There is an upward trend of Australians making generous charitable gifts in their wills. However, there is a lack of awareness that gifts or donations made in wills to charities that classify as deductible gift recipients (DGRs), are not tax deductible. Therefore, where a will-maker intends to make significant donations it is imperative that they explore tax effective strategies as part of their estate planning.
A gift to a DGR can take many forms, including:
- Specific gift of money
- Specific gift of assets
- A percentage of the residue of your estate
Donating Asset vs Cash
Normally when an executor of a deceased estate disposes of a capital gains tax (CGT) asset there is an automatic CGT roll-over of any CGT gain or loss in respect of that asset. This means that the liability passes to the beneficiary and is assessed once they dispose of the asset. However, when a CGT asset passes to a DGR under a will, no roll-over applies as the tax liability is completely disregarded.
Although there are is no tax payable by a deceased estate or DGR for cash donations, the estate will not be entitled to a tax deduction for the payment.
In the right circumstances, it can be highly tax effective to gift a CGT asset to a DGR rather than sell the asset and donate the cash. As the beneficiary is a DGR the CGT liability is disregarded. Had this asset been gifted to a non-DGR beneficiary they would only be entitled to a roll-over of the CGT liability.
Letter of Wishes
Gifts of cash or property to a DGR made by an individual during their lifetime is tax deductible for that individual. Therefore, as an alternative of leaving gifts to DGRs in a will, many will-makers consider leaving a letter of wishes directing their beneficiaries to make charitable gifts in the deceased’s memory. As the letter is a private undisclosed document it is not binding on the beneficiary or enforceable by the executor or the charity. Therefore, there is an inherent risk that the donations may never be made.
With appropriate estate tax planning a donation to a DGR can both support the vital work of a charity as well as minimise tax implications by improving the value of gifts received by non-DGR beneficiaries of the estate.
For advice and assistance on exploring estate tax planning opportunities, risks and consequences, please contact our team of tax solicitors at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.