3 Critical Estate Planning Steps Every Person Should Take

What is estate planning?

Estate planning isn’t the most exciting of tasks – but it is essential. Developing a strategy on how to best manage or distribute your assets in the event of death or the loss of capacity can be daunting but it’s a necessary evil.

Estate planning is a three-part process involving:

1st          Identification of your personal assets and the assets in your broader estate such as assets held in a superannuation fund, owned jointly, owned by trusts or companies, and life insurance

2nd          Identification of potential risks you wish to address, including for example loss of mental capacity or early death, or the possible divorce or bankruptcy of a beneficiary

3rd           The design and implementation of a plan and structures that incorporate all your assets and takes into account; flexibility to accommodate future changes, family concerns, risk minimisation, tax minimisation and succession issues.

The process is a multi-disciplinary exercise that will usually require the co-ordinated involvement of you, your financial planning, accounting and legal advisers.

Although a Will is a good start, estate planning involves much more. A Will only covers estate assets owned in your personal name such as property, shares, bank accounts and personal valuables. It does not include non-estate assets such as superannuation (if a beneficiary nomination is not made to the estate) assets in an inter vivos trust or insurance policies. A Will is an essential part of a solid estate plan – Morrows outlines why and other fundamentals you should consider including:


The fundamentals of estate planning

A good estate plan is one that covers all types of assets, covers you for unforeseen circumstances in the future and protects your beneficiaries from paying excessive tax. It typically includes the following considerations:

  1. A Will
    Writing a Will needs serious planning and thinking beyond the obvious. Contrary to popular belief, a will doesn’t just deal with money in the bank, property or other tangible assets. A will may include the appointment of a guardian of minor children, the gifting of items of significance such as family heirlooms or jewellery and testamentary trusts. A testamentary trust is a discretionary or fixed trust that passes on control of an asset to a nominated individual but not direct ownership of the asset itself, which in turn can help to protect beneficiaries in the future in the event of unforeseen circumstances such as bankruptcy or Family Law hearings. A testamentary trust can also provide effective taxation benefits for your beneficiaries on the inheritance they receive.
  2. Superannuation
    It is estimated Australians hold approximately $2.2 trillion in superannuation.  However many do not consider what happens to their superannuation benefits (which often includes a life insurance component) upon their passing and even fewer understand the difference between binding and non-binding, lapsing and non-lapsing nominations.  In the absence of a beneficiary nomination, the trustee of the super fund will generally distribute the fund in accordance with the governing rules of the fund and the Superannuation Industry (Supervision) Act (1993).  Importantly your Will does not automatically control the flow of these funds You can override the discretion of the trustee through a binding death nomination, however care must be taken to ensure that your beneficiary is legally entitled to receive your superannuation benefits.  It is critical to consider appropriate beneficiary nominations for your superannuation and life insurance policies in the context of your estate plan and to update these in the event of changing circumstances such as divorce or death of a beneficiary.
  3. Enduring Powers of attorney
    An Enduring power of attorney is a document in which individuals are nominated by you to make decisions on your behalf if you are unable to do so, in the event of absence, illness or injury. You can nominate an attorney for your financial and legal, medical and lifestyle (health and welfare) decisions.  Each state has its own legislation regarding Enduring Powers of Attorney so it is important to ensure you have the correct documents in place.  It is also important to consider who your alternate attorney will be, in case the first one is unable or unwilling to act on your behalf. You can also include separate powers of attorney to address different matters. For instance, your spouse may be your medical power of attorney, but you may nominate your business partner to make decisions on behalf of your company.
  4. Critical events
    It is vital that your estate plan has consideration of a range of critical events, apart from death. These include:

    • mental incapacity: yours and each of your future beneficiary’s;
    • physical incapacity: yours and each of your future beneficiary’s;
    • bankruptcy or business failure: yours and each of your future beneficiary’s;
    • divorce: you and each of your future beneficiary’s;
    • your retirement;
    • re-marriage: you or your spouse after the first passes away; and
    • the potential for disputes between beneficiaries over the Will.
  5. Business succession planning
    It is vital to ensure that there is a co-ordination of your company, trust and self managed superannuation fund structures.  If you run a business, due consideration must be given to the future realisation of your investment in the business.  Do you have an exit strategy?  If you have a business partner, how will you continue to run your business should your business partner die or lose mental capacity?  An appropriate shareholders agreement, a buy/sell agreement coupled with appropriate insurance levels are some strategies that should be considered.
  6. Insurance
    The use and integration of insurance as an asset in your plan, whether as part of a business succession strategy to cover debt or income, or simply to bolster the wealth of your future estate for your family.
  7. Letter of wishes
    While a letter of intent is not a legally binding document, it can act as a supplement to your will, detailing not just how you want your financial assets to be managed but your personal belongings or wishes to be met. For instance, it may include how you want the assets in your family trust to be managed, your funeral to be carried out or personal messages to loved ones.
  8. Digital assets
    In today’s digital age with everyone and their pet on some form of social media platform or for those who may hold works or material of substantial value (books, photos, emails) on an electronic device, it is important to consider what happens to these upon your death. The laws in Australia have not caught up with the digital age in this regard and each provider such as Facebook, Apple Music or Google have their own terms and conditions which apply. We recommend that you specifically give someone the power to access and manage your digital assets. In a separate secure document you may wish to also list your passwords and instructions so that your wishes can be carried out.A good estate plan is one that has been developed holistically, taking into consideration estate and non-estate assets, tax benefits and wealth accumulation. At Morrows, our Legal, Tax and Private Wealth teams use a collaborative approach to develop estate plans that meet the diverse and specific needs of every client. To find out more about our estate planning services, please visit www.morrow.com.au or contact us on 03 9690 5700.


A discretionary trust, or a simple Will?

Which one should you consider to protect your assets and minimise tax burden?

After a long courtship and an extravagant wedding, William and Kate were ready to settle down and start a family. They now have three minor children, George, Charlotte and Louis and like most young parents are considering the best way to structure their Wills. Kate, who has a relatively modest asset base but will eventually inherit her parent’s party planning business, wants to leave her estate to her husband William. William comes from a wealthy family and doesn’t need to work but currently has a job in the Air Force to keep him busy. As a result of the income he earns, William currently pays the top marginal tax rate (not including Medicare levy) of 45%. William and Kate’s children each attend private schools and don’t earn any income. Assume that on her death Kate’s estate, if invested, would generate an income of $60,000 per year.

If Kate left her estate to William outright in a simple Will (ie not in a testamentary discretionary trust) and he received the $60,000 income per year then William’s after-tax position would be:

Income $60,000
Tax (not inclusive of medicare levy)* $27,000
Net Income after tax $33,000

If instead Kate leaves her estate to a testamentary discretionary trust with William as the trustee and the trust income is distributed equally between George, Charlotte and Louis, the after-tax position would be:

George Charlotte Louis Combined
Income $20,000 $20,000 $20,000 $60,000
Net Income after tax $20,000 $20,000 $20,000 $60,000

*based on 2019/2020 tax rates
**Note that the tax savings that can be achieved by using a testamentary discretionary trust will depend on the individual circumstances of the Willmaker and their family members. In particular, it will depend on the tax position of their beneficiaries (in particular adult beneficiaries), how many children under 18 those beneficiaries have and the tax position of those children. Recent changes also make it clear that the tax beneficial treatment of minors in a testamentary trust only applies to assets (or income generated from those assets) in the trust which were left by the deceased and not assets added to the trust after it was established.

Tax saving per year: $27,000
Summary of benefit

The testamentary discretionary trust saves $27,000 tax per annum, leaving more funds available for William to spend on George, Charlotte and Louis’ education and welfare. The savings each year will increase as a testamentary discretionary trust can run for 80 years after Kate’s death.

Apart from the tax benefits, a well drafted testamentary discretionary trust can also provide asset protection benefits for beneficiaries including protection from creditors in bankruptcy, and some protection in family law disputes.

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