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

In Part 1, we examined how taxation can undermine even the most carefully considered estate plans. We explored the importance of clear instructions, flexible drafting, and the foundational tools, such as appropriation and valuation clauses, that allow executors to respond to tax consequences in a practical way.

Part 2 builds on that foundation. It turns to specific asset classes, beneficiary circumstances, and the practical mechanisms required to translate a testator’s intention of “equality” into a genuinely fair, after-tax outcome. The focus is on execution: how estate plans operate in the real world, where tax liabilities crystallise, beneficiaries compare outcomes, and disputes can arise if expectations are not met.

Specific Gifts and Specific Assets: Where Distortions Begin
One of the most common sources of inequality in estate administration arises where a testator directs that a particular beneficiary receive a specific asset, such as real estate, shares, or a business interest.

These gifts are often motivated by:

• Sentimental attachment
• Perceived suitability (e.g. one child is “better with property”)
• Practical considerations (e.g. continuity of a family business)

However, once a testator also expresses a broader intention that the estate be divided “equally,” complexity arises. The allocation of a specific asset necessarily requires that the asset be valued. If that asset carries embedded tax liabilities – or will generate tax in the future – then the method of valuation becomes critical.

Gift or Sale: Structuring the Transfer
A Will can deal with specific assets in a number of ways. Two common approaches are:

1. Sale to a Beneficiary
A beneficiary may be given an option to purchase an asset from the estate. This approach converts the asset into cash for distribution purposes; and triggers a CGT event at the estate level. The tax consequence is immediate. The estate will generally bear the CGT liability unless the Will provides otherwise.

2. Gift (Inheritance) of the Asset
Alternatively, a beneficiary may receive the asset as part of their entitlement. In this case:

• CGT roll-over relief may apply;
• The beneficiary inherits the cost base; and
• Tax is deferred until a future disposal

While this appears tax-efficient, it shifts the burden to the beneficiary – potentially distorting equality between beneficiaries depending on whether latent tax is taken into account.

Who Bears the Tax?
A critical but often overlooked issue is the allocation of tax liability arising from the exercise of these options. Where an asset is sold to a beneficiary the estate incurs CGT and the question arises whether that cost should be borne by all beneficiaries (via reduced residue), or by the purchasing beneficiary.

Where an asset is inherited tax may be deferred, but future liability remains, the Will should ideally clarify whether that latent liability is to be recognised in valuing the beneficiary’s entitlement.

Two alternative drafting approaches are commonly used. The appropriate approach depends on the testator’s broader objectives and the relative positions of beneficiaries.

• Estate bears the cost: promoting simplicity but potentially creating inequity
• Beneficiary reimburses the estate: promoting fairness but requiring clear drafting and enforcement

Strategic Allocation: Choosing the Right Asset for the Right Beneficiary
A powerful planning strategy is asset streaming – allocating assets to beneficiaries in a manner that minimises overall tax. This requires Advisors to consider:

• The nature of the asset (CGT vs non-CGT)
• The tax profile of the beneficiary (resident vs non-resident, individual vs entity)
• The availability of exemptions or concessions

For example:

• Non-resident beneficiaries may be better suited to receiving taxable Australian property (e.g. real estate), which does not trigger certain adverse CGT events
• Charities (particularly deductible gift recipients) may be ideal recipients of CGT-heavy assets
• Individual beneficiaries on high marginal tax rates may benefit from receiving tax-advantaged assets

Appropriation clauses are essential in enabling this flexibility during administration.

Real Estate: A Case Study in Complexity
Real estate is often the most valuable, and the most tax-sensitive, asset in an estate.

Foreign Beneficiaries and CGT
Where a beneficiary is a non-resident, the distinction between the following becomes critical – taxable Australian property (e.g. Australian real estate); and non-taxable Australian property (e.g. shares).

CGT event K3 will generally only arise where non-taxable Australian property passes to a foreign resident. Accordingly, a sensible planning strategy is to stream real estate to non-resident beneficiaries; and allocate CGT-heavy financial assets to resident beneficiaries or tax-advantaged entities.

The Main Residence Exemption
The deceased’s principal residence offers a valuable concession:

• A full CGT exemption may apply if the property is sold within two years of death; or
• The exemption may continue beyond two years if the property is occupied by an eligible person (such as a spouse or someone with a right to reside under the Will)

This creates planning opportunities:

• Allocating the main residence to a beneficiary who can utilise the exemption effectively;
• Structuring occupation rights to preserve the exemption

However, the drafting must be precise. A mere discretionary power to allow occupation may not suffice and the right must be clearly conferred.

Superannuation Death Benefits: A Separate Regime
Superannuation does not automatically form part of the estate, yet it plays a central role in estate planning outcomes. The taxation of death benefits depends on the composition of the benefit (taxable vs tax-free components); and the status of the recipient.

Death Benefits Dependants vs Non-Dependants
This creates a significant planning opportunity.

• Death benefits paid to a tax dependant (e.g. spouse, minor child, interdependent person) are generally tax-free
• Benefits paid to a non-dependant attract tax

Streaming Superannuation
A Will can include provisions directing the executor to allocate superannuation death benefits preferentially to tax dependants; and use other estate assets to satisfy the entitlements of non-dependants. Without such planning, equal division of superannuation may produce highly unequal after-tax outcomes.

Gross vs Net Value
Another critical issue is whether beneficiaries’ entitlements are measured on a gross basis (before tax); or a net-of-tax approach is adopted. Failure to address this can result in unintended disparities.

Shares and Financial Assets
Shares introduce additional layers of complexity. In addition to latent CGT, dividends may be taxable, and franking credits may benefit some beneficiaries more than others. This raises the question: should valuation take into account not only capital gains tax, but also the income tax profile of the asset?

While this level of granularity is not always necessary, it highlights the broader point: different assets produce different economic outcomes depending on who receives them.

Blended Families: Fairness vs Reality
Estate planning becomes particularly challenging in blended family situations. These arrangements often involve the following. Tax considerations add another layer of complexity.

• Competing interests between a surviving spouse and children from prior relationships;
• Emotional sensitivities and communication barriers;
• A heightened risk of dispute

Occupation Rights: A Common Flashpoint
A frequent planning solution is to grant a surviving spouse a life interest; or a right to reside in a property, with capital passing to children on the spouse’s death.

Tax Implications
These arrangements interact with the CGT main residence exemption:

• A valid right to occupy can extend the exemption beyond two years;
• Poor drafting may jeopardise this outcome

Additionally, the creation and termination of such rights can trigger CGT events affecting the occupant; the trustee; the remaindermen. Given the complexity, Advisors should draft occupation rights carefully; and seek specialist tax advice where necessary.

Tax Equalisation: The Key to Delivering Fairness
Even with careful asset allocation, disparities may remain. This is where Tax Equalisation Clauses play a critical role.

What Do They Do?
These clauses empower the executor to adjust beneficiaries’ entitlements; and ensure that the intended proportions are achieved after taking tax into account.

They operate alongside valuation clauses; and appropriation powers to create a complete framework for achieving fairness.

A Simple Example
A clause may direct the executor to:

• Divide the estate equally;
• Value assets at market value;
• Disregard latent CGT (or alternatively, take it into account); and
• Make cash adjustments to equalise outcomes

The key is clarity. The clause must specify the valuation methodology; the treatment of tax; and the mechanism for resolving disputes.

When Things Go Wrong: Lessons from the Courts

Todd v Todd
This case illustrates the risks of ambiguity. The Will required equalisation but was silent on whether latent CGT should be considered. The Court ultimately held that assets should be valued at market value; and latent CGT should not be taken into account.

The result may or may not have reflected the testator’s actual intention, but the absence of clear drafting meant the Court had to decide.

Lesson: Silence invites litigation.

Craven v Bradley
Here, the Will attempted to address tax explicitly, but ambiguity remained. Issues included:

• How to calculate notional CGT;
• The relevant valuation date

The Court resolved these issues by interpreting the Will as a whole, emphasising the importance of context; and the limits of judicial intervention.

Lesson: Even detailed clauses must be internally consistent and precise.

Conclusion
Tax is the invisible force shaping estate outcomes. As this two-part series has demonstrated:

1. Equal shares do not guarantee equal results;
2. Asset classes and beneficiary profiles can significantly distort outcomes;
3. Without careful planning, tax can undermine a testator’s intentions

To address this, Advisors must develop a strong working knowledge of estate taxation; elicit clear and comprehensive instructions from clients; and use a combination of flexible and bespoke drafting techniques.

Ultimately, the goal is to equip executors with the tools they need to:

1. Respond to tax consequences as they arise;
2. Make informed allocation decisions; and
3. Deliver outcomes that are fair – not just in form, but in substance

When done well, estate planning becomes more than a legal exercise. It becomes a disciplined effort to ensure that a client’s intentions survive contact with reality, tax and all.

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.

June 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.