A trust is not always the best idea

MONEY MADE SIMPLE with Noel Whittaker

Noel Whittaker is the author of Making Money Made Simple. His advice is general and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au.

JACK was the meticulous type and decided that his wife, who was inexperienced in the ways of finance, needed to be protected after his death. So his will had 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 would receive income from other assets of his estate. Their children were named as trustees of the testamentary trust.

Jack 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 the house and used the proceeds 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 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, the family sold the house for $2 million. After the sale they were horrified to find the entire profit of $1.6 million was a taxable capital gain. Because the house was in the name of a trust, they had no capital gains tax exemption such as applies to homes held in the personal names of the occupiers. The only good news was that the family was eligible for the 50% capital gains discount, and 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.