0

Estate Planning

Estate planning

Estate planning is an essential component of any financial plan. However when it comes to establishing a financial plan, estate planning is often overlooked or given only cursory consideration. While financial planning focuses on creating and preserving wealth, protecting your assets and legally reducing your tax throughout your lifetime, estate planning aims to provide the same outcome for your loved ones once your assets are passed onto them.

Planning your estate: more than simply making a Will

It is important to understand that having an effective estate plan in place to protect your assets for your loved ones involves much more than simply expressing how you want your assets distributed in a Will.

Your Will can only direct the distribution of certain assets, known as ‘estate assets’ which are owned solely and legally in your own name – it cannot direct the distribution of assets such as superannuation benefits (with one exception), insurance, companies and trusts.  It is therefore important that a Will consider how your assets are utilised once they have been passed onto your loved ones. For example if you are leaving assets to minors, or any other beneficiary who may not treat the gift they receive from you responsibly, you risk your gift being squandered. In order to avoid your assets being wasted, you need to have an effective estate plan in place that allows you to control how your beneficiaries benefit from the gift you provide to them. Also, without an effective estate plan, your assets may not be passed on in the most tax effective manner, leaving your beneficiaries to pay extra tax on their inheritance.

By implementing an effective estate plan, with the assistance of a qualified estate planner working in conjunction with your accountant and financial planner, you can address these issues to ensure that your assets are protected for your intended beneficiaries utilising all available options.

Protecting your gift to your loved ones

One way of protecting your gift is to incorporate one or more a discretionary testamentary trusts into your estate plan as this allows you to retain far greater control over the distribution of your assets to your intended beneficiaries and may  also provide some tax advantages for those receiving your intended gift.

An appropriately structured discretionary testamentary trust can help prevent your gift to an intended beneficiary from being lost to a third party such as an estranged partner or spouse, business partner or creditors.

If a beneficiary could potentially experience a relationship breakdown, it may be prudent to offer them the option of taking their inheritance via a discretionary testamentary trust. This way, any assets held inside the trust are not in the personal name of the beneficiary but instead held in the name of the trust. This assists in removing the inheritance from the pool of assets that are vulnerable to seizure or redistribution between parties following any marital or commercial breakdown.

If you are concerned about the marital stability of a beneficiary, it may be necessary to draft the trust in a way that further restricts a former spouse’s access to the inheritance by appointing an independent third party as trustee of the beneficiary’s trust.

While testamentary trusts can provide protection in such circumstances, it’s important to understand that progressive changes in family and bankruptcy law mean that the protection offered by testamentary trusts is by no means absolute. It is, however, the most effective way to protect your assets. Keeping the inheritance in a separate trust can, at the very least, help ensure that the assets inside the trust are treated as a resource of the beneficiary, as opposed to property that the court can order be passed to a disgruntled spouse.

You can also use a discretionary testamentary trust to protect your gift where you have a beneficiary who is vulnerable due to age (such as minors), mental health, drug or gambling addictions or spendthrift tendencies. Here, a discretionary testamentary trust can protect your beneficiary’s inheritance from undue waste and dissipation and ensure that it is responsibly managed on your beneficiary’s behalf – either for their lifetime, or until they are capable of responsibly managing it themselves.

In such a case, the inheritance is passed into a testamentary trust for the benefit of the beneficiary with the trust controlled and managed by a trustee. This trustee ensures that the capital and income generated from the inheritance is gradually released to the beneficiary for appropriate purposes, such as meeting the beneficiary’s medical, educational and reasonable living costs.

With this option, you can specify when the beneficiary can gain control over their own inheritance (for example, upon reaching a certain age) or, alternatively, the inheritance can be protected inside the testamentary trust for the beneficiary’s lifetime.

Reducing tax payable by your beneficiaries

Given that actual death duties have long been abolished, many people mistakenly believe that tax is not an important issue when planning the transfer of their assets to their loved ones. However, this is actually not the case as other taxes may apply (although death is not of itself a trigger for capital gains tax).

If a beneficiary takes their inheritance in their personal name then tax is payable on income generated from the inheritance at their personal marginal tax rate. There may be significant tax advantages in taking the inheritance through a testamentary trust instead of in the beneficiary’s personal name.  This can be particularly effective where the beneficiary has:

– a high personal marginal tax rate;

– a partner on a lower income minor children and grandchildren;

– and/or children or grandchildren with no, or lower, taxable income.

A discretionary testamentary trust allows your beneficiary to split the income generated from their inheritance amongst the beneficiaries of their trust.  This allows the beneficiary to distribute income more tax effectively. To minimise the amount of tax paid, income generated from the inheritance can be split and streamed to members of the trust who are on a lower marginal tax rate.

Income distributed from a discretionary testamentary trust to any minor beneficiaries, such as children or grandchildren, has further potential for significant tax savings. Unearned income distributed to minors under trusts created during a testator’s lifetime (such as family trusts) is taxed at high rates once income reaches $416. However, income distributed to minors from testamentary trusts is ‘excepted’ from the higher tax rates that usually apply to unearned income. In this case, minors are instead treated like adults. They have a tax free threshold of $18,200 and normal marginal tax rates apply to every dollar above this threshold.

Superannuation Assets

As mentioned above, superannuation benefits are not normally dealt with in your Will. Superannuation assets are either dealt with by the trustees of the superannuation fund or in accordance with a binding death benefit nomination.  When dealt with by the trustees they will usually be distributed to any superannuation beneficiaries as defined in the legislation (basically, spouse and children, or if none, your estate). However a valid binding death benefit nomination must be followed by the trustees and is effectively the ‘Will’ for your superannuation benefits. It is an advance direction telling the trustee where to pay your benefits on death and this can be to any person who is defined as a superannuation beneficiary (generally spouse or children) or to your estate (the exception referred to above).

It should be noted that tax may be payable by beneficiaries on superannuation benefits, usually when paid to adult children. Tax is payable on the taxable component of a deceased member’s superannuation benefits at the rate of 16.5% as adult children are not taxation dependants for superannuation benefits. This can result in a potentially significant death benefit tax liability when passing your superannuation benefits to an adult non-dependant child.  Through an effective estate plan, you can identify any potential death benefits tax liabilities and with advance planning you can implement strategies to reduce or eliminate these liabilities for your beneficiaries.

With a comprehensive estate plan you can help ensure that your assets are protected once they pass to your intended beneficiaries and utilised in the manner that you feel is most appropriate for each individual beneficiary.  Your estate plan will also help to identify potential death benefits tax liabilities when planning the distribution of your super and consider strategies that will legally minimise, or altogether avoid, any tax liabilities.

Estate assets v non-estate assets including trust assets and superannuation benefits

Before you make a Will, it is important to understand the assets you can give away in a Will, and those you cannot. The starting point is to ensure you have appropriate ownership of the relevant asset, which can be more complicated than it initially seems. In addition, there are certain types of assets which generally cannot be dealt with under your Will at all, regardless of ownership. You may need to make additional arrangements to ensure that you have effective estate planning measures in place for these assets.

Starting point: do I have appropriate ownership of the asset?

You can only deal with an asset in your Will if you own it.

Clearly, a will maker cannot give away property under their Will if the property belongs to another person.

Additionally, certain types of ownership may restrict the extent to which you can deal with an asset in your Will.

The table below summarises the common types of ownership, and the extent to which you can deal with assets owned in each of those ways in your Will.

Ownership of asset Can I give the asset away under my Will?

 

 Exceptions? Qualifications?
Solely owned assets Yes.
Assets owned in joint names as tenants in common Yes. You can only pass your share of the asset under the Will.
Assets owned in joint names as joint tenants No.

Jointly owned property (including real estate and possessions) passes automatically to the surviving joint proprietor.

You are therefore unable to deal with jointly owned assets in your Will.

 If the other joint proprietor(s) of an asset pre-decease you, the asset will become solely held by you and you will be able to dispose of it under your Will.
Trusts In many cases, no.

The legal title to trust assets is held by the trustee of the trust, for the benefit of the beneficiaries.

As the trust assets are not owned personally by a particular individual in their own right, they cannot be dealt with in a Will.

 If you hold the position of appointor or trustee of a trust, you may be able to appoint your successor through your Will: however this depends on the terms of the trust deed.

This enables you to influence which persons have control of the relevant trust and its assets on your death.

If you solely own a specific interest in a trust, such as units in a unit trust, then you can give that interest away in your Will.

Estate assets: what can I give away in my Will?

Gifting an asset

You can give away all real estate and personal property that you own, subject to the commentary in the table above.

Examples of assets you can deal with in your Will include:

  •  a house or property, if you are the sole owner of the property;
  •  your share in a house or property, if you own the property as a tenant in common with another;
  •  motor vehicles;
  •  jewellery;
  •  artwork;
  •  household possessions;
  •  family heirlooms;
  •  the contents of your bank accounts; or
  •  cash.

Any of the above assets can be specifically gifted to another person under your Will.

If an asset is not specifically gifted, it will form part of your residuary estate (that is, the balance of your estate which is available for distribution after all specific gifts have been distributed and all debts and other expenses have been settled).

Gifting a liability

The executor of your estate is required to settle all of your debts and other expenses (including funeral expenses) out of the assets of your estate.

However, if you dispose of property in your Will that is subject to a mortgage, the executor will not be required to deal with that debt, and instead the beneficiary of the property will be responsible for the mortgage over the property.

The exception to this is if you expressly indicate in your Will that you want the beneficiary to take the property free from the relevant mortgage. In this case, your executor will arrange for the debt secured by the mortgage to be paid out of the (other) assets of your estate. However, even in this situation, if your estate assets are insufficient to satisfy the debt secured by the mortgage, then the relevant beneficiary will still be responsible for the outstanding balance under the mortgage.

Estate planning

Estate planning is an essential component of any financial plan. However when it comes to establishing a financial plan, estate planning is often overlooked or given only cursory consideration. While financial planning focuses on creating and preserving wealth, protecting your assets and legally reducing your tax throughout your lifetime, estate planning aims to provide the same outcome for your loved ones once your assets are passed onto them.

Planning your estate: more than simply making a Will

It is important to understand that having an effective estate plan in place to protect your assets for your loved ones involves much more than simply expressing how you want your assets distributed in a Will.

Your Will can only direct the distribution of certain assets, known as ‘estate assets’ which are owned solely and legally in your own name – it cannot direct the distribution of assets such as superannuation benefits (with one exception), insurance, companies and trusts.  It is therefore important that a Will consider how your assets are utilised once they have been passed onto your loved ones. For example if you are leaving assets to minors, or any other beneficiary who may not treat the gift they receive from you responsibly, you risk your gift being squandered. In order to avoid your assets being wasted, you need to have an effective estate plan in place that allows you to control how your beneficiaries benefit from the gift you provide to them. Also, without an effective estate plan, your assets may not be passed on in the most tax effective manner, leaving your beneficiaries to pay extra tax on their inheritance.

By implementing an effective estate plan, with the assistance of a qualified estate planner working in conjunction with your accountant and financial planner, you can address these issues to ensure that your assets are protected for your intended beneficiaries utilising all available options.

Protecting your gift to your loved ones

One way of protecting your gift is to incorporate one or more a discretionary testamentary trusts into your estate plan as this allows you to retain far greater control over the distribution of your assets to your intended beneficiaries and may  also provide some tax advantages for those receiving your intended gift.

An appropriately structured discretionary testamentary trust can help prevent your gift to an intended beneficiary from being lost to a third party such as an estranged partner or spouse, business partner or creditors.

If a beneficiary could potentially experience a relationship breakdown, it may be prudent to offer them the option of taking their inheritance via a discretionary testamentary trust. This way, any assets held inside the trust are not in the personal name of the beneficiary but instead held in the name of the trust. This assists in removing the inheritance from the pool of assets that are vulnerable to seizure or redistribution between parties following any marital or commercial breakdown.

If you are concerned about the marital stability of a beneficiary, it may be necessary to draft the trust in a way that further restricts a former spouse’s access to the inheritance by appointing an independent third party as trustee of the beneficiary’s trust.

While testamentary trusts can provide protection in such circumstances, it’s important to understand that progressive changes in family and bankruptcy law mean that the protection offered by testamentary trusts is by no means absolute. It is, however, the most effective way to protect your assets. Keeping the inheritance in a separate trust can, at the very least, help ensure that the assets inside the trust are treated as a resource of the beneficiary, as opposed to property that the court can order be passed to a disgruntled spouse.

You can also use a discretionary testamentary trust to protect your gift where you have a beneficiary who is vulnerable due to age (such as minors), mental health, drug or gambling addictions or spendthrift tendencies. Here, a discretionary testamentary trust can protect your beneficiary’s inheritance from undue waste and dissipation and ensure that it is responsibly managed on your beneficiary’s behalf – either for their lifetime, or until they are capable of responsibly managing it themselves.

In such a case, the inheritance is passed into a testamentary trust for the benefit of the beneficiary with the trust controlled and managed by a trustee. This trustee ensures that the capital and income generated from the inheritance is gradually released to the beneficiary for appropriate purposes, such as meeting the beneficiary’s medical, educational and reasonable living costs.

With this option, you can specify when the beneficiary can gain control over their own inheritance (for example, upon reaching a certain age) or, alternatively, the inheritance can be protected inside the testamentary trust for the beneficiary’s lifetime.

Reducing tax payable by your beneficiaries

Given that actual death duties have long been abolished, many people mistakenly believe that tax is not an important issue when planning the transfer of their assets to their loved ones. However, this is actually not the case as other taxes may apply (although death is not of itself a trigger for capital gains tax).

If a beneficiary takes their inheritance in their personal name then tax is payable on income generated from the inheritance at their personal marginal tax rate. There may be significant tax advantages in taking the inheritance through a testamentary trust instead of in the beneficiary’s personal name.  This can be particularly effective where the beneficiary has:

– a high personal marginal tax rate;

– a partner on a lower income minor children and grandchildren;

– and/or children or grandchildren with no, or lower, taxable income.

A discretionary testamentary trust allows your beneficiary to split the income generated from their inheritance amongst the beneficiaries of their trust.  This allows the beneficiary to distribute income more tax effectively. To minimise the amount of tax paid, income generated from the inheritance can be split and streamed to members of the trust who are on a lower marginal tax rate.

Income distributed from a discretionary testamentary trust to any minor beneficiaries, such as children or grandchildren, has further potential for significant tax savings. Unearned income distributed to minors under trusts created during a testator’s lifetime (such as family trusts) is taxed at high rates once income reaches $416. However, income distributed to minors from testamentary trusts is ‘excepted’ from the higher tax rates that usually apply to unearned income. In this case, minors are instead treated like adults. They have a tax free threshold of $18,200 and normal marginal tax rates apply to every dollar above this threshold.

Superannuation Assets

As mentioned above, superannuation benefits are not normally dealt with in your Will. Superannuation assets are either dealt with by the trustees of the superannuation fund or in accordance with a binding death benefit nomination.  When dealt with by the trustees they will usually be distributed to any superannuation beneficiaries as defined in the legislation (basically, spouse and children, or if none, your estate). However a valid binding death benefit nomination must be followed by the trustees and is effectively the ‘Will’ for your superannuation benefits. It is an advance direction telling the trustee where to pay your benefits on death and this can be to any person who is defined as a superannuation beneficiary (generally spouse or children) or to your estate (the exception referred to above).

It should be noted that tax may be payable by beneficiaries on superannuation benefits, usually when paid to adult children. Tax is payable on the taxable component of a deceased member’s superannuation benefits at the rate of 16.5% as adult children are not taxation dependants for superannuation benefits. This can result in a potentially significant death benefit tax liability when passing your superannuation benefits to an adult non-dependant child.  Through an effective estate plan, you can identify any potential death benefits tax liabilities and with advance planning you can implement strategies to reduce or eliminate these liabilities for your beneficiaries.

With a comprehensive estate plan you can help ensure that your assets are protected once they pass to your intended beneficiaries and utilised in the manner that you feel is most appropriate for each individual beneficiary.  Your estate plan will also help to identify potential death benefits tax liabilities when planning the distribution of your super and consider strategies that will legally minimise, or altogether avoid, any tax liabilities.
Other decision makers

Estate planning should also include setting out your wishes in the event you are unable to make decisions about your assets or your health. This could include appointing:

  • A general power of attorney: set for a specific period of time when you’re unable to make financial or legal decisions (e.g. you’re off trekking in the Himalayas)
  • An enduring power of attorney: takes affect only if and when you become incapable of making legal and financial decisions for yourself
  • Medical power of attorney: can make medical decisions (but not legal or financial decisions) about you if you’re unable or incapable of doing so.

For peace of mind – for both you and your nominated decision-maker – it’s wise to draw up directives, clearly stating how you wish decisions to be made. Anticipatory directives, Advance Healthcare Directives and ‘Living wills’ clearly set out medical treatment you want or don’t want, if you’re unable to make those decisions yourself. They can be general or very specific, detailing the type of care or medication you’re willing to receive or deny if you’re unable to make those intentions known personally, at the time.

Common terminology

The essentials –

  • Beneficiary: a person or organisation who receives something in your will
  • Estate: all your assets, including your share in assets held jointly with someone else
  • Executor: the person responsible for finalising any debts out of your estate, and then distributing the remainder to your beneficiaries (this may include selling assets and distributing the proceeds)
  • Intestate: dying without making a valid will. The distribution of the estate is then carried out in accordance with a ‘Letter of Administration’
  • Probate: a legal document provided by a state’s Supreme Court, declaring that a will is valid, and that the Executor has the authority to distribute your assets and administer your will
  • Will and Testament: a legally binding document that details your final wishes with regards to the distribution of your estate after you die.


Estate planning checklist

To make things easier for your executor and beneficiaries, you should consider all the tasks that your executor will need to manage, when paying off debts and distributing your will.

Your will: firstly make sure you have one, and you tell your executor where it is

Debts: list details of personal loans, credit cards, store cards and mortgages. These will need to be paid out of your estate before it’s distributed to your beneficiaries

Assets: these can be very diverse and wide-spread, so ensure you include details (and locations) of:

  • Property deeds
  • Share certificates
  • Superannuation funds
  • Bank accounts
  • Investment accounts
  • Collectables
  • Bonds and other tradable investments
  • Motor vehicles, boats etc
  • Cash
  • Personal assets such as jewellery etc
  • Contact details of all beneficiaries

Professional advisors: list the contact details of any financial advisors, lawyers and stock brokers – especially if they’ve arranged estate planning strategies designed to minimise tax or maximise capital gain

Insurance details: life policies including any death and permanent disability cover held with your superannuation fund

Funeral arrangements: especially if you have arranged a pre-paid funeral plan

Writing a will

Whether your estate is fairly straightforward or more complex, it is not advisable to write your own will. These “self-written” or simple will kits purchased from the internet or your local post office, etc., may not generally be as “water tight” as you would like for your beneficiaries’, if they are challenged in a court of law.

Legislation and Succession laws are complex, and it is wise to get help from a lawyer who is an expert in Estate Planning. You will need to pay for their services, but you will receive expert advice, and documents that are specifically tailored to your unique situation.

Who you name as beneficiaries, and how you choose to distribute your estate is entirely up to you. Just ensure that your will –

  • Clearly identifies your beneficiaries
  • Clearly identifies your executor
  • Is dated correctly
  • Is signed correctly
  • Is witnessed correctly
  • Lists exactly how you want your estate to be distributed amongst your beneficiaries (including contingencies if they die before you)
  • Is up-to-date

If you choose, you can also include preferences for your preferred funeral arrangements.