Estate planning involves much more than having an up to date will. It is important to ensure that your assets are distributed in the most effective manner and without adverse tax consequences for your beneficiaries.
What is estate planning?
Estate planning involves considering what will happen to your assets upon your death or that of your partner. You may want to consider how to structure your estate to ensure it is distributed according to your wishes. You may also want to ensure your family’s interests are protected and tax is minimised.
As part of your estate plan, you will need to consider factors such as whether your will is up to date, if you have adequate life insurance, the tax consequences of how your assets are distributed, implementing a binding death benefit nomination for your superannuation and whether an enduring power of attorney is appropriate for you. If you own a business, you may also need to consider implementing appropriate business succession plans.
What is a will?
A will is a legal document that sets out who is to receive your assets after you die. A will may also appoint a guardian for any children you have who are under 18 years of age and State your wishes regarding your funeral and burial.
Your solicitor can help you draft a legal will. This may involve working with your financial adviser to ensure the appropriate financial structures are included.
Why make a will?
If you die without a will (also known as ‘dying intestate’), your assets will be distributed according to the laws of the State or territory in which you lived at the time of your death. This may not be the way you would have wanted your assets distributed.
Also, if you have children under 18 who are left without a parent and you don’t have a valid will appointing a guardian for them, a guardian will be appointed under the laws of the State or territory in which they live. This may not be the person you would have chosen to bring up your children. These reasons make it incredibly important to have a valid will.
A testamentary trust is a trust established by someone’s will. It comes into existence only when that person dies. Including a testamentary trust in your will can be useful for making tax effective distributions to beneficiaries under 18, caring for children or a dependant who is incapacitated, and preventing beneficiaries from inappropriately spending their inheritance.
Power of Attorney
If you are worried that you will be unable to manage your own affairs, you might consider implementing a Power of Attorney (PoA). Granting someone a PoA means they can legally act on your behalf.
There are four types of PoAs:
- Specific: Enables the person to act on your behalf for a specified purpose.
- Limited: Enables the person to carry out a particular transaction on your behalf.
- General: Enables the person to carry out any business for you or deal with your affairs and assets.
- Enduring: While specific, limited and general PoAs cover you while you are alive and of sound mind, an enduring PoA will cover you up until your death, even if you become physically or mentally impaired and are unable to manage your affairs. This person will be able to take care of your investments and other financial matters.
On death, any PoA issued becomes invalid and your will and executor take over the management of your affairs.
Another way of planning for your future is to appoint an enduring guardian. If you lose the capacity to make your own decisions, an enduring guardian can make personal decisions on your behalf, such as where you should live and what medical treatment and services you should receive.
Tax effective estate planning
The disposal of assets in accordance with your will may have tax consequences, including CGT, that you should consider when drafting your will and creating your estate plan. There are many strategies you can use to help make your estate plan as tax effective as possible for your dependants and beneficiaries. For example:
- The proceeds of an insurance policy paid from a superannuation fund are tax free if paid to dependants.
- Distributing an asset (rather than the proceeds of the sale of that asset) to a beneficiary can defer any CGT liability.
- Using discretionary trusts can help minimise the tax a beneficiary pays on receipt of an inheritance.
- Using testamentary trusts can be an effective way to provide an inheritance to young children.
Wealthwise can help you investigate which strategies may be appropriate for your personal situation.