Estate Planning – More Than Just A Will
Estate planning involves much more than an up to date will.
It is important to ensure that your assets are distributed in the most effective manner and without adverse tax consequences for your beneficiaries.
Death may be one of the two certainties in life – the other being taxes – but another could easily be the reluctance many have towards dealing with this inevitable event. Do you know how your loved ones will be cared for if something happens to you? If the answer is “no”, then it’s time you took steps to put your affairs in order.
There are many good reasons for having an estate plan, these are just the top three:
- Not wanting to add your family’s anxiety or hardships while they are trying to deal with their loss;
- Your hard-earned assets to end up in the wrong hands or to cause friction between those named in your will, simple because your intentions weren’t properly documented; and
- Your beneficiaries to pay more tax on their inheritance than they are obliged to.
That’s why proper estate planning, including having a will and keeping it up to date, is essential.
In Australia, if you die without a valid will – known as dying ‘intestate’ – a court-appointed administrator could be charged with distributing your assets and even deciding who looks after your children if they are under 18.
He or she may follow a pre-determined formula that could lead to a very different outcome to the one you wanted, which could cause delays in settling your estate. Studies show that 45 percent of Australians don’t have a will so if you don’t have one, then it’s time to join the 55 percent.
Drawing up a will is far more complex than merely deciding to whom you want to leave your assets to. An understanding of which assets pass into your estate is required and therefore seeking advice is important.
For instance, not all the assets you own or control can be dealt with under your will, including:
- Assets owned as a joint tenant;
- Assets owned by a company or held in a trust; and
- Superannuation death benefits or life insurance proceeds that are paid directly to a beneficiary rather than to your estate.
JOINT TENANCY AND TENANCY IN COMMON
Jointly owned assets or property can be held in one of two ways – either as joint tenants or as tenants in common. If an asset is held as joint tenants, on your death, the surviving joint tenant automatically acquires ownership of your share of the asset (‘rule of survivorship). The asset won’t form part of your estate and can’t be dealt with under your will.
If an asset is held as tenants in common, your share of the asset (i.e. 50%) will form part of your estate and can be specifically dealt with under your will.
ASSETS OWNED BY A COMPANY OR HELD IN TRUST
If you own assets via a company or trust, your estate plan needs to address how control of that entity will be passed upon your death. This will ensure the assets of the entity will pass in accordance with your wishes.
In the case of a company, this will involve considering who will be entitled to any shares you own in the company on your death. It may also require an examination of any rights you may have under the constitution of the company to appoint directors.
In the case of a trust, you will need to examine any rights you may have under the trust deed to appoint a replacement trustee and/or appointor or to wind up the trust and direct how its assets should be disposed of. If the trustee of the trust is a company, it will also involve considering who would be entitled to any shares you own in that company.
Ensure your future financial and health needs are sorted by nominating an enduring power of attorney.
SUPERANNUATION & LIFE INSURANCE DEATH BENEFITS
Assets held by a superannuation fund usually bypass the estate and are paid to a dependant spouse or children, as are life insurance benefits with binding nominations (where you specifically name your beneficiaries). If there is no nomination or the nomination is faulty, the payment of benefits may be subject to the super fund’s rules, and this may not always be what you desired.
As part of your estate plan, you also need to consider the tax implications of how your death benefit is dealt with. Lump sum payments paid to dependents (as defined under income tax laws) are tax-free. Taxable components paid to non-dependents are subject to tax.
PLANNING FOR YOUR OWN FUTURE NEEDS
You should also be planning for your own future requirements. For example, there may come a time when you’re unable to make decisions for yourself because of a loss of capacity. To assist here, you need to nominate an enduring power of attorney. This trusted person is someone you appoint to make financial and property decisions on your behalf.
Nominating an enduring power of attorney before you get to the ‘loss of capacity’ stage is important as you can’t nominate one after this happens. Remember that a regular power of attorney becomes invalid upon your death or if you lose the mental capacity to make your own decisions. An enduring power of attorney, however, will allow your trusted person to act on your behalf if this happens and you are no longer able to manage your financial affairs.
You may also wish to nominate a medical power of attorney, also known as an enduring guardian, who can make medical decisions on your behalf.
A testamentary trust is a trust established by someone’s will. It comes into existence only when that person dies. Including a testamentary trust in your will can be useful for making tax effective distributions to beneficiaries under the age of 18, caring for children or a dependent who is incapacitated, and preventing beneficiaries from inappropriately spending their inheritance.
TAX EFFECTIVE TAX PLANNING
The disposal of assets in accordance with your will may have tax consequences, including CGT, that you should consider when drafting your will and creating your estate plan. There are many strategies you can use to help make your estate plan as tax effective as possible for your dependents and beneficiaries. Some of these strategies include:
- Ensuring the proceeds of an insurance policy paid from a superannuation fund is paid to dependants as this would be, tax-free;
- Distributing an asset (rather than the proceeds of the sale of that asset) to a beneficiary to defer any CGT liability;
- Using discretionary trusts to help minimise the tax a beneficiary pays on receipt of an inheritance; and
- Using testamentary trusts can be an effective way to provide an inheritance to young children.
Insurance cover: According to consulting group Rice Warner, Australia has a large underinsurance problem. It found that if couples in their mid-thirties with young children relied on the default cover in their super fund, then only 30 percent of their life insurance needs were covered.
Tax: There are many tax time bombs found in estate planning. For instance, an asset you leave one child may be subject to capital gains tax while an asset left to another may be exempt. This could result in each child receiving very different inheritances when you thought you were leaving them equal shares. Also, the tax payable on some benefits may depend on each beneficiary’s personal circumstances.
Asset ownership structures: Different structures offer different benefits. For example, a testamentary trust comes into effect at the time of your death and can help protect your assets against any claims that arise if your children become divorced or bankrupt. They can also be used to reduce tax and provide for young or disabled children. Other structures include companies, self-managed super funds and family trusts.
Your wishes: You may want to give additional direction to those you have given powers of attorney. For example, an anticipatory direction lets you list what medical treatment you want or don’t want, if you can no longer make those decisions yourself. Similarly, an advance healthcare directive (or living will) details the type and extent of healthcare you wish to receive. You may also want to spell out your desires regarding your funeral arrangements, rather than have your family second guess what you would have wanted.
Estate planning can be complicated, but it’s important to do things properly so that your family can avoid any potential legal issues – especially as regulations change over time.
At a time when your loved ones are coping with a loss, don’t leave them with additional hurdles to overcome.
Your financial planner can help you investigate which strategies may be appropriate for your personal situation.
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This article is provided as general information only and does not consider your client’s specific situation, objectives or needs. It does not represent accounting advice upon which any person may act. Implementation and suitability requires a detailed analysis of a client’s specific circumstances.