ESTATE planning is the process of creating the controls and structure to ensure assets are passed on to future beneficiaries as intended.
It can vary from one person to the next and will be based on personal circumstances.
However, the planned goal of estate planning will be consistent among all – ensuring your assets pass to beneficiaries in the intended manner and in the most tax-effective fashion.
Careful estate planning can also provide clarity for future beneficiaries.
Should someone pass away without an appropriate estate plan in place, complications, family politics and poor tax outcomes might unfortunately result.
Upon death, assets generally fall into one of the following two categories.
The first is estate assets, which are assets that you hold in your own name.
This could include personal property, such as cars and jewellery, collectibles, loans, cash, shares, property and other investments.
These assets are dealt with in the will, where as non-estate assets are not covered by the will and dealing with this can be complex and require careful planning.
Non-estate assets include superannuation, company assets, Jointly owned assets and family trust assets.
If you have a self-managed superannuation fund (SMSF) the details are slightly different.
When a SMSF member passes, their superannuation interests are generally paid as a ‘superannuation death benefit’ to their beneficiaries under a valid binding death benefit nomination.
This nomination is a document that outlines who the SMSF member wishes to receive their superannuation interest upon their passing.
Where no binding death benefit nomination has been prepared, the allocation of the deceased’s superannuation is usually at the discretion of the surviving trustee.
This can be problematic as in the case of Katz v Grossman – the surviving trustee might not pay out the superannuation death benefit consistent with the intent of the deceased.
A superannuation death benefit paid to a tax dependant under superannuation law will be tax-free to the recipient.
A tax dependant person is described as a spouse, de facto, child under the age of 18, any other person with whom the deceased had an interdependency relationship prior to death and any other person who was a dependant of the deceased (i.e. for financial maintenance) before death.
If a superannuation death benefit is paid to a non-tax dependant, the beneficiary receiving that money is taxed at up to 15 per cent.
Family trust assets remain in the trust after the death of a trustee (of the trust).
The surviving trustees have discretion to distribute the capital and income of the trust to beneficiaries.
Choosing the appointor of the trust is a vital aspect of estate planning.
The appointor is authorised to appoint/and or remove the trustee and specific mention of the appointor of a trust should therefore be noted in the will.
A harsh reality can occur where direct reference is not given to the appointor in the will and the surviving trustee exercises discretion to distribute the income and capital of the trust against the wishes of the deceased.
Further planning should be focused on the trust deed. This governs who will be trustee in the event of the appointer’s death and the terms of the trust deed should be reviewed to make sure control will pass as intended.
Company assets and jointly owned assets are also treated differently.
In the event of the death of a company director his/her shares will form an estate asset if held by the deceased personally; however, the company assets continue to be owned by the company.
Jointly owned assets, which are generally assets held in joint names, pass automatically to the surviving partner.
There are some exceptions to this rule but they are less common.
Other important considerations
A valid will is usually sufficient to warrant the distribution of estate assets according to the deceased’s wishes.
Nevertheless, the will can still be challenged by a person (typically a family member or an ex-spouse) who feel they have not received a fair share of the estate.
If a person dies intestate (without a will) or the will is invalid, the estate is administered under the laws relating to intestacy and the distribution of the estate assets will be governed by these rules.
Such rules typically follow a prescribed formula that might vary from state to state in Australia.
Testamentary trusts are also becoming increasingly common.
In today’s society where divorce is at an all-time high, care must be taken to protect the assets inherited by beneficiaries.
This protection also extends to the risk of the assets being exposed to bankruptcy or litigation.
A testamentary trust is a discretionary trust expressly created by the will upon death.
This provides beneficiaries with maximum flexibility in dealing with an inheritance and the transferring of assets to beneficiaries via a testamentary trust does not typically trigger capital gains tax (CGT) or stamp duty.
There are two key benefits to using testamentary trusts.
The first is that it is a tax-effective income distribution method and the second is that it allows for asset protection.
Since the assets are not legally owned by the beneficiaries personally, the assets may be protected against bankruptcy, business failure and relationship breakdown.
However, where it is deemed that action has been taken to defeat creditors or in anticipation of a relationship breakdown, this may not be the case.
When someone inherits a person’s primary residence, the beneficiary generally has a two-year window to sell the property tax-free (settlement must occur within the two-year period).
When a main residence is inherited, the most important consideration is the date that it was first acquired by the deceased.
If the main residence was acquired before September 20, 1985 and used by the deceased as their principle place of residence, the beneficiary is deemed to have acquired it at its current market value at the date of death.
If acquired after September 19, 1985, the beneficiary is deemed to have acquired the property at its original cost price (i.e. what the deceased originally paid).
As long as the deceased was using the property as their main residence up until their passing and it was not used as an investment property, you do not have to pay CGT if you sell the property within two years of the death or you live in the property as your primary residence until you sell.
There are of course many other aspects to consider, such as a family business, how you choose the right executor and appointing a power of attorney.
But careful estate planning not only ensures that a person’s assets are transferred according to their wishes, but also in the most tax-effective manner.
It is often said that wills and estate planning aren’t for the person who has deceased, but more importantly for those we leave behind.
We all work extremely hard to build wealth and it should be appropriately structured so that it can be passed on in the future as intended.
The information provided is the opinion of the author. The AJN recommends that readers seek independent financial advice.