Navigating estate planning: Balancing family assets and interests

Why flexibility matters in estate planning

When distributing real estate assets among multiple beneficiaries, flexibility is key to avoid potential family disputes. Leaving the properties to children as tenants in common may seem fair, but it can create tension, especially when family members have different needs, preferences and financial circumstances. There are also differing tax treatments for the properties that should be taken into consideration before a final decision is made. 

To help reduce the risk of conflict, here are several options to consider: 

1. Sell the properties and distribute the proceeds

A straightforward approach is to sell both properties upon death and divide the proceeds equally among the children. This eliminates the complexities of shared ownership, promotes fairness and allows each child to use their inheritance in a way that suits their individual circumstances. 

2. Retain the beach house for family enjoyment

If the beach house holds strong sentimental value, consider selling the family home and keeping the beach house for shared family use. This preserves cherished memories while simplifying the estate. 

However, shared ownership comes with risks. Setting clear expectations through open discussions and written agreements can help prevent future misunderstandings. 

Tip: If the principal place of residence is sold within two years of death and wasn’t used to produce income, it may be exempt from Capital Gains Tax (CGT). 

3. Understanding CGT implications on the beach house

If the beach house was purchased before 20 September 1985 (a pre-CGT asset), its cost base is the market value at the date of death. For properties acquired after that date, the cost base is the deceased’s original cost base. 

There are several ways to manage this: 

• Sell the property and pay CGT: The property can be sold, and with the CGT liability settled, any surplus proceeds can be divided equally among the siblings.
• Rent out the property: If the family want to retain ownership, consider renting out the property during periods when it’s not in use to generate income while still maintaining it as a family asset.
• Allow family buyouts: If some siblings wish to sell their share of the property, they can offer it for sale to the others at market valuation.

4. Consider the ongoing costs of property ownership

Inheriting property involves more than emotional value, it also brings financial responsibility.

Beneficiaries should be aware of the ongoing costs and obligations that may arise, including: 

• Land tax: May apply depending on the property’s location.
• Vacant residential land tax (if applicable): In Victoria, properties may be subject to this tax if the beneficiaries do not use the property for at least four weeks in a calendar year. 
• Council and water rates: Recurring charges that must be budgeted for.
• Body corporate fees: Applicable if the property is part of a strata or community title. 
• Mortgage repayments: If there is any outstanding mortgage, repayments will be an ongoing responsibility.
• Maintenance costs: Includes general upkeep, repairs and potential capital improvements to keep the property in good condition.
• Foreign resident beneficiaries: Australian property owned by foreign residents are generally not entitled to the 50 per cent CGT Discount and are subject to withholding tax at 15 per cent upon disposal.
• Foreign property and foreign trusts: Property located in other jurisdictions or held in a foreign trust create an additional layer of complexity and are best discussed with a specialist tax adviser.

If agreement among beneficiaries is unlikely, selling both properties and distributing the proceeds equally may offer the most practical and equitable solution. 

Finding the right path forward 

Given the emotional and financial complexities involved, it is important to consult with family members and consider their preferences, preferably before the parents pass. If unanimity seems out of reach, a balanced approach like selling both properties and distributing the proceeds equally can help ensure a smoother transition.

If you're feeling uncertain about the best approach for your family's situation, reach out to a BDO family enterprise adviser. Our family enterprise team can guide you through estate planning strategies that ensure a fair and seamless distribution of assets, always with your family's unique dynamics in mind.