Estate PlanningI won’t be here, so they can sort it out among themselves…

We hear many stories about families falling apart after someone has passed away, whether the breakdown is a result of financial complications, or where children from a blended family miss out on their inheritance because the surviving spouse remarries, and their new partner takes control of the assets.

Most people think that a Will prevents this from happening, and ensures all of their wishes will be carried out. Unfortunately this is not always the case.

Wills

Your Will only covers the assets owned in your own name.

Your Will does not cover assets owned in a company, superannuation or a trust. You need to ensure the right people are in control of these assets to ensure your estate is divided as you would like it to be.

If you don’t have a Will and pass away intestate (i.e. the value of your assets is greater than the sum of your enforceable debts and funeral expenses) the Public Trustee will be responsible for your estate.

A Will ensures your estate will be dealt with according to your wishes.

Your Will can place a protection barrier around your assets so you lessen the risk of your assets being controlled by those you don’t want controlling them.

You need to ensure your Will is structured correctly to protect your assets from unrelated parties, such as future spouses, step children and/or creditors.

Your Will can provide significant tax savings to your children or grandchildren.

For those under the age of 18, there are significant tax savings, provided the Will is written and executed correctly.

These assets can also be protected from third parties (such as in-law parents/guardians) by controlling what age your beneficiaries can take responsibility of them.

Even though you may appoint a person to be an executor of your Will, they do not have to accept this appointment.

If this person has not been consulted prior to the appointment, their choice not to be the executor will generally only surface after you have passed away and it is too late. You need to ensure you consult your chosen Executor prior to the appointment.

Trusts

The most common type of trust where people hold assets is a Discretionary Trust, or more commonly known as a Family Trust.

If your trust owes you money, either as a loan, or from a previous year’s income distribution, this amount will be included as an asset in your name and will be covered by your Will.

However, the other assets of the trust will not.

There are three important roles in a trust:

    1. The trustee

The person(s) or company that is responsible for conducting the affairs of the trust. The trustee is the legal owner of the assets and holds these assets for the beneficiaries. Ultimately, the assets in your trust will be controlled in accordance with the trust deed.

    1. The beneficiaries

The list of people, entities or organisations that benefit from the assets, by either income or capital.

    1. The appointor or principal

      • The assets are not distributed directly to the beneficiary and therefore may not be exposed to creditors and family law claims.
      • You can ensure assets are maintained for a beneficiary, however if it is not appropriate for the beneficiary to control the assets, another person can do this.
        Some situations where this may be the case is where there are children under 18; a child has a disability; a grandparent wishes to leave inheritances to grandchildren without their parents accessing the capital; a beneficiary has a substance dependency; or where a child or partner is in a career where they could be held personally liable to creditors.
      • Where minors (under 18s) receive an income distribution from a Testamentary Trust, this income is taxed as if the child was an adult. Ordinarily, on a passive income of $20,000, a minor would be taxed $7,650 (an average rate of 38.25%). If the minor received this income from a distribution from a Testamentary Trust, the tax on $20,000 would be $750 (an average tax rate of 3.75%). That’s a lot of school fees and general living expenses!
      • Cover all aspects of your financial structure as your Will can only deal with assets in your name.
      • Ensure the right people are in control of your assets and the entities that own them.
      • Ensure your Will is prepared by a suitably experienced Estate Planning lawyer and considers all aspects of your financial affairs in developing your Estate Plan. It must be prepared as part of your Financially Well Organised Strategy.

The person(s) who has the ability to remove and appoint the trustee. It is critical that the appointor position is addressed in your Estate Plan under your Will and in the Trust Deed itself.

A common scenario . . .

Joe and Mary are married, have three children and their Family Trust owns investments.

Joe and Mary are both trustees and appointors. As stated under the Trust Deed, following the death of an appointor, their personal legal representatives (i.e. their executor) take responsibility for their appointor duties. The Trust Deed lists all future spouses of Joe and Mary, current and future children, and stepchildren as beneficiaries.

Mary dies suddenly in a car accident and under her Will, appoints Joe as her executor.

Joe then becomes the sole trustee and appointor of the trust.

Joe meets Wendy and has another child. They both decide on creating a new Will –appointing each other as executors.

When Joe died, Wendy (Joe’s executor) took control of the appointor role under the trust. Wendy appoints a company in which she is the sole director and shareholder as trustee. As Wendy and her child are eligible beneficiaries, Wendy decides she will distribute all the income and capital of the trust to herself and her child, excluding Joe and Mary’s children, even though the assets were created while Mary was alive.

If Joe and Mary both died in the car accident and had only appointed their two eldest children, Peter and Jane (who are over 18) as their Executors, Andrew (16) would have no control over the trust. If we assume that the trustee of their trust was a company and only had two shares issued, if the shares were left to all three children in their Will, each child would own one-third of the two shares each.

When it comes to voting, there can only be one vote per share. One way of ensuring that each child has an equal vote is to ensure each child receives a share. A trustee company should be established with a minimum shareholding of 120 shares. This number is divisible by many combinations: 1, 2, 3, 4, 5, 6, 8, 10, 12, 15, 20, 24, 30, 40, 60, and 120. This means that you can leave the shares directly to each beneficiary so that each shareholder can have a say in the company, and who the directors are.

When individuals pass away, their executor/s make decisions on their behalf as the legal representative of the trustee. It is therefore critical you make sure the right people are the executor/s.

Companies

If you own a company, or are a shareholder of a company in your private legal structure, only the shares held in your name can be dealt with under your Will.

If shares in the company are owned by a trust, you must consider who will be in control of the trust.

Ultimately, it is the shareholders of a company who hold the power. When you pass away your executors are not automatically appointed as directors. You must therefore consider who will be the shareholders.

The shares owned by the deceased form part of the estate and can be left to beneficiaries.

Superannuation Funds

Most people’s wealth resides in their home and superannuation. However, it is a common misunderstanding that Wills cover your superannuation. This is the case if the trustees of the superannuation fund decide to pay out the superannuation to the deceased estate, but this isn’t always the most advantageous strategy for the survivors, and cannot be guaranteed.

It is the trustee of the fund who decides which dependants receive what amounts, if any.

Binding Death Nomination

The only way to ensure the trustee of your superannuation fund pays your superannuation benefits to your estate, or to those dependants that you choose, is if you provide a written Binding Death Nomination to the trustee. This document binds the trustee to payout the distribution in accordance with your instructions, which may be to your Estate or directly to your dependants.

A Binding Death Nomination must be made with caution, and you must consider all aspects of your Estate Plan as this nomination could actually restrict other planning opportunities, which might be relevant to your family at the time of your passing. Most Binding Death Nominations are only valid for three years. The rules regarding Binding Death Nominations are covered under the superannuation fund’s Trust Deed and should be disclosed in the Product Disclosure Statement.

Self Managed Superannuation Fund (SMSF)

If you are a member of a SMSF, you are required to be a trustee, either individually or as a director of the trustee company. You must consider who is going to be in control of the superannuation fund after your death so you need to ensure the correct executors are appointed, or by leaving the correct amount of shares in the trustee company to the right beneficiaries.

Life Insurance Policies

Owning your life insurance policy in a superannuation fund is an efficient strategy from a tax and estate planning perspective. In many instances, the surviving family members will rely on this money for income or to pay debts. If these policies are owned in superannuation, you rely on the trustees of the fund to make the right decision in distributing these funds.

Often these life insurance policies are owned under a separate fund to the superannuation fund where the member, or their employer, makes contributions. In this scenario, there would be two different trustees who make individual decisions about where to payout these benefits. In some instances, it makes sense that if there are proceeds in excess of what’s required to clear debts, these proceeds should stay in your super and the surviving spouse draws a pension.

Pensions are tax free for over 60-year-olds and the earnings in the fund are also tax free. For under 60’s, the pension is taxed at normal rates but the recipient will generally receive a 15% tax rebate. The tax saving can have a significant impact on long term returns and capital appreciation.

Testamentary Trusts

Too often you hear stories about children losing their inheritances to subsequent blended families. Or when a child divorces, their spouse receives half of the inheritance. Where a de facto relationship exists, there is sometimes the opportunity for the de facto spouse to access an inheritance.

A common way of providing some protection to your assets is via a Testamentary Trust which is established under your Will.

The concept of a Testamentary Trust is that instead of a beneficiary receiving their inheritance directly, the inheritance is owned under a trust.

Some of the advantages of a Testamentary Trust are:

The beneficiaries of the trust can be as broad or as limited as you require. The rights of beneficiaries can be tailored to your situation or requirements. For example, a spouse of a child can be eligible to receive income distributions, but no capital distributions. They can also be excluded from acting as a singular trustee of the Testamentary Trust so that upon the passing of the child, the assets can be protected for grandchildren. Any future spouses of the child and their children or step children can be excluded as beneficiaries.

Ensure your Estate Plan addresses your wishes and protects your family.

Call elliotts today on 07 3833 3999.

Or email info@elliottsgroup.com.au.