Estate Planning Step-by-Step – Rest Easy by Protecting Your Assets & Loved Ones
by Luke Bland
4 min 30 sec read
- Questions to Ask Yourself in Estate Planning
- Common Assets involved in Estate Planning
- Drafting your Will – Who is involved?
- Who is the Executor?
- Testamentary Trusts & Asset Protection
- Where Do You Start?
There are tasks in life that we never really want to undertake but know we need to. Two of these are your Will and Estate Planning, and we all know they really are some of the most important documents you will ever have drawn up.
You work hard throughout your life to buy a house, build a business and maybe even an investment portfolio. The assets that you accumulate mean something to you and the people closest to you. It should be you that decides what happens to these assets.
While most people realise they need to create a Will to distribute their belongings and organise an executor of their Will, they don’t realise how broad and complex estate planning can be. To ensure that your wishes are carried out, and to save your children, grandchildren or other intended recipients a lot of trouble and heartache, thorough estate planning is vitally important.
Questions to Ask Yourself in Estate Planning
- Assets – What do you own?
- Asset ownership – How are these assets owned? E.g. personally, in a superfund, via a family trust, joint tenants vs tenants in common.
- Asset inclusions – Which assets need to be included in your Will and which assets fall outside of your estate/Will?
- Asset beneficiaries – Who do you want to leave your assets to?
- Asset exclusions – In there anyone (such as an ex-spouse or estranged family member) that you specifically want to exclude?
- Unexpected beneficiaries – Have you considered all potential beneficiaries? Failure to do so could lead to your Will being challenged, which can be a costly and traumatic experience for the intended beneficiaries.
- Life insurance – Do you have a life insurance policy? Where or who will these proceeds be paid to?
- Executor – Who will be the executor (personal representative) of your Will? This can be an individual or multiple people jointly.
- Testamentary Trust – Do you want your assets to go directly to your beneficiaries or will you use a Testamentary Trust?
- Asset distribution – How can your assets be distributed to the intended beneficiaries in a tax effective manner?
Common Assets involved in Estate Planning
If you own your principal residence (home) with your spouse as joint tenants, the title will automatically be transferred to your spouse on your death. If you own your home as tenants in common, your share will form part of your estate, to be dealt with in your Will. If you are the sole owner of your home, it will also form part of your estate.
If your home has never been used for another purpose (as an investment property or business premises) there are no tax implications when the title (ownership) goes to your spouse as joint tenants. If ownership of your home is transferred in accordance with your Will, the new owner(s) have up to 2 years to move in and make it their primary residence, or sell the property, for it to be exempt from capital gains tax (CGT). If they hold onto the property and sell it after more than 2 years, they may be liable for CGT. Their cost base for CGT is regarded as the market value of the property on the date of your passing.
Personal Assets – Cash, term deposits, listed equities, real estate and other investments
These assets will form part of your ‘estate’. In your Will, you can dictate how much should be allocated to each person (beneficiary) and whether specific investments should go to specific beneficiaries. If specific investments are referenced in your Will, it’s important that your Will is updated when these investments are sold or new investments are acquired. It’s common for assets to be allocated on a percentage basis, or to allocate specific amounts to specific beneficiaries.
For assets that have been acquired after September 1985, beneficiaries will inherit these with your original cost base. If any assets were acquired before that date, the cost base for the beneficiary will be the market value on the date you pass away.
Another option is for the estate to sell or realise the investments and instead distribute cash to the beneficiaries. However the estate will need to pay capital gains tax on any capital gains realised, meaning the beneficiaries will receive less value when the proceeds are distributed.
Family Trust Assets – Cash, term deposits, listed equities, real estate and other investments
If you have built up an asset portfolio within a Family Trust, you need to think about what you want to happen to this trust and these assets. The underlying assets will not form part of your estate, but the trust will usually have a trustee company. Your shares in the trustee company will form part of your estate.
You can leave these shares to one or more beneficiaries in your Will. The new shareholders will generally have the combined power to appoint/remove directors. This effectively gives them control of the trustee company and therefore control over the trust’s assets.
You also need to consider who the appointor of the trust is, as they have the power to remove the trustee and appoint a new trustee i.e. ultimate control of the trust. Your trust deed will contain provisions on how to change an appointor.
The trust may continue to operate, and the income and assets of the trust will be able to be distributed to the beneficiaries of the trust, in accordance with the trust deed. There generally won’t be any tax implications upon the shareholders of a trustee company changing.
If you own shares in a Private Company, whether it is carrying on a business, an investment company, or a dormant company, your shares will form part of your estate. Your Will should determine what you want to happen to these shares. The shares may represent a controlling interest in the company, allowing the new shareholder(s) to ultimately control to operations of the company.
The CGT implications and cost base provisions when transferring shares to beneficiaries in accordance with a Will are the same as if transferring listed shares (see Personal Assets above). However in some circumstances small business CGT concessions may be available to reduce the taxable capital gain to nil when the beneficiary or legal personal representative sells the shares. This can happen when the deceased would have been able to access the small business CGT concessions just prior to their death, and the shares are sold within 2 years of the date of their passing. These concessions also apply to other small business assets, not just shares.
If you hold a life insurance policy, the proceeds will be paid out to the nominated beneficiary. This may be an individual, or your estate. If it’s paid to your estate, it should be considered in your Will. If it’s paid to an individual directly, you should consider the life insurance payment that this beneficiary will receive when you are deciding where to allocate your other assets.
Any superannuation interests you hold will be dealt with outside of your Will. The treatment of your superannuation upon your death will be determined by a combination of your superfund’s trust deed, any reversionary pension nominations you have made, and any binding or non-binding death benefit nominations you have made.
The rules regarding payment of superannuation death benefits are complex, but the key points are:
- Any superannuation interests in pension phase can revert to another member of the fund (e.g. your spouse), thus remaining in the superannuation system. This is known as a reversionary pension. The recipient must be aware of their transfer balance cap, and may have to roll back some of their existing pension account to their accumulation account.
- Superannuation interests in accumulation phase will be paid in accordance with a valid binding death benefit nomination (BDBN) if one exists. A BDBN can instruct the trustee to pay the amount to a specific beneficiary, or to your legal personal representative, where it will form part of your estate and be dealt with by your Will.
- If no valid reversionary pension nomination or BDBN is in place, it is up to the trustee to determine to whom your superannuation death benefit is paid. In a self-managed superannuation fund (SMSF), the trustees (or trustee directors) will usually be the remaining member(s), or your executor if there is no remaining member. In complex family situations, such as your spouse having children from a previous relationship, your spouse could potentially transfer your super to those children, leaving your own children or relatives with nothing.
- If paid out as a superannuation death benefit, to an individual directly or via your estate, in accordance with a BDBN or otherwise, there can be income tax implications. If paid to a death benefit dependent, the amount is tax free. There are a number of criteria that must be met for someone to be considered a death benefit dependent. Spouses and children under 18 will usually meet these criteria. Adult children often will not meet the relevant criteria, and could lose up to 17% of their payment in tax. In some circumstances, such as the diagnosis of a terminal medical condition, it may be worth considering withdrawing some or all of your superannuation as a lump sum payment, and gifting this to your adult children. This will fall outside of the superannuation death benefit rules.
Drafting your Will – Who is involved?
Any assets that pass to your estate on death will be distributed in accordance with your Will. It is therefore very important that your Will is drafted in a way that is clear and follows your wishes.
It’s wise to engage a lawyer that specialises in Estate Planning to draft your Will. You may want your accountant or business adviser to be present at any meetings with your estate planning lawyer, to ensure your lawyer understands your business and asset holding structures, and can provide for these appropriately within your Will.
Remember that a Will can be challenged. You need to consider anyone that could make a claim on your estate, such as someone who you have provided financial assistance to, or had a close personal relationship with in the past. If you don’t want to leave anything to a person that may expect something, or for your proposed distribution of assets to be viewed as ‘unfair’, you will need to document and justify why you want your assets to be allocated that way.
Who is the Executor?
Your executor will be responsible for administering your Will and distributing your assets in accordance with your Will. Your executor is also responsible for paying any tax liabilities from your estate. They generally have the power to appoint a new director to any companies where you held the sole directorship.
Given the importance of their role and the power they hold, your executor should be a trusted person, such as a relative, adviser or lawyer. You can also nominate a number of people to act jointly as executors.
Testamentary Trusts & Asset Protection
You can choose to set up one or more testamentary trusts in your Will. This means that instead of assets passing directly to a beneficiary, the assets are passed to the testamentary trust and controlled by the chosen trustee – usually a family member, accountant, adviser, solicitor or a combination – on behalf of the beneficiaries of the testamentary trust.
A testamentary trust allows a beneficiary to receive the income and benefits of an asset or group of assets, without having control of these assets. This is particularly useful in situations where you have an adult child that may not be financially savvy, or may be going through bankruptcy or a relationship breakdown, where introducing additional assets may leave these assets exposed to creditors or a recent ex-spouse.
You can also dictate who the beneficiaries are of a testamentary trust. For example, you may specify that all income is to be distributed to your grandchildren rather than your children.
As well as asset protection, testamentary trusts can provide tax advantages. The trustee will usually have discretion to distribute the income of the trust to various beneficiaries. This enables the trustee to take advantage of lower marginal rates of tax of one or more potential beneficiaries. It should also be noted that, unlike a standard discretionary or family trust, income from a testamentary trust that is distributed to minors is taxed at adult rates, including the full tax free threshold.
Where Do You Start?
Estate planning is complex and your needs are ultimately determined by your assets, your family situation, and your interests in any trusts, companies and super funds. In addition to the general rules outlined above, your trust deeds and company constitutions may contain special rules.
To get your estate planning organised, the important next step is sitting down with your lawyer and adviser to map out your assets and your structures, how you picture everything being allocated and who you want to have control over various areas.
If you don’t have a trusted lawyer or adviser, please speak to our team of business advisers who can take you through the process and put you in touch with an estate planning lawyer. We would accompany you to meetings with your lawyer to put in place the required documentation that ensures your assets are distributed according to your wishes with minimal risk of disputes.
While thinking about our death or what happens after is never pleasant, it’s worth planning for so the people you care about are safeguarded. Therefore if you have significant assets and don’t have an estate plan in place, we recommend organising one as soon as you can.
Wishing you every success!