What is estate planning?

Estate planning involves much more than having 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.

Estate planning involves considering what will happen to your assets upon the death of you or your partner or if you become mentally incapacitated and unable to manage your own affairs. You may want to consider how to structure your estate to ensure it is distributed according to your wishes and ensure your family’s interests are protected and tax effective.

As part of your estate plan, you will need to consider the following questions:

Is your Will up to date?
Do you have adequate life insurance?
Are there any tax consequences of how your assets are distributed?
Do you have a binding death benefit nomination for your superannuation? and
Whether an enduring power of attorney and/or enduring guardian is appropriate for you?

If you own a business, you may also need to consider implementing appropriate business succession plans.

What assets are governed by a Will?

It’s important to ensure your assets are owned in the appropriate way to avoid being caught by stamp duty or capital gains tax (CGT) if the ownership structure needs to be changed at a later time or transferred to a beneficiary after your death.

Many assets, including personal possessions, property, money in bank accounts, shares and managed funds become part of a person’s estate upon their death and are governed by their Will.

Jointly owned assets held as tenants in common can also be dealt with under your Will, as your share of the asset becomes part of your estate.

What assets are not governed by a Will?

Not all the assets you own or control can be dealt with under your Will. These include the following three areas:

Joint tenancy

Jointly owned assets or property can generally be held as joint tenants. On your death the surviving joint tenant automatically acquires ownership of your share of the asset. The asset won’t form part of your estate and can’t be dealt with under your Will.

Assets owned by a company or held in trust

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 or to wind up the trust and direct how its assets should be disposed of. If the trustee is a company, it will also involve considering who would be entitled to any shares you own in that company.

Superannuation death benefits

Many people wrongly assume that their superannuation will pass to their beneficiaries according to their Will. In fact, this will only happen if your legal personal representative (on behalf of your estate) is the recipient of your superannuation death benefit.

Legally, your superannuation fund can pay your death benefit to any of your dependants (which include your spouse, children, financial dependants and interdependent relations), or your legal personal representative, often at the discretion of the fund trustee. Many superannuation funds allow you to override this situation by making a binding death benefit nomination. These are written nominations made by you, which direct your superannuation fund on how to pay your death benefit. There are several types of death benefit nominations, including binding, non-binding, lapsing and non-lapsing.

As part of your estate plan, you also need to consider the taxation implications of how your death benefit is dealt with through your superannuation. Lump sum payments paid to dependants (as defined under income tax laws) are tax-free. Part or all of death benefits paid to non dependants are subject to tax.

Life insurance

When you take out a personal life insurance policy (outside super), you generally have the option to nominate a beneficiary for the policy proceeds. Any payout under the policy will be paid directly to the nominated beneficiary (or beneficiaries), bypassing your estate. As such, your estate plan should factor in who you have nominated as the beneficiary of your life insurance policy.

It may be prudent to nominate a beneficiary or to have a third party such as a spouse or partner as the owner of the policy rather than simply having the proceeds paid to your estate (unless a testamentary trust is required). A life insurance company will generally require a grant of probate to make a payment to a deceased estate for life insurance proceeds of $50,000 or more, whereas in the case of a nominated beneficiary or a third party owner, usually all that is required is a copy of the death certificate.

Testamentary trusts

A testamentary trust is a trust established by someone’s Will and 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 18, caring for children or a dependant who is incapacitated, and preventing beneficiaries from inappropriately spending their inheritance.

Enduring Power of Attorney

If you are worried that you will be unable to manage your own affairs, you might consider appointing an enduring Power of Attorney (PoA) and enduring Guardian.

Granting someone a PoA means they can legally act on your behalf in relation to financial matters. Unlike a general PoA, an enduring PoA continues to apply if you lose mental capacity, meaning you can appoint someone you trust to look after your financial affairs if you’re no longer able to do so.

Funeral expenses

Setting aside funds to pay funeral expenses provides peace of mind that money is available. There are several ways of funding funeral expenses, including funeral bonds and pre-paid funerals.

Tax effective estate 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 dependants and beneficiaries.

For example:

The proceeds of an insurance policy paid from a superannuation fund are tax-free if paid to dependants.
Distributing an asset (rather than the proceeds of the sale of that asset) to a beneficiary may defer any CGT liability.
Using discretionary trusts may help minimise the tax a beneficiary pays on receipt of an inheritance.
Using testamentary trusts can be an effective way to provide an inheritance to young children.

If you have any questions or would like assistance with your estate planning, give us a call on 03 5434 7600.