When a beneficiary passed away
Scenario:
A friend of mine, Mr Cane, died in his 40s on 22 October 2014 with no wife or children. According to his will, all his assets would be passed to his parents. They are the beneficiaries and executors of the estate. A tax file number has been set up for the estate and a tax return lodged in 2015. For the 2016 tax year, two properties that were held in Mr Cane's name were sold in July 2015. There were also a few minimal shares, cash-earning interest and another property earning rent that has been sold in the 2017 financial year. I believe in normal circumstances it would be appropriate to distribute all the capital gains and income to the parents equally.
The further complication, however, is that his father died on September 30, 2015. I still think it is appropriate to distribute the capital gains equally to both parents given that the gains occurred before the date of his father's death. I am assuming, however, that I should apportion the interest earned, dividends and rental income so that 100% is allocated to his mother after the date of the father’s death. Is my approach to this correct?
There is a significant tax saving to the mother by splitting the capital gains equally with her deceased husband. Would you be able to advise if there is any documentation that I should ensure is in place?
Explanation:
It is almost certain that you have no discretion as to how the distributions are made from Mr Cane's estate. Subject to reviewing the actual wording in Mr Cane's will, it is likely that 50% must go directly to his mother and 50% to his father's deceased estate. Ordinarily, a will provides that a beneficiary has to survive the deceased (i.e. Mr Cane) by 30 days and if they do, they receive whatever benefit is specified for them. Given his father died approximately 11 months after Mr Cane, I expect that the father's benefit under Mr Cane's will be vested and therefore, half of Mr Cane's estate has to flow to this father's estate. The above case is irrespective of whether the gains in Mr Cane's estate occurred before or after the father's death.
Similarly, your assumption in respect of the interest, dividends and rental income is not correct. They most likely have to be distributed 50% directly to his mother and 50 % to his father’s estate (even though the father’s estate may likely flow to the mother as well). In respect of documentation required, from a succession law perspective, there should be beneficiary distribution notices from Mr Cane’s estate to his mother and father’s estate notifying them of the beneficial distribution and detailing what the components are (i.e. capital gain, interest income and rental income.)