the Will.
If you are a dependant of the deceased, you do not need to pay tax on any component of a superannuation death benefit if you receive it as a lump sum (if you receive it as an income stream you may need to pay tax on it). Also do not include it on your tax return as income.
If you are not a dependant and you receive a death benefit it must be as a lump sum. The item is generally taxable as follows:
A Will should also make provision for the executors to pay for expenses such as the funeral, and to discharge any debts out of the deceased estate. An Executor will also ensure that any applicable income tax is paid from the deceased estate. The estate must pay any other tax that falls due as a result of the liquidation of assets, such as superannuation payouts and capital gains on the sale of investments such as shares or property.
Generally, an Executor will pay the debts of the deceased before any assets are distributed to beneficiaries. The only exception is that the superannuation death benefits and life insurance of the deceased cannot be used to repay the debts of the deceased estate. All other assets of the deceased estate are available to the Executor for the purpose of discharging debts, regardless of the instructions of the will as to the distribution of assets. Therefore an executor is unable to, for example, distribute a mortgage-free property to a beneficiary if there are other debts in the estate that cannot be discharged without the sale of the property.
If the estate does not contain enough assets to cover the debts at the time of death, the Executor will pay the debts according to either bankruptcy provisions or the insolvent estate provisions. An Executor is not required to repay the debts out of their own pocket unless they have some direct involvement with that debt (i.e. the debt is secured against a property that they own or, they have personally guaranteed the debt).
Bankruptcy and insolvency estate provisions ensure that the first priority is the funeral, testamentary, and administration expenses. The Executor will then discharge current and past tax debts, regardless of any instructions that the deceased has left in the Will, followed by the repayment of secured debts such as home or car loans. The deceased estate will also prioritise the payment of any delinquent child support and make provision for the ongoing payment of child support for a dependent child (if applicable). If there is a HECS-HELP education debt outstanding at the time of death, the balance of the debt will be extinguished.
The final debts to be paid out of a deceased estate are unsecured debts, and it is this class of debts that are most likely to remain unpaid if the estate is insolvent. This means that even if a Will makes a provision, for example, that an unsecured debt to a family member is to be repaid, this debt will be paid only after all secured debts are discharged. This can be an issue where family members have provided substantial unsecured loans towards the purchase of a home or investment in a business. This is one of many reasons that family loans should always be formalised and documented.
If you’re interested in knowing more about Deceased Estates, speak to the expert Geelong lawyers at The Hrkac Group. Making sure that everything runs as smoothly as possible depends on all legal and financial obligations being met, and that can require liaison between a number of different parties.
Our Geelong Lawyers’ expertise and experience in facilitating Deceased Estates can help ensure a positive experience for you. To make an appointment to meet one of our friendly Geelong Lawyers today, feel free to contact us via email or phone (03) 5224 2366.
