"Estate planning should be an efficient and effective intergenerational wealth transfer solution that provides for your required lifestyle and enjoyment ambitions while you are alive."
Careful estate planning will make sure your assets, such as property, are transferred smoothly
Planning your estate is an important matter. Estate planning involves arranging your assets and circumstances in such a way as to ensure that your beneficiaries after your death receive from your assets the maximum use and enjoyment at a minimum cost in taxes and heartache.
In other words, estate planning should be an efficient and effective intergenerational wealth transfer solution that provides for your required lifestyle and enjoyment ambitions while you are alive.
Before delving deeper into this topic with your legal adviser, it is important to understand the basic fundamentals. The main issue to understand is that your will only looks at your estate assets, which will be managed through your will, and not your non-estate assets, which are outside of your will.
It is also important to understand that the typical will leaves assets to specific people, e.g., spouse and children. The problems arising when the assets pass to that person directly is that it leaves them vulnerable to attack in bankruptcy situations, family law court hearings and the problem of minor’s tax. This is where children under 18 are taxed at rates between 66% and 45% (plus Medicare levy) on unearned income.
• Ensure your estate assets pass onto intended people or organisations (charities, etc.) the funds/assets in the amounts you intend;
If you die without a will it is unlikely you will achieve your desired outcomes. The various states have different laws on how assets are to be distributed if you die without a will (intestate).
The most important issues to address in your will are:-
• Ensuring that the interest of your spouse and children are protected;
There are many cases where the courts have overridden the wishes of the deceased. This can happen when a grieving child, spouse or other person feels they were mistreated in your will especially when they did not receive what they thought was due to them. So you need to discuss this possibility with your lawyer when drafting your will to minimise the chances of any estate litigation.
1. Estate assets
Assets owned together with someone else can either be as joint tenants or tenants in common. Under joint tenancy, the other person automatically takes full ownership upon your death. Tenants in common have your portion moving to your estate upon your death.
• Assets in a trust
The trust would also typically have an appointer, being you. The position of appointer is a personal one and as such is not part of your estate assets. On death you can move this position to someone else via a memorandum of wishes.
• Superannuation. These assets are not covered by your will whether in a self-managed super fund or a retail/industry fund.
The super legislation prescribes who is eligible as a beneficiary, so it is critical to understand who is eligible, and how the dependency affects the tax treatment of funds received from your super. These rules are the same irrespective of whether you “give” directly to someone or to your estate who then pays it out.
1. beneficiaries being bankrupt;
The use of a testamentary trust is another way to pass on your wealth. A testamentary trust in essence passes on control, not the specific asset. Instead of passing assets directly to a beneficiary they are passed into a trust and a chosen beneficiary/s is put in control of the trust. This is not executed until your death, but forms part of your will. It is often an annexure to your will.
The problem is a will is normally prepared many years before death and as such there is no crystal ball to show what will happen in the future. In many cases people forget to update wills with changes. Even if immediately on your death all could be fine, but some time in the future things may change.
Testamentary trusts are usually a discretionary or fixed trust/s established as part of a will that takes effect following your death. It is important to also consider the use of a family lineage trust as the basis of your testamentary trust. This ensures only direct family members gain access to benefits, thereby potentially guarding against an in-laws’ attack.
There is no standard format for a testamentary trust, they are adapted to suit the needs of a particular family. In many cases they include a lineage clause to ensure only your direct descendants can benefit from the income or capital. A will can include more than one testamentary trust and you can have sole or multiple beneficiaries in control. The bottom line is, who do you want your assets to go to and then set up the testamentary trust/s to mirror the decision. The only difference is that you pass control of assets to individuals not asset ownership.
4. Insurance policies
1. Enduring power of attorney
As is the case with your will, the above are state government driven, so state legislation applies.
Ken Raiss is a certified accountant and director of Chan & Naylor national accounting firm. Ken’s experience lies in working with large publically listed multi-national companies, which gives Ken excellent insight into international market trends. Ken specialises in educating “mum and dad” property investors and small business owners with advice on wealth creation, asset protection, taxation, superannuation and compliance.