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Estate planning

Estate planning is an essential component of any financial plan. However when it comes to establishing a financial plan, estate planning is often overlooked or given only cursory consideration. While financial planning focuses on creating and preserving wealth, protecting your assets and legally reducing your tax throughout your lifetime, estate planning aims to provide the same outcome for your loved ones once your assets are passed onto them. 

Planning your estate: more than simply making a Will

It is important to understand that having an effective estate plan in place to protect your assets for your loved ones involves much more than simply expressing how you want your assets distributed in a Will.

Lady with documents in briefcaseYour Will can only direct the distribution of certain assets, known as ‘estate assets’ which are owned solely and legally in your own name – it cannot direct the distribution of assets such as superannuation benefits (with one exception), insurance, companies and trusts.  It is therefore important that a Will consider how your assets are utilised once they have been passed onto your loved ones. For example if you are leaving assets to minors, or any other beneficiary who may not treat the gift they receive from you responsibly, you risk your gift being squandered. In order to avoid your assets being wasted, you need to have an effective estate plan in place that allows you to control how your beneficiaries benefit from the gift you provide to them. Also, without an effective estate plan, your assets may not be passed on in the most tax effective manner, leaving your beneficiaries to pay extra tax on their inheritance.

By implementing an effective estate plan, with the assistance of a qualified estate planner working in conjunction with your accountant and financial planner, you can address these issues to ensure that your assets are protected for your intended beneficiaries utilising all available options.

Protecting your gift to your loved ones

One way of protecting your gift is to incorporate one or more a discretionary testamentary trusts into your estate plan as this allows you to retain far greater control over the distribution of your assets to your intended beneficiaries and may  also provide some tax advantages for those receiving your intended gift. 

An appropriately structured discretionary testamentary trust can help prevent your gift to an intended beneficiary from being lost to a third party such as an estranged partner or spouse, business partner or creditors.

If a beneficiary could potentially experience a relationship breakdown, it may be prudent to offer them the option of taking their inheritance via a discretionary testamentary trust. This way, any assets held inside the trust are not in the personal name of the beneficiary but instead held in the name of the trust. This assists in removing the inheritance from the pool of assets that are vulnerable to seizure or redistribution between parties following any marital or commercial breakdown.

If you are concerned about the marital stability of a beneficiary, it may be necessary to draft the trust in a way that further restricts a former spouse’s access to the inheritance by appointing an independent third party as trustee of the beneficiary’s trust.

While testamentary trusts can provide protection in such circumstances, it’s important to understand that progressive changes in family and bankruptcy law mean that the protection offered by testamentary trusts is by no means absolute. It is, however, the most effective way to protect your assets. Keeping the inheritance in a separate trust can, at the very least, help ensure that the assets inside the trust are treated as a resource of the beneficiary, as opposed to property that the court can order be passed to a disgruntled spouse.

You can also use a discretionary testamentary trust to protect your gift where you have a beneficiary who is vulnerable due to age (such as minors), mental health, drug or gambling addictions or spendthrift tendencies. Here, a discretionary testamentary trust can protect your beneficiary’s inheritance from undue waste and dissipation and ensure that it is responsibly managed on your beneficiary’s behalf - either for their lifetime, or until they are capable of responsibly managing it themselves.

In such a case, the inheritance is passed into a testamentary trust for the benefit of the beneficiary with the trust controlled and managed by a trustee. This trustee ensures that the capital and income generated from the inheritance is gradually released to the beneficiary for appropriate purposes, such as meeting the beneficiary’s medical, educational and reasonable living costs. 

With this option, you can specify when the beneficiary can gain control over their own inheritance (for example, upon reaching a certain age) or, alternatively, the inheritance can be protected inside the testamentary trust for the beneficiary’s lifetime.

Reducing tax payable by your beneficiaries

Given that actual death duties have long been abolished, many people mistakenly believe that tax is not an important issue when planning the transfer of their assets to their loved ones. However, this is actually not the case as other taxes may apply (although death is not of itself a trigger for capital gains tax).

If a beneficiary takes their inheritance in their personal name then tax is payable on income generated from the inheritance at their personal marginal tax rate. There may be significant tax advantages in taking the inheritance through a testamentary trust instead of in the beneficiary’s personal name.  This can be particularly effective where the beneficiary has:Man protected from tax by umbrella

- a high personal marginal tax rate;

- a partner on a lower income minor children and grandchildren;

- and/or children or grandchildren with no, or lower, taxable income.

A discretionary testamentary trust allows your beneficiary to split the income generated from their inheritance amongst the beneficiaries of their trust.  This allows the beneficiary to distribute income more tax effectively. To minimise the amount of tax paid, income generated from the inheritance can be split and streamed to members of the trust who are on a lower marginal tax rate.

Income distributed from a discretionary testamentary trust to any minor beneficiaries, such as children or grandchildren, has further potential for significant tax savings. Unearned income distributed to minors under trusts created during a testator’s lifetime (such as family trusts) is taxed at high rates once income reaches $416. However, income distributed to minors from testamentary trusts is ‘excepted’ from the higher tax rates that usually apply to unearned income. In this case, minors are instead treated like adults. They have a tax free threshold of $18,200 and normal marginal tax rates apply to every dollar above this threshold.

Superannuation Assets

As mentioned above, superannuation benefits are not normally dealt with in your Will. Superannuation assets are either dealt with by the trustees of the superannuation fund or in accordance with a binding death benefit nomination.  When dealt with by the trustees they will usually be distributed to any superannuation beneficiaries as defined in the legislation (basically, spouse and children, or if none, your estate). However a valid binding death benefit nomination must be followed by the trustees and is effectively the ‘Will’ for your superannuation benefits. It is an advance direction telling the trustee where to pay your benefits on death and this can be to any person who is defined as a superannuation beneficiary (generally spouse or children) or to your estate (the exception referred to above).

It should be noted that tax may be payable by beneficiaries on superannuation benefits, usually when paid to adult children. Tax is payable on the taxable component of a deceased member’s superannuation benefits at the rate of 16.5% as adult children are not taxation dependants for superannuation benefits. This can result in a potentially significant death benefit tax liability when passing your superannuation benefits to an adult non-dependant child.  Through an effective estate plan, you can identify any potential death benefits tax liabilities and with advance planning you can implement strategies to reduce or eliminate these liabilities for your beneficiaries. 

With a comprehensive estate plan you can help ensure that your assets are protected once they pass to your intended beneficiaries and utilised in the manner that you feel is most appropriate for each individual beneficiary.  Your estate plan will also help to identify potential death benefits tax liabilities when planning the distribution of your super and consider strategies that will legally minimise, or altogether avoid, any tax liabilities.


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