They met 80 years ago, and it was a marriage made in heaven. He was a solid, dependable, professional man aged 35, she was a beautiful, vivacious woman of just 20.
From her point of view he would be a reliable partner for life; from his point of view she would be the perfect wife. A bonus was that he already owned a home that had been left to him by his father.
Their marriage was a happy one, and produced four children. He was the meticulous type, and when doing the estate planning, decided that his wife, who was inexperienced in the ways of finance, needed to be protected after his death. Accordingly, his will included a clause that the family home, which was in his name, was to be left to a testamentary trust with provision for his wife to live there as long as she wished, and also to receive income from other assets of his estate. Their children were named as trustees of the testamentary trust.
The husband died in 1990, and the wife lived in the house until 1993, when she decided it was too big for one person. The children sold their father's house, and used the proceeds of that sale to buy her a smaller place in an area she loved. The new home cost $400,000 and was held in the name of the testamentary trust.
In 2002, her daughter, one of the trustees, moved into the house with her and acted as her carer. This arrangement worked well until 2012, when the mother moved into aged care, where she is still living happily at the age of 100. The daughter continued to live in the house.
Eventually, without taking prior advice, the family sold the house for $2 million. After the sale was completed, they were horrified to find that the entire profit of $1.6 million was a taxable capital gain. Because the house had been bought in the name of a trust, they had lost the right to the capital gains tax exemption that applies to homes held in the personal names of the occupiers. The only good news was that the family was eligible for the 50 per cent capital gains discount, and were also able to add all costs associated with that property since the day it was bought to the base cost.
This story illustrates the importance of taking expert advice before major transactions are completed. If the mother had been left the original home, and no trust or life tenancy had been put in place, she could have simply used the sale proceeds of that home to buy the second home in her own name in 1993. Then the new residence would have been exempt from capital gains tax, even after she had moved into aged care, as long as the daughter was still living in it. In his efforts to protect his family from financial misfortune, the husband had created a tax liability that was more than the original price of the house.
It also highlights the wisdom of making sure both partners are engaged in the family finances, so that they both have the necessary skills to carry on alone.
There is nothing in this story to decry the effectiveness of strategies like testamentary trusts, and binding death nominations in superannuation, when used appropriately. However, the effect of such instruments can limit the opportunity for executors and beneficiaries of an estate to manage affairs for optimal minimisation of tax. These are definitely not "one size fits all" tools – like fire, they can be very useful, but must be handled with caution.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au
