Part I – Equal Shares, Unequal Outcomes: Managing Tax Distortions in the Estate Plan

One of the focuses of estate planning is achieving “fairness” between a testator’s future beneficiaries – that is, ensuring that a testator’s wishes are honoured and that their beneficiaries receive what has been promised to them. Yet, in practice, even the most carefully constructed estate plans can produce outcomes that are anything but “fair”. The culprit, more often than not, is taxation.

Different asset classes attract different tax treatments. Different beneficiaries may have different tax profiles. And the timing and manner in which assets are transferred can significantly alter the net benefit ultimately received. The result is that two beneficiaries, each notionally entitled to an equal share of an estate, may walk away with materially different after-tax outcomes.

This article which is part 1 of a two part article examines how these distortions arise and what estate planners (referred to throughout as “Advisors”) can do to anticipate and manage them. The focus is practical: identifying common tax issues in estate administration and exploring strategies that can be embedded into estate planning documents to better align outcomes with a testator’s intentions.

The Scope of the Problem
Estate planners are frequently described as “preventative practitioners.” Their role, looked at through a “best practise lens”, is not merely to document a client’s wishes, but to anticipate future risks and design structures that minimise the likelihood of disputes, inefficiencies, or unintended consequences.

One of the most significant yet underappreciated risks lies in the taxation of future estate assets.

• Certain assets – such as real property, shares, and superannuation – carry embedded tax attributes.
• Likewise, beneficiaries may differ in their tax residency, marginal tax rates, or eligibility for concessions.

When these factors interact during estate administration, the result can be a substantial divergence between intended and actual outcomes.

This article focuses on two key issues:

• The taxation consequences that arise during the administration of a deceased estate, and how they may distort a testator’s intended distribution; and
• The strategies Advisors can employ to “plan for tax fairness,” recognising that fairness is ultimately defined by the client’s own objectives.

This article is not intended to be a comprehensive treatise on deceased estate taxation. Rather, it highlights recurring issues and offers practical tools to address them.

A Practical Lens
The emphasis throughout is on practical application. Estate planners must operate not only as legal technicians but as strategic advisors who can translate complex tax rules into workable, client-focused solutions.

To that end, this article incorporates:

• Sample Will clauses
• Case studies illustrating real-world scenarios
• Commentary on how planning decisions play out during estate administration

A Note on Anti-Avoidance
Any discussion of tax planning must acknowledge the potential application of Part IVA of the Income Tax Assessment Act 1936 (Cth) – Australia’s general anti-avoidance regime.

While this article does not explore Part IVA in detail, Advisors must remain mindful that aggressive or artificial arrangements designed primarily to obtain tax benefits may be challenged. All planning strategies should therefore be grounded in genuine commercial or familial objectives.

Preliminary Observations
Before turning to technical strategies, it is worth reflecting on two enduring truths of estate planning.

“Where there’s a will, there’s a relative.”

This aphorism highlights the reality that estate disputes are often driven by self-interest. The more complex the estate plan – particularly where blended families, trusts, or unequal distributions are involved – the greater the risk that beneficiaries will scrutinise outcomes and, if dissatisfied, challenge them.

For Advisors, this underscores the importance of clarity, precision, and foresight in drafting. Estate planning documents should therefore always be prepared on the assumption that they may one day be tested in court.

“It’s all about the money.”

Even where families insist that “it’s not about the money,” experience suggests otherwise. Beneficiaries are typically highly attuned to the financial outcomes of an estate, even if they do not express this openly.

If an estate plan produces results that appear unfair – particularly where tax has eroded one beneficiary’s share more than another’s – the likelihood of dispute increases significantly.

Advisors must therefore ensure that estate plans not only reflect the testator’s intentions, but also achieve those intentions in economic terms.

Taking Instructions: Understanding What the Client Really Wants
A critical step in estate planning is identifying the client’s “Global Testamentary Intention” – that is, their overarching objective for how their wealth should be distributed.

Clients often express this intention in percentage terms (e.g., “divide my estate equally between my children”). However, this simplicity can be misleading. Key questions arise:

• Should equality be measured before or after tax?
• Should latent tax liabilities (such as unrealised capital gains) be taken into account?
• How should non-estate assets (e.g., superannuation) be treated?

Many testators do not fully consider:

• The future value of their assets; or
• The tax consequences that will apply when those assets are ultimately realised by beneficiaries

It is therefore the Advisor’s responsibility to:

• Obtain comprehensive instructions; and
• Ensure the client understands the implications of those instructions

A Simple Illustration
Consider a testator, Simon, with two children, Paul and Art.

Simon owns:

• A home (CGT-exempt)
• An investment property (subject to CGT)
• Cash assets

He wishes to:

• Leave one property to each child; and
• Ensure the overall distribution is equal

The question is: how should the properties be valued on order to achieve Simon’s planning objectives?

Two approaches are possible:

1. Ignoring latent CGT

• Both properties are treated as having equal value
• Cash is divided equally

2. Accounting for latent CGT

• The investment property is discounted to reflect future tax liability
• Cash is adjusted to compensate the recipient

Each approach produces a different outcome. Neither is inherently “correct” and the appropriate method depends on Simon’s intentions.

The key point is that unless this issue is explicitly addressed by an Advisor with Simon at the planning stage , the executor – and potentially the Courts – may be left to determine the outcome.

Keeping Tax Options Open
One of the most effective ways Advisors can add value is by building flexibility into estate planning documents. Two foundational strategies are particularly important:

1. Direction as to Priorities
A Will can include a clause directing executors to:

• Preserve the intended distribution between beneficiaries; and
• Consider tax efficiency when allocating assets

Such a clause signals that tax outcomes are a relevant consideration and empowers executors to act accordingly.

2. Appropriation Clauses
Appropriation clauses give executors broad discretion to allocate specific assets to beneficiaries without requiring their consent. This flexibility is critical where:

• Different assets carry different tax consequences; and
• Strategic allocation can improve overall outcomes

Case Study: Tax-Aware Allocation
Consider Joni, who leaves her estate equally to:

• Her niece; and
• A registered charity (a deductible gift recipient)

Her estate includes:

• A home; and
• A share portfolio with embedded capital gains

With appropriate drafting (including a direction as to priorities and an appropriation clause), the executor can:

• Allocate more CGT-heavy assets to the charity (which may be exempt); and
• Allocate tax-free or low-tax assets to the niece

This approach preserves equality in economic terms while minimising overall tax leakage.

Moving Beyond Flexibility: A Bespoke Approach
While keeping options open is valuable, more sophisticated planning involves embedding specific mechanisms into the Will to address anticipated tax issues.

Australia’s taxation regime for deceased estates is complex, combining concessions (such as CGT roll-over relief) with potential pitfalls (such as the denial of that relief in certain circumstances).

Effective planning requires Advisors to:

• Understand the relevant tax rules;
• Anticipate how they may apply in the future; and
• Draft documents that guide executors toward the desired outcome

The Importance of Will Construction
A fundamental principle of estate law is that a Will is interpreted based on its wording. Courts generally:

• Rely on the plain meaning of the text; and
• Avoid rewriting provisions, even if the outcome appears unintended

This has significant implications for tax planning. If a Will does not clearly specify:

• How assets are to be valued; or
• How tax liabilities are to be allocated

then the testator’s true intentions may not be realised. Accordingly, precision in drafting is essential.

Bespoke Clauses: The Foundation of Tax Fairness
Two types of clauses are particularly important in managing tax distortions:

1. Valuation Clauses
These clauses specify how assets are to be valued when determining each beneficiary’s share. A key issue is whether to account for latent CGT. For example, a clause might state:

• That future CGT liabilities are to be disregarded; or
• That they are to be taken into account

Without such a clause, disputes may arise over how to measure “equality.”

2. Adjustment Clauses
Adjustment clauses allow for post-allocation corrections to ensure that the intended distribution is achieved. A specific subset – tax equalisation clauses – will be explored in Part 2.

CGT and Deceased Estates: The Basics
A central feature of estate taxation in Australia is the CGT roll-over on death.

General Rule
In most cases:

• No CGT event occurs when assets pass from the deceased to the executor or beneficiary;
• The beneficiary inherits the deceased’s cost base

This means that tax is deferred until the asset is eventually sold.

Pre-CGT Assets
Assets acquired before 20 September 1985:

• Become post-CGT assets upon death;
• Are reset to market value at the date of death

Testamentary Trusts
CGT roll-over generally extends to assets passing through testamentary trusts, provided certain conditions are met.

When Roll-Over Relief Does Not Apply
Roll-over relief is not available where assets pass to:

• Tax-exempt entities (with limited exceptions)
• Superannuation funds
• Non-residents (except for taxable Australian property)

In these cases, a CGT event K3 may occur, triggering an immediate tax liability in the deceased’s final return. This can significantly reduce the value of the estate unless properly managed.

Strategic Use of CGT Events
In some cases, it may be advantageous to trigger a CGT event rather than defer it.

For example:

• Where capital losses are available; or
• Where CGT concessions (such as small business concessions) can be utilised

This highlights an important point: tax deferral is not always the optimal outcome. The best approach depends on the broader estate plan.

Looking Ahead
Part 1 has laid the groundwork by:

• Identifying how tax can distort estate outcomes
• Highlighting the importance of clear instructions and precise drafting
• Introducing key tools such as appropriation, valuation, and flexible executor powers

In Part 2, we will build on this foundation by examining:

• Tax equalisation clauses in detail
• The CGT K3 event and planning for non-resident beneficiaries
• The interaction between superannuation, property, and shares
• Strategies for blended families

The objective remains the same: to ensure that “equal shares” translate into genuinely fair outcomes after tax.

Paper and Citations – Part I and Part II are a precis of the Greg Russo’s paper which can be accessed here. Where relevant, this paper includes case citations.

May 2026

Greg Russo, Principal Solicitor, Greg Russo Law

Greg Russo Law Disclaimer
The information given by Greg Russo and Greg Russo Law in this document and in Greg Russo’s presentation (Information) is given in good faith but is of a general nature only. It is not financial advice. It is not intended that the Information will be acted or relied upon. Each person’s requirements and circumstances will be different and accordingly, each person should engage in professional assistance according to their own particular needs.

Furthermore, any Will (including one that includes any form of testamentary or protective trust) must be drafted to consider the particular circumstances of a will maker (including the residency and domicile of the will maker and the location of the will maker’s assets) and of the will maker’s intended beneficiaries. The illustrative clauses and sample trusts in this presentation have been prepared for educational and general information purposes only and should not be relied on as (or in substitution for) legal, accounting, financial or other professional advice. Neither Greg Russo nor Greg Russo Law warrant or represent that the Information is accurate, reliable, complete or free from error or omissions. None of the Information should be taken as legal or accounting advice. Subject to any law which cannot be excluded Greg Russo and Greg Russo Law do not accept any responsibility for errors in or omissions contained in the information.