Estate planning is the process of managing the disposal and distribution of your assets after you die whilst minimizing tax in the process. Estate planning is also about looking after your assets and having a decision process in place if you are unable to make decisions for your self, such as if you were incapacitated. Effective estate planning will also establish provisions for minors and any other people who may be dependent on you.
Identifying Beneficiaries in Estate Planning
An effective estate planning process will identify all potential beneficiaries (this can be done most effectively by providing a family tree detailing your direct relationships, ensuring no one is left out). From there you will be able to identify who in your family will be beneficiaries and, in some cases, why other people within your family will not be. When estate planning, you will also need to identify anyone outside of your family who may be a potential beneficiary, including organizations such as charities or schools.
Dependent considerations in Estate Planning
In your estate plan, you will then need to identify and list specific assets that may be gifted and to whom. You will need to clearly articulate what you want to happen to your estate, taking into consideration the following:
- Who is currently dependent on you and how will you look after them when you are gone?
- Do you have elderly dependent parents? Are you expecting someone else to take up the responsibility, or will you provide for them directly?
- Do any of the beneficiaries of your estate have:
- Marital issues – do you need to protect assets from their partner?
- Intellectual disabilities – how are you going to care for them?
- Spendrift children – would you like to have a 3rd party included in the decision making process?
Assets that may not form part of your estate
When estate planning, you need to be aware of assets that you cannot dispose of in your will. If you own a house or any asset as joint tenants, the asset will simply pass to the remaining joint tenant. Your superannuation also may not form part of the assets of your estate. When estate planning, we can provide some very beneficial strategies, that can be employed, however, if they are not handled correctly, can cause the tax man to smile from ear to ear .
Tax considerations in estate planning
Not only is estate planning about deciding who gets what assets, but is also about ensuring your plans are not derailed from the tax man. Tax planning is an essential consideration in estate planning. Did you know that dependents are dealt with differently then non-dependents when receiving your assets by the tax man? In general, the terms of dependents are treated far more favorably then non-dependents. There is not one specific definition of a dependent and so it is sometimes unclear who is a dependent or not. And to make matters more complicated, the Superannuation legislation has a separate definition of a dependent.
Estate Planning Tools
There are a number of estate planning tools that you may use to effectively distribute your assets in the most tax effective manner. Below is a brief description of some of the main tools that may be used in estate planning.
A will is a legal declaration by a person, known as the testator, naming one or more persons to manage his/her estate and provides for the transfer of his/her property at death.
A testamentary trust is a trust created upon death through a will. A testamentary trust may handle some, or all, of the assets of your estate. There may also be several testamentary trust created to handle different assets or to cater for different beneficiaries. Testamentary trust are usually created to tax effectively manage the distribution of your assets by providing greater flexibility.
Enduring Power of Attorney
An effective estate planning tool to ensure that financial decisions can be made on your behalf by a trusted person, or people, that you appoint. The benefit of an enduring power of attorney is that it will continue to operate even if the you lose full capacity.
As superannuation is not automatically included in your estate assets it provides some powerful opportunities. The use of binding nominations and child pensions may provide significant opportunities in controlling the distribution of super and tax minimization that are not possible through your will or a testamentary trust.
Effective estate planning is not only about who gets what assets, but ensuring your wishes are not likely to be challenged and ensuring the complex issues of tax minimization are handled correctly. The best place to start is by speaking to an adviser who is adept at estate planning solutions, who can develop a sound understanding of your goals and work with you to create a tax effective estate plan. A specialist estate planning solicitor would then be brought in to draft a legally binding agreement ensuring your wishes are carried out as they were meant to be.
Henry’s will made the tax man rich
Henry had always wanted to live on the beach in retirement. Henry had purchased a beach front block of land on the southern strip of the Gold Coast. Unfortunately, Henry died before he realized his dream.
As a dutiful husband, Henry’s will left everything to his much-loved wife Sarah.
However, Sarah did not share Henry’s dream of living on the water and decided to remain in their family home of 30 years. Sarah, already having her only child living on the Gold Coast, decided to give the land to her daughter to build her own dream home.
The gift of the beachfront land made the daughter extremely excited but was shocked when she received a bill of $38,175 for stamp duty as her land was now valued at $1,000,000.
Matters became even worse when Sarah received a tax bill of $24,949 for capital gains tax on the $200,000 increase in the land value, since Henry had purchased the property.
The Value of Estate Planning Advice
Henry and Sarah could have protected the family and not paid any of these fees and taxes by seeking Estate Planning advice from their adviser, accountant and estate planning solicitor. The cost of a quality estate plan would have been well below the cost of not implementing one of their best investments.
Assumptions: Capital gains tax of $200,000 discounted to $100,000. Sarah had not received any additional income during that tax year so her total income was the $100,000 gain for the 2010/11 tax year. Based on a Marginal tax rate of 37% not including Medicare levy. The results do not take into account any other potential tax rebates or deductions that may be payable.