What You Need To Know About Deceased Estates
Selling deceased estate property? Understand probate, 2-year CGT exemption, executor duties, and tax obligations for beneficiaries and inherited assets.
A morbid topic, yes – but deceased estates are relevant at some point in everyone’s lives and it’s important to have a basic understanding of what they are and what the tax consequences are before you find yourself needing to know. While it might not be the most cheerful subject, having clarity on how deceased estates work can help you or your loved ones navigate the legal and financial landscape with ease.
Top Highlights
- Tax still applies: final tax returns must be lodged and beneficiaries may need to pay tax on rental income or capital gains from inherited assets.
- An Executor (if there’s a will) or a court-appointed Administrator (if there isn’t) oversees the distribution, debt repayment, and legal duties.
- You can sell a deceased estate property, but only after obtaining Grant of Probate (with a will) or Letters of Administration (without a will).
What Is a Deceased Estate?
When a person dies, they typically hold assets that have monetary value such as property and cars, cash and shares, insurance policies and sometimes loans against these assets. The combination of these balances is what forms a deceased estate. In simpler terms, it’s everything a person owns (and owes) at the time of their death. (Source: Victoria Legal Aid)
How Is a Deceased Estate Property Distributed?
When a person passes away, their deceased estate doesn’t simply transfer to their loved ones overnight. There is a structured estate administration process to ensure that deceased estate assets are properly distributed, outstanding debts are settled, and any necessary legal steps are taken. Whether an estate is divided among beneficiaries of a deceased estate, used to pay off estate liabilities, or even sold as part of a deceased estate property sale, the process depends on whether a valid will exists and who is legally appointed to manage the estate. Understanding estate distribution laws and the role of an estate executor can help beneficiaries navigate this often complex and emotional process with greater clarity.
What Happens To An Estate When Someone Passes Away?
Most people think of deceased estates as a distribution of assets to the individual’s chosen beneficiaries. However, the debts and loans held by the individual at their time of death often continue and need to be paid for out of the estate.
If the individual has a will in place at the time of death, it will typically include details of their nominated Executor – the person who has been chosen to manage payments of any debts as well as distribute any assets in accordance with the wishes of the deceased.
Can You Sell a Deceased Estate Property?
Selling a deceased estate property is possible, but the process depends on whether the deceased left a valid will. If a will is in place, the Executor is responsible for handling the sale, ensuring that all debts are paid before distributing the remaining funds to beneficiaries. If there is no will, the court will appoint an administrator to oversee the process, which can take longer and involve additional legal complexities.
Before selling, it is essential to obtain a Grant of Probate (if there is a will) or Letters of Administration (if there is no will). This legal authority allows the estate’s representative to manage and distribute assets, including selling any property. Additionally, any capital gains tax (CGT) implications should be considered if the property is sold.
One of the most important tax considerations when selling a deceased estate property is whether it qualifies for the main residence exemption from capital gains tax (CGT). If the property was the deceased’s principal place of residence at the time of death, and the property is sold within two years of their passing, it may be fully exempt from CGT. This exemption can result in significant tax savings for beneficiaries.
However, if the property was not the deceased’s main residence, such as an investment property or holiday home, CGT may apply on any capital gain made between the date of death and the sale date. Similarly, if the sale occurs more than two years after the date of death, partial CGT may be triggered even on a former main residence. The executor or administrator should consider these timing implications carefully when planning a deceased estate property sale, and beneficiaries should seek professional tax advice to understand their specific CGT obligations.
Legal and Tax Implications of Deceased Estates
Handling a deceased estate involves more than just distributing assets, it also comes with important legal and tax implications that must be addressed before beneficiaries receive their inheritance (Source: Queensland Public Trustee). From finalising tax returns and managing potential capital gains tax (CGT) liabilities to understanding superannuation death benefits and the responsibilities of an executor vs. trustee, the process can be complex. Whether you’re an estate executor, a trustee, or a beneficiary of a deceased estate, knowing your obligations can help you navigate the process smoothly while ensuring compliance with estate tax laws and legal requirements.
How Do Taxes and Deceased Estates Work?
The executor or chosen administrator of the estate is responsible for arranging the lodgement of any tax returns, including declaring any relevant income on assets held by the estate. If the deceased person was carrying on a business, there may be additional obligations and lodgements to attend to. Any tax obligations must be finalised and paid before distributing the remaining assets of the estate. The administration process of a deceased estate can take 6-12 months or sometimes longer. For detailed guidance on tax obligations for deceased estates, refer to the ATO’s deceased estate tax requirements.
What Are The Tax Consequences If You Are The Beneficiary Of A Deceased Estate?
Even though there are no inheritance or estate taxes as such in Australia, there may still be tax obligations that arise as a result of:
- Disposing of an asset that you inherited from a deceased estate (potential capital gains tax consequences)
- Receiving income such as interest, dividends and rental income from assets such as shares or property that you inherited
If it is deemed that you are ‘presently entitled’ to the income of a deceased estate, you need to include it in your tax return. For example, if the deceased person owned a rental property that continued generating rental income after their death, as the beneficiary you may become presently entitled to that rental income and therefore need to include it in your own tax return. According to the ATO, beneficiaries should understand their tax obligations when inheriting income-producing assets.
There are also issues to consider when receiving superannuation death benefits as a beneficiary. The super fund’s trustee typically determines who is to receive the benefits, and the tax consequences depend on many things including:
- Whether you were a dependant of the deceased according to tax law
- Whether the super death benefit is paid as a lump sum or income stream
- What the components are in the super fund (i.e. whether or not the super fund itself has already paid tax on the benefit being paid to the beneficiary)
Executor Duties vs. Trustee Responsibilities
Being an Executor or Trustee of a deceased estate comes with significant legal and financial responsibilities. The Executor is primarily responsible for administering the will, paying off debts, managing legal obligations, and distributing assets according to the deceased’s wishes. Meanwhile, a Trustee may be responsible for managing assets held in trust for beneficiaries, which could include investments, property, or ongoing income payments.
| Feature | Executor | Trustee |
| Role | Administers the estate as per the will. | Manages assets held in trust for beneficiaries. |
| Duration of Role | Generally a shorter-term role, concluding upon distribution of assets. | Can be a longer-term, ongoing role, especially with ongoing trusts. |
| Primary Duties | – Locate and validate the will. – Apply for probate. – Collect and manage assets. – Pay debts and taxes. – Distribute assets to beneficiaries. | – Manage trust assets according to the Will or trust deed. – Invest assets prudently. – Distribute income and capital to beneficiaries. – Act in the best interests of beneficiaries. – Keep proper accounting records. |
| When Role Begins | Upon the death of the testator. | Begins after the executor’s duties are substantially completed, and a trust has been established. Often this is the same person who was the executor. |
| Purpose | To wind up the deceased’s affairs. | To manage assets for the ongoing benefit of beneficiaries. |
Understanding the distinction between these roles is important to ensure compliance with legal obligations and to manage expectations effectively.
What Else Is There To Know?
If the deceased has no will in place, the result can be complicated and expensive, and the court may determine who will manage and be entitled to the estate.
It is worth seeking both legal and financial/taxation advice in relation to estate planning, as well as the tax consequences for beneficiaries, to ensure that all considerations have been made in relation to assets, and so that the process is as seamless as possible when the time comes.
If you need tax advice, you know where to find us. We can also put you in touch with excellent legal counsel. For more information on Australian small business tax deductions, you can read our guide to essential tax deductions for Australian small business owners.
FAQ
1. How Long Does Probate Take?
The probate process typically takes 6-12 months, depending on the complexity of the deceased estate. If there is a valid will, the executor of the estate must apply for a Grant of Probate, which provides the legal authority to manage and distribute assets. If there is no will, the process can take longer, as the court must appoint an administrator and issue Letters of Administration. Factors such as disputes, unpaid debts, or complex assets can further extend the timeline.
2. What If a Will Is Contested?
A contested will can delay the estate administration significantly. Beneficiaries or other parties may challenge the will due to claims of undue influence, lack of testamentary capacity, or concerns about the validity of the document. If a dispute arises, the matter may need to go through mediation or court proceedings, which can prolong the deceased estate settlement process. The executor of the will is responsible for ensuring a fair resolution while complying with legal obligations.
3. Selling or Keeping an Inherited Property: What’s the Best Choice?
Deciding whether to sell or retain inherited property depends on financial, legal, and tax considerations. If the property is sold, potential capital gains tax (CGT) consequences may apply, particularly if the property was not the deceased’s principal place of residence. However, if the property was the deceased’s main residence and is sold within two years of death, it may qualify for full CGT exemption, see our section on main residence exemptions above for more detail. Keeping the property may generate rental income, but beneficiaries must declare this in their tax return. The executor of the estate must also ensure any outstanding estate debts are settled before distributing the remaining assets.
4. How to Transfer Ownership of a Deceased Estate Property?
Transferring property ownership requires obtaining either a Grant of Probate (if there is a will) or Letters of Administration (if there is no will). The executor or administrator must lodge the relevant legal documents with the land titles office and ensure any estate tax obligations are met. If the property is inherited and later sold, the beneficiary of the deceased estate may need to consider potential CGT implications.
If you need tax advice, you know where to find us. We can also put you in touch with excellent legal counsel.
