Estate Planning is the art of arranging your assets and affairs so that during your lifetime you (and your beneficiaries after your death) can enjoy maximum use and benefit of those assets at a minimum cost in tax and duties. As a result, estate planning principles need to be borne in mind throughout the life cycle of wealth creation, estate maintenance and preservation and estate transmission.

the wealth creation stage

The choice of the right type of entity or vehicle for the acquisition of a business or other asset is a crucial first step in the estate planning process. The choice of an appropriate entity will involve not only tax and asset protection considerations but also set up costs, continuing administrative costs, the ability to transfer interests and the capacity to introduce new participants.

The types of business structure available include sole trader, partnership, joint venture, discretionary trusts, unit trusts, company or a combination of the above. Each of these structures has advantages and disadvantages, depending on your own requirements and objectives.

Superannuation is also a valuable estate planning tool during the wealth creation stage because it provides a protected environment for the creation of wealth with the added advantage of concessional tax treatment.

These advantages have resulted in a substantial growth in the number of self-managed superannuation funds (SMSF) to about 300,000 in Australia today. In the event of bankruptcy, assets held in a regulated superannuation fund are protected from creditors and the trustee in bankruptcy.

wealth maintenance and preservation

There are a number of simple strategies which can provide protection of hard earned assets from creditors in bankruptcy.
Traditionally, companies have provided a vehicle under which you could venture capital into an enterprise, but limit your liability to your investment in that company, without exposing your personal assets, such as your home, to risk. However, this protection has somewhat eroded in recent times because of the exposure of directors of a company to liability under personal guarantees (provided in favour of the company’s bank, landlord and major suppliers) and also liability arising out of the statutory obligations of directors (for example, liability for insolvent trading).

Discretionary family trust remains a very effective estate planning vehicle for both taxation and asset protection reasons. Discretionary family trusts allow distribution of income from a business or asset owned by the trust amongst family members and sometimes other entities, in a flexible and tax effective way. At the same time, as a general rule, the beneficiaries of a discretionary family trust are not personally liable for the debts of the trust.
In contrast, the income of unit trusts must be distributed strictly according to the unit holdings and the unit holders (beneficiaries) themselves can be held liable for the debts of the unit trust.

enduring powers of attorney

Every adult should make an Enduring Power of Attorney (EPA). Under an EPA, you can appoint someone to look after your financial affairs and also your health and personal decisions in the event that you lose your mental capacity. If you do not have an EPA in place, the Public Trustee may be required to assume control of your financial and property affairs and the adult guardian may step in to make decisions in relation to your health and personal matters.

If you own property or operate a business, failure to have an EPA in place can have catastrophic results. If you lose mental capacity, for a period of time there may be no one able to make decisions for your business or to sign cheques and other necessary documents.
It is essential to select the right person to be your attorney. An attorney for financial matters is given extremely wide powers in relation to your money, business and your property. As a result, most people appoint close relatives who they trust to be their attorneys.
The EPA for health and personal matters is equally important and also involves wide powers including the power to make decisions about the withdrawal or withholding of life sustaining medical treatment.

estate transmission

The primary objective in making a Will is to ensure that your hard earned assets pass to the right people with the least possible cost and taxation consequences.
It is important to remember that there are some assets that you cannot leave in your Will. For example, if you own your house as joint tenants with your spouse or hold joint bank accounts, these assets will automatically pass to the surviving joint owner regardless of what you put in your Will.

For taxation and asset protection reasons, it is common these days for people to hold assets in other structures such as companies, family trusts and superannuation. The assets held in these entities cannot be left in your Will. It is therefore crucial to ensure that control of the entity which owns the assets is passed to the people you want to inherit those assets. For example, in the case of a discretionary family trust which owns an investment property, you must ensure that the person who you want to inherit that investment property becomes a trustee of the trust and the principal (or appointor) of the trust. But that is not the end of the matter. Often, the balance sheet of a discretionary family trust will contain a beneficiary loan account in favour of another family member and unless that loan account is dealt with properly, that other family member can enforce repayment of the loan account.

Superannuation is a very useful estate planning tool for taxation and asset protection reasons, but can create uncertainties when the member of the superannuation fund dies. On the death of a member, the member’s death benefits (which includes their own contributions, employer contributions and sometimes life insurance policies) are held within the superannuation fund on terms whereby the superannuation trustees can decide who amongst the spouse, dependants, nominated beneficiaries or personal representatives of the deceased member, is entitled to receive the death benefits. You can during your lifetime nominate a beneficiary who you want to receive the death benefits when you die, but under most superannuation fund trust deeds, this is not binding. As a result, there is uncertainty as to who will receive the death benefits.

This uncertainty can be eliminated where the superannuation fund’s trust deed has been amended to allow for binding nominations.

conclusion

If you are confused, you are not alone. Estate planning is a minefield of complex issues with conflicting and sometimes unintended consequences, and every step in the process needs to be carefully considered in consultation with your solicitor, accountant and financial planner.
This article was contributed by David Whitehill of Clewett Corser & Drummond, Lawyers. David is recognised for his expertise in the areas of estate planning, asset protection, business structuring and is regarded in the SME community as being commercially focused and solutions orientated.