By Colin Lewis,
Head of Technical Services,
Fitzpatricks Private Wealth
October 2018

Estate planning is much more than having a will. Unfortunately, many Australians don’t even have this!

Simply, estate planning involves planning for both what happens to your assets and affairs after you die and who takes charge of your affairs in the event you lose capacity, i.e. your back up plan.

The objectives when putting together your estate plan is to pass control and ownership of your “estate” assets and interests to the right person(s) in a timely way in the most tax efficient manner. In the process you want to protect the assets and interests you wish to distribute. That is, you’ll want to maximise asset protection for beneficiaries from say bankruptcy or a relationship breakdown – you don’t want your assets left to a son or daughter walking out the door to their other half if things go wrong between them.

Also, consider the impact on beneficiaries with Government benefits. No point in leaving your hard-earned money or assets to someone who doesn’t want it because they’ll lose income support payments. It’s astounding the number of people who’ve asked how to re-direct an inheritance because it’s going to affect their Government payments, when in fact they could generate more income and be better off investing the inheritance properly. Once a bequest is received the social security gifting rules come into play if it is given away.

So, in constructing your estate plan think about who you would like your estate assets distributed to. Conversely, you should think about who you don’t want those assets going to and how you’ll deal with those individuals, if at all, because if you leave out of your will someone who considers themselves entitled, they may challenge it. If you do not make adequate provision for the proper maintenance, support, education or advancement in life of certain persons, a Court has the discretion to make an order for that provision.

Plan for someone to take charge of your affairs in case of incapacity, so you’ll need to appoint attorney(s).

As morbid as it seems, also address your health care wishes and end of life preferences.

You need to identify the owner(s) of your most valuable assets and interest as not all assets are “estate assets” dealt with via your will. For example, assets owned in your own name, e.g. property, shares, cash and assets owned as tenants-in-common and certain business interests are estate assets. Whereas assets owned jointly, superannuation, life insurance, interests in discretionary trusts and certain business interests are non-estate assets and not dealt with in your will.

Typically, a person’s largest assets are their home and super.

The home is often owned jointly between spouses which automatically transfers to the surviving spouse on death. It is not dealt with in your will as it is a non-estate asset.
Your super is also a non-estate asset and therefore not dealt with via your will, unless you specifically leave it to your legal personal representative – the executor of your estate.

Tax

It’s important to consider the tax implications of proposed bequests for each beneficiary. The choices you make can significantly impact the tax your beneficiaries pay.

Death is not a capital gains tax (CGT) event and tax is only paid on the ultimate disposal of certain assets. Non-resident beneficiaries, however, are treated differently where death is a deemed disposal.

Your home is exempt from CGT for two years from the date you die, even where it’s rented out during that time, but it may not be totally exempt if its income producing at time of death.

Your beneficiaries are deemed to acquire your investment assets on death for their original cost bases – so it’s essential to bequeath documentary proof of their purchase prices. The 50% CGT discount applies where an asset is held for more than 12 months from the date you acquired it.

However, if your investment assets were acquired before 20 September 1985 – exempt from CGT in your hands – your death will bring them into the “CGT net”. That is, your beneficiaries are deemed to acquire these assets on your passing for their market value at date of death and the 50% CGT discount applies only after they are held for more than 12 months from that date.

Testamentary trusts

Consider incorporating in your will the establishment of a trust, known as a testamentary trust. These trusts provide a greater level of control over the distribution of assets to beneficiaries and offer many advantages, including being useful where the beneficiary is unable to responsibly manage their inheritance due to age, disability or spendthrift tendencies.

Testamentary trusts allow capital and income to be spread between beneficiaries at the trustee’s discretion. Thus, they are extremely flexible in that income can be distributed tax effectively and income distributed to minor children and grandchildren is taxed at adult marginal rates and not subject to punitive tax.

Also, assets are protected from any legal action involving beneficiaries and/or misuse of those assets.

Dealing with Super

Your super can end up in the hands of whoever you want, but your super fund can only pay certain beneficiaries directly, as super law dictates eligible dependants. Only your spouse (including a de facto partner), children, someone financially dependent on you or someone with whom you are in an interdependent relationship can receive your super directly.

So, if you want your super to go to someone else, say a sibling, parent, ex-spouse or charity, then you must nominate your legal personal representative and deal with it in your will.

You have several options in determining how your super is distributed after your death. You could make a lapsing or non-lapsing binding death benefit nomination (BDBN), a non-binding nomination, a reversionary nomination for an income stream, or for self-managed funds, incorporate your wishes into the fund’s trust deed.

A BDBN is critical in many situations, especially with blended families. Without a valid BDBN, trustee discretion applies whereby the decision on who gets your super is in the hands of the fund’s trustee. Your nomination in a fund with trustee discretion is purely a guide only. However, the appeal of trustee discretion is that your circumstances at date of death are considered, whereas a valid BDBN must be acted upon even if your situation has changed since you made it. For example, if you’re legally married but separated and in a new relationship, a BDBN to your estranged spouse will be acted upon even if you wanted your new spouse to receive your super.

It’s important to have an estate plan to ensure your estate assets and interests go to the right person(s) and you need to review it every five years or earlier for a major family event.

Whatever you do, don’t leave it to chance!