Essential Estate Planning Tips for Australians with US Beneficiaries

Passing on your legacy should be a seamless process, yet for many Australians with family in the United States, it can become a complex web of competing tax laws. Imagine your children in the US inheriting your Australian shares, only for the estate to be hit with an unexpected tax bill before a single dollar is distributed. Or consider your Australian investment property, which could create a significant tax headache for a US-based beneficiary. These scenarios are common, but they don't have to be your reality.

Navigating the differences between Australian and US estate laws is critical. While Australia abolished estate taxes decades ago, the transfer of assets can still trigger Capital Gains Tax (CGT). The US, on the other hand, has federal estate taxes, gift taxes, and complex reporting requirements for foreign inheritances. Understanding how these two systems interact is the first step toward protecting your assets and ensuring your beneficiaries receive the full legacy you intend for them.

This guide provides essential estate planning tips to help you manage this cross-border complexity. We will walk through how different assets are treated, from real estate to superannuation, and outline actionable strategies to optimize your estate plan. For a deeper dive into specific investment challenges, you can also download our free white paper, How PFICs Affect Australian Expats Who Are US Tax Residents.

Australia vs. The US: Two Different Worlds of Inheritance Tax

At first glance, the systems seem straightforward. Australia doesn't have an "inheritance tax," while the US has an estate tax. However, the reality is far more nuanced. Failing to understand these differences can lead to suboptimal tax outcomes (including double taxation of Superannuation accounts) and significant administrative burdens for your US beneficiaries.

The Australian Approach: It’s All About Capital Gains

The last Australian state abolished traditional estate and gift taxes in 1979. This often leads to the misconception that inheritances are entirely tax-free. While beneficiaries don't pay tax simply for receiving an asset, Australia’s tax system focuses on the capital gain that occurs when an inherited asset is later sold by an heir.

Here are the key principles:

• No Estate Tax: Your estate's value is not taxed upon your death.
• Capital Gains Tax (CGT) Applies: When a beneficiary sells an inherited asset, such as shares or an investment property, CGT may be due.
• No "Step-Up" in Cost Base: For Australian resident beneficiaries, the asset’s original purchase price (cost base) is transferred to them. This means they inherit the unrealized capital gain.
• Deceased Estate Trust: Assets in a deceased estate are temporarily held in a trust overseen by the executor, with any income earned during administration generally taxed at individual rates for beneficiaries; this structure also provides a strategic planning window before final distribution.

The US Approach: Estate Tax and Global Reporting

The US employs a federal estate tax on the worldwide assets of its citizens and residents. Individual U.S. states may also employ their own Estate and/or Inheritance tax. In addition to taxes, the U.S. also imposes strict reporting rules on beneficiaries who receive foreign gifts or inheritances.

Here’s what you need to know:

• Federal Estate Tax: In 2025, an individual’s estate is taxed at 40% if its value exceeds a lifetime exemption of $13.99 million. Thanks to post-OBBBA changes, this threshold will rise to $15 million per person in 2026, with further annual inflation adjustments. These higher limits mean most estates will not be liable for US estate tax, though the rules remain different for non-US citizens with US-based assets.
• "Step-Up" in Basis: A major advantage in the US system is that beneficiaries typically receive inherited assets at a "stepped-up" cost basis. This means the asset's value is adjusted to its fair market value at the date of death, effectively wiping out any capital gains accrued during the deceased's lifetime.
• Form 3520 Reporting: A US beneficiary who receives more than $100,000 from a foreign estate in a tax year must report it to the IRS on Form 3520. While this is an informational form and doesn't trigger tax on its own, the penalties for failing to file can be severe—up to 5% of the value of the unreported inheritance for each month the form is late, capped at 25% of the total amount, even when no tax is due.

The Importance of Situs—How Asset ‘Location’ Drives Tax Outcomes

Before diving into asset-by-asset tax treatment, it’s important to understand the concept of “situs.” Situs refers to the legal location of an asset for tax purposes, which determines how (and even if) it will be taxed by a particular country.

Australia applies the concept of situs most visibly through its rules for “Taxable Australian Property” (TAP). TAP includes Australian real estate, certain business assets, and any shares or interests in entities where most underlying value is connected to property in Australia.

The classification is critical:  

• Assets deemed TAP are always subject to Australian Capital Gains Tax regardless of the owner's residency.  
• Assets not considered TAP—such as shares in companies primarily invested outside Australia—typically escape Australian CGT when held by non-residents, though special rules (such as CGT Event K3) can apply at death.

The TAP framework means the tax treatment of inherited assets depends not just on what the asset is, but also where it is “situated” under Australian law, the beneficiary’s residency, and how the estate is structured. Properly understanding situs is essential to minimize surprises and maximize tax efficiency for heirs in multiple countries.

How Each Asset Class is Taxed: A Detailed Breakdown

The tax treatment of your legacy depends heavily on the type of asset being transferred and the beneficiary's tax residency. An asset that is tax-efficient for an Australian beneficiary could create a nightmare for a US one.

Australian Real Estate

Real estate is considered "Taxable Australian Property" (TAP). Its tax treatment depends on whether it was your primary residence or an investment.

• Primary Residence: If the property was your main home and sold by the estate or beneficiary within two years of your death, the capital gain is generally fully exempt from Australian CGT. The two-year rule provides a valuable planning opportunity.
• Investment Property: Inheriting an Australian investment property is far more complex for a US beneficiary. If they continue to own it, they will face Australian tax on rental income at high non-resident rates (starting at 30%). Upon sale, they lose the 50% CGT discount available to Australian residents. Furthermore, a 15% foreign resident capital gains withholding tax applies to the sale proceeds, which must be remitted to the ATO by the buyer. For more information, read about What to Know About Investing in Australian Real Estate from the U.S..

Australian Shares & Investments: Beware CGT Event K3

When a non-resident (like a US beneficiary) inherits Australian assets that are not TAP, such as shares or managed funds, a specific tax event is triggered: CGT Event K3.

This event occurs just before your death and crystallizes the capital gain on the assets earmarked for the non-resident beneficiary. The tax is calculated on the difference between the asset's market value at death and its original cost base. This tax is paid by your estate from the beneficiary’s share of the inheritance.

Case Study: Frank and Eva
Cameron passes away, leaving his estate equally to his children: Frank (an Australian resident) and Eva (a US resident). The estate includes $200,000 in cash and a $200,000 share portfolio with a cost base of $120,000.

• Eva's Inheritance: CGT Event K3 is triggered for her half of the shares. The estate calculates a capital gain of $40,000 ($100,000 market value - $60,000 cost base). After the 50% CGT discount, the estate pays tax on $20,000, reducing Eva's inheritance by around $9,000.
• Frank's Inheritance: Frank inherits his shares with no immediate tax. However, he also inherits the original $60,000 cost base and will pay CGT on the full gain when he eventually sells.
• The difference here is that Frank inherits shares without any immediate tax impact, whereas Eva must pay tax on distribution.

For US beneficiaries, these investments might also be classified as Passive Foreign Investment Companies (PFICs), triggering punitive US taxes and complex annual reporting on Form 8621.

How Superannuation is Taxed on Death—and Who Counts as a ‘Tax Dependent’

Superannuation is one of the more complex assets to deal with at death, and the way it’s taxed depends crucially on the type of beneficiary.

Who is a Tax Dependent?

The way superannuation is taxed after death depends heavily on the relationship between the deceased and their beneficiary. Under Australian law, a “tax dependent” can receive superannuation death benefits tax-free, either as a lump sum or an income stream. Tax dependents include:

• A spouse or former spouse  
• A child under 18 years  
• Someone financially dependent on the deceased  
• Someone in an interdependency relationship with the deceased

Adult children are not tax dependents unless they meet one of the financial dependency or interdependency tests. As a result, they face a different—and much less favorable—tax regime.

By contrast, non-dependents are required to take any super death benefit as a lump sum, and must pay tax at 15% plus a 2% Medicare Levy on the taxed component, and up to 30% on any untaxed component. Only those deemed tax dependents by law have the option to receive the benefit as an ongoing income stream; all other beneficiaries must receive their inheritance as a single payment and often face a much higher overall tax burden as a result.

The “taxable” and “tax-free” components within your superannuation balance originate from different types of contributions. Taxable amounts generally come from before-tax (concessional) contributions, such as compulsory employer payments (Superannuation Guarantee), salary sacrifice arrangements, and personal contributions claimed as a tax deduction. These are taxed at 15% when paid into your fund. In contrast, tax-free amounts reflect after-tax (non-concessional) contributions made from money you've already paid income tax on—like contributions from your take-home pay, proceeds from an inheritance, or after-tax lump sums. The split between taxed and tax-free components shapes the overall tax owed on superannuation death benefits by your heirs.

Superannuation: The Potential Double Tax Trap

Superannuation is often the least tax-effective asset to leave to a US beneficiary. It creates the highest potential for double taxation.

• Australian Tax: Adult children are generally not considered "tax dependents." This means a death benefit paid from your super to a US-based child will be taxed at up to 17% in Australia (15% tax plus the 2% Medicare Levy) on the taxable component.
• US Tax: The IRS does not recognize Australian super as a tax-advantaged retirement account in the same way as a 401(k) or IRA. The distribution is often treated as taxable income to the US beneficiary, with federal rates up to 37% plus any applicable state taxes.

Unfortunately, the US-Australia tax treaty provides limited relief for this situation. While the treaty allows for foreign tax credits on foreign-sourced income, the Australian tax paid on the superannuation death benefit and the US tax owed on that same distribution are calculated on different bases, severely limiting or eliminating any meaningful credit offset. This structural mismatch means double taxation is often unavoidable, making superannuation one of the worst assets to leave to a US beneficiary.

Testamentary Trusts: A Compliance Minefield for US Beneficiaries

While testamentary trusts are a popular estate planning tool in Australia for asset protection and tax-effective income streaming, they can create a compliance disaster for US beneficiaries. The problem lies in how the IRS classifies and taxes these foreign structures.

When Does a US Person Trigger Foreign Grantor Trust Treatment?

A testamentary trust will be classified as a "foreign grantor trust" if a US person has certain powers or control over the trust. Specifically, grantor trust status is triggered when the US person:

• Has the power to vest income or capital in themselves – If the US beneficiary can unilaterally distribute trust assets to themselves, they're treated as the owner
  
• Serves as trustee or director of a corporate trustee with discretion over distributions, especially if they can benefit themselves
  
• Acts as appointor with the power to remove and replace the trustee and ultimately control who receives distributions
  
• Has the power to revoke the trust or amend its terms to benefit themselves
  
• Controls substantial decisions of the trust, including investment decisions, without veto power from another person
  
• Is the primary beneficiary with control rights – Even if not formally trustee, a beneficiary with practical control may trigger grantor status
  

The Tax Consequences of Foreign Grantor Trust Status:

If classified as a foreign grantor trust, the US person is required to pay US tax on all trust income annually, whether or not they receive any distributions. This includes:

• Australian-source income
• Capital gains realized within the trust
• Any other worldwide income earned by the trust

The US beneficiary must also file Form 3520-A annually, providing detailed information about the trust's income, assets, and operations.

The Alternative: Foreign Non-Grantor Trust Treatment

If the testamentary trust is structured to avoid grantor trust status (for example, by using an independent Australian trustee and limiting the US beneficiary's control), it will be treated as a "foreign non-grantor trust." While this sounds better, it comes with its own punitive tax regime:

• Throwback taxes apply – When the trust distributes income it has accumulated in prior years, the US beneficiary is taxed at the highest ordinary income tax rates (currently 37% federal) plus an interest charge calculated from the year the income was originally earned
  
• Capital gains lose preferential treatment – Long-term capital gains distributed from accumulated income are taxed as ordinary income rather than at favorable capital gains rates
  
• Complex calculations required – Determining the "throwback tax" and interest requires tracking undistributed net income (UNI) over multiple years
  

The PFIC Problem Compounds the Issue

To make matters worse, Australian testamentary trusts commonly hold managed funds, unit trusts, or ETFs as investments. From a US tax perspective, these are almost always classified as Passive Foreign Investment Companies (PFICs). This means:

• The US beneficiary must file Form 8621 for each PFIC held by the trust annually
  Penalties for failure to file can reach $10,000 per PFIC per year
• "Excess distributions" from PFICs are taxed at the highest ordinary rates plus interest, similar to throwback taxes
• Annual compliance costs can easily reach $15,000–$30,000 for professional tax preparation when multiple PFICs are involved

The Bottom Line on Testamentary Trusts

Given these overlapping compliance nightmares, testamentary trusts should be used with extreme caution when US beneficiaries are involved. In most cases, it's far simpler and more tax-efficient to distribute assets directly to US beneficiaries rather than holding them in an Australian trust structure. If a trust must be used, careful drafting is essential to limit the US person's control and avoid grantor trust classification, though this comes at the cost of flexibility and may still trigger throwback taxes and PFIC reporting.

Cash and Life Insurance

These are generally the simplest assets to transfer.

• Cash: A cash inheritance is not taxable income for a US beneficiary, though they must report it on Form 3520 if it exceeds $100,000.
• Life Insurance: Proceeds from an Australian life insurance policy are typically tax-free in both Australia and the US. 
  
  • While pure death benefit payouts remain tax-free in both jurisdictions, some life insurance policies contain an investment-linked component or cash value feature. Any gains realized on the investment portion during the policy holder's lifetime may trigger tax consequences, though the actual death benefit payout itself—the pure insurance protection component—remains tax-free.

Strategic Planning to Protect Your Legacy

With foresight and proper planning, you can minimize taxes and simplify the inheritance process for your US beneficiaries.

1. Strategic Asset Allocation in Your Will

The most powerful strategy is to align assets with the right beneficiaries.

• Leave Superannuation to Australian Residents: Nominate an Australian tax resident (e.g., a spouse or another child in Australia) to receive your super. They will face a much lower tax burden.
• Leave Cash and Primary Residence to US Beneficiaries: These assets transfer with minimal tax friction.
• Equalize with Other Assets: Use the remaining assets in your estate, like investment portfolios or cash, to ensure the total value distributed to each beneficiary is fair and in line with your wishes.

2. Manage CGT Event K3 and PFICs

Instead of leaving Australian shares directly to a US beneficiary, consider directing your executor to sell the assets within the estate. The estate can utilize the Australian tax resident 50% CGT discount, pay the Australian tax, and distribute the net cash proceeds. This avoids triggering CGT Event K3 and eliminates the PFIC reporting nightmare for your beneficiary.

3. Review Your Superannuation Nominations

Use a Binding Death Benefit Nomination (BDBN) to direct your super proceeds. Without a valid BDBN, the super fund's trustee decides who receives your money. Nominate an Australian resident dependent or your Legal Personal Representative (your estate) to provide the executor with flexibility.

4. Consider Lifetime Gifting

Gifting assets during your lifetime can be a simple way to transfer wealth.

• Advantages: There is no gift tax in Australia. A US beneficiary can receive up to $100,000 per year from you tax-free without any US reporting obligations. This also reduces the size and complexity of your estate.
• Disadvantages: Gifting appreciated assets (like shares) can trigger CGT for you, the donor. Also, gifted property does not receive a step-up in basis for US tax purposes. Instead, the US beneficiary will acquire the donor’s original cost basis for the gifted asset, meaning any unrealized appreciation is subject to US capital gains tax when the asset is sold. This contrasts with inherited property, which does receive a step-up in basis to market value at the date of death, often reducing or eliminating capital gains when sold.

5. Plan for Tax Residency Timing

A deceased estate trust can hold assets for a period after your death. This creates a window of opportunity. If a US-based child is considering returning to Australia, they could potentially move and establish Australian tax residency before assets are distributed. This would allow them to avoid CGT Event K3 and non-resident tax rates. This requires careful planning, as establishing tax residency is complex and involves more than just physical presence. If this applies to your family, exploring Key Financial Planning Steps for those Planning to Retire to Australia may be beneficial.

A Checklist for Executors and Advisors

If you are an executor of an estate with US beneficiaries, this checklist can guide your actions:

• Identify Beneficiaries' Tax Status: Confirm who are US citizens, green card holders, or tax residents.
• Classify All Assets: Distinguish between Taxable Australian Property (TAP) and non-TAP assets to identify where CGT Event K3 applies.
• Model the Tax Outcomes: Calculate the potential CGT from Event K3 and the death benefits tax on superannuation.
• Plan Distributions Strategically: Consider selling non-TAP assets within the estate and distributing cash. Structure distributions to stay under the US$100,000 Form 3520 threshold per year if possible.
• Manage Withholding Tax: For real property sales, apply for a foreign resident capital gains withholding clearance certificate to avoid automatic 15% withholding.
• Provide Clear Documentation: Give US beneficiaries all necessary paperwork, including date-of-death asset values (to establish their US cost basis) and records of any foreign tax paid.

Practical Hurdles and How to Overcome Them

Even with a perfect plan, cross-border estate administration comes with practical difficulties.

• Foreign Exchange: Transferring large sums of money internationally involves currency risk and high bank fees. Using a specialist foreign exchange service can save thousands.
• Finding Expertise: Very few advisors in Australia or the US have deep expertise in both tax systems. Assembling the right team is crucial.
• Administrative Delays: The need to coordinate between jurisdictions, authenticate documents, and satisfy different legal requirements means cross-border estates often take 6–18 months longer to settle than domestic ones.

Secure Your Cross-Border Legacy

Estate planning for Australians with US beneficiaries is undeniably complex, but it is manageable with proactive and informed strategies. By understanding how the two tax systems interact and carefully structuring your will, you can protect your wealth from unnecessary taxes and ensure your legacy is passed on smoothly and efficiently.

The key is to plan ahead. Don’t leave these critical decisions to chance. If you need help navigating the intricacies of cross-border financial planning, our team is here to bring clarity and confidence to your global financial life.

Schedule a 15-minute Fit Call to see if our expertise matches your needs.

Disclaimer: The information provided here is for general informational purposes only and does not constitute personal financial, tax, or investment advice. You should consult with a qualified professional before making any decisions based on this content.