When it comes to estate planning, dividing assets “equally” between children may seem straightforward. In practice, however, equality on paper does not always translate to fairness in reality.
A common scenario highlights the issue: two children are each set to receive $2 million from their parent’s estate. One inherits cash, while the other inherits a property. At first glance, this appears perfectly balanced. However, tax can dramatically shift the outcome.
A simple family structure
Mum leaves the following assets in her estate:
- An investment property worth $2 million
- Cash of $2 million
The estate specifies that:
- Child A inherits the property
- Child B inherits $2 million in cash
On the surface, each child appears to receive the same value. However, this overlooks a critical detail: capital gains tax (CGT).
The hidden difference: Cost base and CGT
Assuming the property is a post-CGT asset, Child A inherits their mother’s original cost base of $500,000 for tax purposes.
This means that if Child A sells the property for $2 million, the taxable capital gain is based on the difference between $2 million and $500,000.
Even with the 50% CGT discount and applying the top marginal tax rate of approximately 47%*, a significant tax liability may arise from the sale.
CGT may become an even greater burden due to recently announced Federal Budget changes, subject to final legislation.
In contrast, Child B receives $2 million in cash, which is entirely tax-free.
Why “equal” is not always fair
This scenario creates a built-in imbalance:
- Child A inherits a valuable asset, but also inherits a potential future tax liability depending on the sale price.
- Child B inherits fully accessible, tax-free wealth.
The indicative calculation is:
- Sale price: $2,000,000
- Less inherited cost base of property: ($500,000)
- Gross capital gain: $1,500,000
- Current CGT discount reduction: 50%
- Net capital gain: $750,000
- Tax rate at top marginal rate*: 47%
- Tax payable: $352,500
In effect, Child A’s net position may be hundreds of thousands of dollars lower after tax, depending on the timing of the sale and the property’s future value.
To create true equity in this scenario, the tax-effected assets of the estate are:
- $2,000,000 in cash
- $1,647,500 in property after allowing for the indicative tax liability
A more equitable distribution may therefore be:
- Child A receives the property and $176,250 in cash
- Child B receives $1,823,750 in cash
Practical considerations
There are also several practical issues to consider:
- When the estate plan is prepared, it is not possible to know the property’s market value when Child A eventually inherits it.
- Property is illiquid, so Child A may need to sell it to access funds.
- Holding the property involves ongoing costs.
- The eventual tax outcome is uncertain and depends on market movements.
While future growth could shift the balance over time, the inheritances may not be equal at the point of distribution.
Key estate planning risks
This type of arrangement introduces several risks that are often overlooked:
- Unintended inequality between beneficiaries
- Disputes arising from perceived unfairness
- Unexpected tax burdens
- Poor liquidity outcomes for asset-rich beneficiaries
It also highlights the importance of maintaining accurate cost base records, as missing documentation can further increase CGT exposure.
How to create true fairness
There are several strategies that may better align beneficiary outcomes.
Consider contingent tax liabilities
The estate plan can take embedded or future tax liabilities into account when determining how assets are divided.
Adjust the asset allocation
The will can be rebalanced so that the property recipient receives additional cash or a reduced share of the property.
Sell assets within the estate
Disposing of the property before distribution may allow the tax liability to be shared across beneficiaries.
Consider the structure
An appropriate structure may help manage the timing of tax events and introduce greater flexibility in how assets are distributed.
These approaches can help beneficiaries receive outcomes that are not merely equal in nominal value, but fair in economic terms.
Next steps
Estate planning is not simply about dividing assets. It is also about understanding their value after tax.
Without careful structuring, well-intentioned decisions can result in unintended inequality. The difference in value between cash and an asset with an embedded CGT liability can be significant, so considering these tax implications upfront is essential to achieving fairness across generations.
It is also important to be aware of proposed CGT changes arising from recent Federal Budget announcements.
To better understand how tax, structure and asset mix may shape your estate planning outcomes, speak with your usual Forvis Mazars adviser or contact one of the firm’s specialists.
*Personal circumstances, such as carried-forward capital losses and a lower marginal tax rate, could reduce this amount.
About the Author
Liliana Harris is a Partner at Forvis Mazars in Melbourne, with more than 20 years of experience as a Chartered Accountant and Tax Agent, complemented by a legal background and accreditation as an Estate Planning Adviser. She advises businesses and individuals on taxation, business structures, asset protection, capital gains tax and succession planning, providing clear guidance that helps clients understand their options and make informed decisions at different stages of their business and personal lives.
To contact Liliana Harris, click here.