How Long can the Estate Continue

There is no set time limit for an estate. It can be wound up in a few months or may go for many years. It depends on how complicated the Will is, how hard it is to dispose of the deceased assets, if the Will is being contested, how young any children are, etc.

The tax consequences for the Estate depend on whether the beneficiary under the Will is “presently entitled” to the income of the Estate. For someone to be presently entitled they must have a legal right to immediately demand payment of the funds (FCT v. Whiting). The ATO has outlined three stages of an estate’s administration and whether someone is presently entitled at those stages.

In the initial stage the executor is still working out what the Estate consists of. What assets, what is owed. The executor uses income or assets in the estate to pay expenses such as funeral expenses etc, but still doesn’t really know yet how much will be left over. At this point there is no one presently entitled so the Estate pays any tax.

In the intermediate stage the executor might determine that there will be surplus assets in the estate. That is, the executor won’t need all assets to pay debts and expenses. So, the executor might start distributing some of the assets. While the executor is still working things out, the beneficiaries have no present entitlement. However, when the executor determines that there are excess funds and starts to pay these out to beneficiaries, then the beneficiaries may be presently entitled to the income actually received and they will have to pay the tax. It depends on whether income has been distributed.

And in the final stage it is all clear. The executor has paid all debts and whatever is now left in the estate and what it has earned is available for distribution. The beneficiaries of the Will are now presently entitled whether they have actually received anything or not. Income that the Estate has earned will be income that the beneficiaries will need to pay tax on (for example interest, dividends received after death, capital gains, super death benefits, etc).

If the Estate pays the tax, this may be less than the beneficiary would pay on the same income. The Estate is taxed like an individual with the first $18,200 tax free, then 17% tax etc. If the beneficiary is working and the income is added on top of their salary, the tax rate could be considerably higher. However, the Estate period cannot be extended arbitrarily. There needs to be a valid reason for the estate to continue, such as time needed to sell an asset. Further, after three tax returns, the tax rate for the estate increases.

If you need clarification on who pays the tax please don’t hesitate to contact us.