Estate Planning

Estate Planning Overview

Estate planning is an essential component of your overall financial plan. Not only does estate planning involve deciding how your assets are to be distributed on death, but it also involves having the correct financial structures and arrangements in place to tax effectively protect your family’s interests.

A will only covers the distribution of the assets that form part of your estate upon death, hence not all of your assets are governed by the details of your will. Some of the main assets that do not form part of your estate are:

  • Superannuation death benefits
  • Assets held as joint tenants
  • Assets owned by a trust or company

Some superannuation funds include an in-built life insurance component to their accounts, which means your superannuation death benefit may be bigger than expected. Your superannuation death benefits will only become part of your estate assets if you make a binding death nomination to your estate.

Estate planning is vitally important for those who have been previously married or have children from previous relationships. It is important that consideration is made to these parties and provisions are made in your estate plan where appropriate.

There are three main professionals involved in estate planning; financial planners, accountants and solicitors. Your financial planner is able to integrate the skills and expertise of the necessary professionals in generating your estate plan. Therefore you should contact your financial planner to ensure your estate planning objectives are met in the most effective manner.

Wills

A will is an important legal document that outlines who is to control your estate and also who is to receive the property and possessions you own, in the event of your death.

The person you place in charge of your estate is known as an “executor” and their role is to carry out the terms of the will. Those to whom you choose to leave your assets are known as “beneficiaries”. It is the executor’s duty to ensure your assets are distributed to the correct people.

There are a number of requirements that need to be met in order for a will to be valid. These requirements may vary from state to state, but generally speaking the following must be adhered to:

  • A will can only be made by someone over 18
  • It must be in writing
  • It must be signed by two adult witnesses (in many states, a witness cannot be a beneficiary)

Establishing a valid will provides peace of mind and certainty as you know exactly how your assets will be distributed. You can be assured that your loved ones are provided for in accordance with your wishes.

Having a will in place also gives you control as to the manner in which your family inherits your assets, providing you with the opportunity to implement effective protective mechanisms such as testamentary trusts.

A testamentary trust is a trust created by a will that comes into operation upon the death of the will maker. It appoints a trustee to use certain estate assets for the benefit of the beneficiaries, in the way outlined in the will.

The trustee will have discretion to determine the benefits received by each beneficiary. Therefore establishing a testamentary trust allows any income and capital gains to be distributed in the most tax effective way. In addition, income received by children will be taxed at normal marginal rates, as opposed to the higher children’s tax rates.

Power of Attorney

A power of attorney is a legal document by which one person (called the donor) appoints another person (called the attorney) to act on their behalf. A power of attorney operates during the lifetime of the donor, so all authority ceases upon the death of the donor.

Each state and territory has their own legislation which regulates the preparation and establishment of a power of attorney, but generally speaking there are four different powers of attorney. These are outlined in the table below.

Power of Attorney Explanation
General Power of Attorney You appoint someone to act on your behalf for a specific period of time or to complete a specific matter, usually to make a financial or legal decision for you (e.g. you are travelling overseas and need to appoint someone to finalise the sale of your property).
Enduring Power of Attorney (Financial) You appoint someone to make financial or legal decisions for you in the event you lose the capacity to make those decisions on your own.
Enduring Power of Attorney (Medical Treatment) Similar to the above power of attorney, however the decisions they can make are in relation to your medical treatment.
Enduring Power of Attorney (Guardianship) You appoint someone to make lifestyle decisions for you (e.g. where you will live) once you no longer have the capacity to make these decisions on your own.

Note: Recently Victoria announced changes to its Power of Attorney rules. Click here to find out more.

It is important that you select an attorney that is trustworthy and will only have your best interests at heart. They should be someone who knows you and knows what you want. If at any stage you are unhappy with your attorney, you can revoke their powers and appoint someone else.

Implementing the appropriate powers of attorney will give you confidence that both you and your assets will be well taken care of in the event that you lose the capacity to act on your own behalf.

Due to the complex issues surrounding powers of attorney we suggest you contact a financial planner to discuss the financial implications of these issues on your situation. Your financial adviser can then liaise with an estate planning specialist to provide you with accurate and appropriate advice.

Super Proceeds Trust

A super proceeds trust is a trust established to accept only lump sum death benefit payments from a superannuation fund. For a super proceeds trust to be in place, it is required that a binding death nomination to your estate is made. These types of trusts operate in a similar fashion to testamentary trusts in that they come into effect upon death and a trustee is appointed to distribute the income to the appropriate beneficiaries.

This type of trust is especially popular with people who have children both over and under 18, who may be treated differently under tax legislation as beneficiaries of your superannuation benefit.

Some of the restrictions that may be placed on super proceeds trusts include:

  • The sole beneficiaries will be tax dependants of the deceased.
  • Upon the cessation of the trust the capital must be distributed to the children of the deceased in equal shares.

There are many benefits associated with setting up a super proceeds trust, including:

  • You are able to benefit from the concessional tax treatment of death benefits paid from a superannuation fund.
  • Flexibility in relation to the distribution of income and capital each year.
  • The income generated in the trust can be split between your spouse and dependant children in the most tax effective manner, with your children’s income being taxed at adult marginal rates.
  • The assets held in the trust will be protected from any creditors or legal action faced by the beneficiaries.
  • Equalisation clauses made in wills can enable non tax dependants to receive other, potentially non taxable, benefits from the estate (non-super).

There are many complex issues surrounding the establishment of a super proceeds trust. It is recommended you contact a financial planner who can explain the financial implications of establishing this trust. The financial adviser, together with an estate planning specialist can ensure you receive appropriate advice.

Tax Issues and Estate Planning

Estate planning is about ensuring that your assets are passed onto your beneficiaries in accordance with your wishes. It is also about transferring those assets in the most cost efficient and tax effective manner.

A well structured estate plan will result in less financial pain for your beneficiaries and will significantly reduce the risk of family disputes about who gets what. Your estate plan needs to:

  • be simple and easy to administer;
  • be cost effective to establish and update;
  • take into account all potential beneficiaries;
  • consider all previous relationships, including children with previous partners;
  • ensure a valid superannuation nomination is in place to cover the distribution of your superannuation benefits;
  • balance your lifestyle today against long term asset preservation for your family; and
  • be reviewed on a regular basis.

The original aim of estate planning was to minimise death and estate duties. As these duties have been removed, the focus of estate planning has shifted to other taxes like capital gains tax.

There are special capital gains tax (CGT) rules that are applied to the transfer of assets as a result of a bequest made in a will.

If the executor sells the estate assets during the administration process, this may trigger a capital gains tax event and CGT may be payable. The CGT liability will be calculated in the same manner that is used to calculate the CGT for a beneficiary.

The cost base that the beneficiary is deemed to have acquired an estate asset will depend on the date at which that asset was purchased by the deceased.

  • If the asset was purchased before 20 September 1985, the cost base would be the market value at the date of death.
  • If the asset was purchased after 20 September 1985, the cost base would be the market value at the date the asset was initially purchased by the deceased.

There is an exemption to the above rules if the asset being passed on is the deceased’s principal residence. This exemption applies if the home is sold or passed to a beneficiary who uses the home as their principal residence, within two years.

People often forget, or are not aware, that your superannuation benefits (and any attached life insurance) are not distributed in accordance with your will (unless a binding nomination is made to your estate). It is important that these benefits are also considered as part of your estate plan, because if it is ignored it may result in one beneficiary receiving more or less of a benefit than you intended.