Chapter 07 – Death and the family home

Estate Planning and the Family Home

There are two broad ways in which a person can own a family home. The first is as an individual, whereby they own the home outright. The second is as a co-owner. The form of ownership informs how the estate planning should proceed for the family home.

We will discuss individually-owned homes in the first section of this article and then look at co-owned homes in the second half.

Individually-Owned Homes

Where a family home is owned by one individual, either because they have always owned it individually or because they are the last remaining survivor (see below), the home typically forms part of the deceased person’s estate.

The simplest way for a person to therefore plan for this part of their estate to be managed is to prepare a will. Assuming they do so, the home will then be treated in accordance with the owner’s legal will.

For example, if a sole owner has a will that requires that their estate passes to their children in equal shares, then the house will transfer along those lines. This means that if the home is kept, the children will own it as tenants in common (unless they agree to change the ownership to one of joint tenancy). If the home is sold, the proceeds of the sale are distributed between the children.

Tax Treatment

If the home qualified as the deceased person’s principal place of residence, there will be no capital gains tax payable upon the sale of the home. The principal place of residence exemption applies if the home is sold up to two years after the owner’s death. This timeframe exists to allow the deceased’s executor to properly manage the estate without feeling time pressure to dispose of assets.

If a home qualified as a deceased person’s principal place of residence, and the inheritors decide to keep it, then they will be deemed to have acquired the asset at the time it was transferred to them. When eventually the inheritor disposes of the asset, the tax treatment will depend on how they used the property. If they used it as a principal place of residence, then they too will qualify for the principal place of residence exemption and not pay CGT. If, however, they did not use it as a principal place of residence (for example, if they rented it out while they lived elsewhere), it will be taxed as the disposal of an investment asset. This will typically mean that it will qualify for the 50% exemption on capital gains tax if the property is held for more than 12 months.

Importantly, the CGT is calculated from the time the inheritor took ownership of the property – not from the time the deceased person acquired it.

Co-Owned Homes

There are two ways in which a home can be co-owned by more than one person. The method of co-ownership will determine what happens to the home when a co-owner dies.

The first form of co-ownership is joint tenancy. The second is tenancy in common. We will examine each of these in turn.  

Joint Tenancy

Joint tenancy is the most common way for couples to own a home. It is relatively rarely used by people who are not couples.

Under a joint tenancy, if an owner dies his or her interest in the property automatically goes to the surviving co-owner/s. The passage of the interest to the surviving joint tenant/s is known as survivorship. To take the most common example, if a husband and wife own a home as joint tenants, and the husband dies, the wife becomes the sole owner of the whole property.

If there are more than two joint tenants, and one dies, the deceased co-owner’s interest is shared between the remaining co-owners.

When it comes to estate planning, the key aspect of joint tenancy is that the deceased’s interest in the property does not form part of their estate. This is because that interest effectively ends when they die.

The principle of survivorship means ultimately there will be one remaining surviving owner of the property. This last remaining owner is not a joint tenant: they own the property as an individual. Accordingly, when that person dies, the property does form part of their estate and it is treated as described above for individually-owned homes.

Estate planning and joint tenancy

Joint tenants must still attend to their estate planning around their property. This is because there is a chance that they will one day own the property as an individual – their fellow co-owners might die first. In fact, in most cases one of the joint tenants will end up owning the whole property as an individual. (The only time this will not happen will be if the joint tenants sell the home before the second last joint tenant dies).

Accordingly, people who own their family home as a joint tenant should still prepare a will and plan for the disposition of the home in that will.

Because of the rules for joint tenancy, the order of death of the joint tenants is important. This is particularly the case where the wills of the joint tenants do not treat their estates the same way. For example, a couple in a second marriage might each leave their estate to their respective children from their first marriages. This could mean that the family home passes to the children of just one of the couple – the one who dies second. When the first member of the couple dies, the property passes to the survivor. When the survivor dies, the property passes to the survivor’s children.

In cases like this, there are a number of options. One might be for the property not to be owned under a joint tenancy, but instead for use to be made of a tenancy in common. As shown below, this would mean that the deceased’s person share of the property passes to their estate when they die. (This arrangement is usually qualified by allowing the surviving spouse to stay in the home until it is sold or they move elsewhere or they die). In cases like this, expert legal advice is typically needed when the estate is being planned.

In very rare cases, joint tenants will die simultaneously (perhaps in a car accident or similar). In such cases, the law usually deems that the older person died first. Under the rules for joint tenancy, this means that the home will be disposed of as per the estate planning of the younger joint tenant. Once again, if the joint tenants do not have the same will, this can lead to unintended consequences.

Taxation treatment upon death of a joint tenant

When a property passes from one joint tenant to the survivor/s, no capital gains tax event has taken place. CGT will only become an issue if and when the property is sold by the survivor/s or passes to their estate.

At that point, the proceeds of the sale will be subject to normal capital gains tax rules. For a family home, this will of course typically mean that no CGT will be payable, as the principal place of residence exemption applies.

Tenants in common

Under tenancy-in-common the principle of survivorship does not apply. Each co-owner’s ownership right is transferable. This means that a share of ownership owned by a tenant in common does form part of the deceased’s estate.  That is, when a person who co-owns a home as a tenant in common dies, the interest in the home does not automatically pass to the other co-owner/s. Instead, it passes to the client’s estate and is distributed according to their wishes.

Tenancy in common is relatively uncommon when it comes to family homes. However, situations do exist for this type of ownership.

For example, consider a female client who owns a property with her sister as a tenant in common. Each of the sisters has a will leaving their assets to their own children. When one of the sisters dies, those children acquire the co-ownership rights to the property. They will then own the property as tenants in common with their auntie. If the remaining sibling then dies, her ownership rights will pass to her children. The home will now be co-owned by the remaining children of each sister, who are cousins of each other.

Where a home is owned as a tenant in common, it is most commonly planned for under the client’s will.

Taxation treatment

The inheritance of the share of ownership will generally not be taxable if the home qualified as the deceased person’s principal place of residence. . The principal place of residence exemption applies if the home is sold up to two years after the owner’s death. This timeframe exists to allow the deceased’s executor to properly manage the estate without feeling time pressure to dispose of assets.

If a home qualified as a deceased person’s principal place of residence, and the inheritors decide to keep it, then they will be deemed to have acquired the asset at the time it was transferred to them. When eventually the inheritor disposes of the asset, the tax treatment will depend on how they used the property. If they used it as a principal place of residence, then they too will qualify for the principal place of residence exemption and not pay CGT. If, however, they did not use it as a principal place of residence (for example, if they rented it out while they lived elsewhere), it will be taxed as the disposal of an investment asset. This will typically mean that it will qualify for the 50% exemption on capital gains tax if the property is held for more than 12 months.

Importantly, the CGT is calculated from the time the inheritor took ownership of the property – not from the time the deceased person acquired it.

Specific issues to do with estate planning and the family home

Second and subsequent marriages

Marriages nullify most wills. That is, if a person marries, any previous will is typically voided. This is the case for all marriages, not just second and subsequent marriages.  This can become an issue where one person entering into the marriage already owns a home. That person’s estate planning – contained in their will – might be for the home to pass to their children. The marriage invalidates the will and thus the passage of the home to the children might not occur.

The obvious solution here is for people getting married to also prepare a new will.

Residential aged care and the family home

Residential aged care generally occurs towards the end of a person’s life – but not at the very end. It is important that people plan for the how they wish their home to be treated if and when they enter aged care. It makes sense for those plans to also be consistent with the person’s estate planning wishes.

What happens to the family home when the owner goes into residential aged care is discussed here in this article.

The Dover Group