Estate planning

Estate Planning is far more than "making a will...."

Planning your Estate is making sure that when you die, the "right" funds and assets go into the "right" hands, at the "right" time. To do this, you need to look at a range of issues, including:

Assets - what you own.

Liabilities- what you owe.

Additional Expenses- executors fees, funeral costs, legal fees

Family - your dependents' needs, present and future, the age and status of children and special circumstances such as a second marriage, de facto relationships, dependent parents and other individual situations.

Tax - the availability of legitimate methods such as a Testamentary Trust to minimise tax and maximise the income your family can receive from your estate.

Timing - the issue of whether it would be beneficial to pass some assets over to others during your lifetime.

Why have a Will? 

The need for a current valid Will is essential if you are concerned with ensuring that when you die, your assets will be distributed as you wish. 

Should you die without a valid Will (intestate), an administrator, who will usually be one of the next of kin e.g. spouse or child, will distribute your estate in accordance with a system of entitlements set out in State Law to your next of kin. 

By completing your will, you not only retain control of your estate, but, also appoint your own executor. 

The Executor ?

Your choice of executor is appointed in your Will. Choosing your executor is not a decision that should be taken lightly. Often the choice is made on the basis of the appointment being a compliment to the person appointed. Depending on the nature of the estate, the duties involved can be quite onerous.

Your executor must deal with a range of government departments. He or she is the trustee of your estate and as such, can be held personally liable for his or her actions (or inaction), even if innocently made. You must ask yourself whether the person you have in mind will be capable of carrying out the duties required, whether they will have the time needed, and the sound judgement you would hope for.

A relative or friend - If you decide to appoint a relative or friend, be sure to gain their consent beforehand. Make sure they have the power to engage a professional such as a solicitor or trustee company should they wish.

Remember, there is no guarantee that your relative or friend will be alive or available when the need arises. People who have been appointed can renounce the role of executor. Often this is done for personal reasons. You should consider appointing at least one alternative executor to cover this position.

Appoint a Professional - You may choose to appoint a solicitor or a trustee company. Quite often the appointment of a professional executor can avoid friction within the family as they are seen as independent.

The obvious advantage of a professional is that they know what they are doing. The fees charges should be measured against the efficient administration of your affairs that they can provide.

Appoint a relative or friend with a professional as a co executor - This option may suit your needs if you do not feel comfortable with either of the first two. The two parties must work together.

Enduring Power of Attorney - Your wish to appoint the person who will look after your affairs should you be incapacitated.

By granting a Power of Attorney you are able to give another person the power to look after your affairs. There are two broad types of powers of attorney i.e. limited and general.

A limited power of attorney is one that gives only specific or limited powers. In other words, it has a specific purpose.

A general power of attorney gives the person to whom it is granted the power to carry out the legal functions the giver was entitled to carry out. They are said to "stand in the shoes" of the other.

A general power of attorney can be either enduring or non enduring. The distinction between the two is extremely important but is often not known or understood.

An enduring power of attorney can continue after the giver has lost control of his or her mental faculties. This can happen as a result of illness, accident or old age. Conversely, a non enduring power of attorney ceases to be effective in these circumstances.

The absence of an effective enduring power of attorney can mean that at the time at which it is most required, it is often too late for it to be granted. Rather than control passing to someone of your choice, it will go to a State Government official.

How is an Enduring Power of Attorney executed?

Once having executed the document it should be stored in a safe place known to your appointed attorney.

Careful consideration will need to be given as to who to appoint as your attorney. You should ask for their consent. The same considerations apply as to the decision on who to appoint as executor of your will.

What if one wishes to look after the affairs of another should he or she be incapacitated?

If you have been granted an Enduring Power of Attorney by another person, you will be able to look after that other person's affairs in the event that he or she becomes incapacitated.

Receiving an Enduring Power of Attorney over your spouse or aged parent can often be just as important as ensuring that you have granted one yourself.

Why a Testamentary Trust? 

The principle advantages of incorporating testamentary trusts (being discretionary trusts in wills) are:

1. Flexibility & Control
2. Taxation Benefits
3. Protection
4. Financial Management

Flexibility & Control - Testamentary trusts generally provide complete flexibility both as to the nature of the investments of the trust and as to the distribution of income and assets of the trust. Trusts can validly be created for up to eighty years and, accordingly, can benefit two or three generations. Alternatively, the trusts can be dissolved at any time and distributions made to the desired beneficiaries.

Taxation Benefits - Income splitting between remaining spouse and children provides the possibility of providing significant tax advantages.

Ordinarily, trusts established by a person for the benefit of children, grandchildren, or any other persons under the age of 18, are subject to penalty rates of tax. In short, where an amount of trust income is distributed to a minor beneficiary, under current tax law that minor beneficiary receives a tax free threshold of only $416.00. In addition any amount received in excess of $416.00 is taxed at a flat rate of 66%, up to $1525.00 and 48.4% thereafter.

Under current tax law, these penalty provisions specifically do not apply to trusts established under a persons Will (a "testamentary trust"). As a result, each resident individual who is a beneficiary of a testamentary trust will receive the benefit of the full tax free threshold ($6,000) and the ordinary marginal rates of tax.

The financial benefits of a testamentary trust can be enjoyed in a variety of circumstances. The testamentary trust is obviously appropriate in circumstances where a deceased person has children under the age of eighteen (18). However, it is equally appropriate where the person has grandchildren, nephews, nieces, cousins or long term friends, whom they wish to benefit and who are under the age of eighteen (18). Alternatively, the testamentary trust may also be used where a relative wishes to benefit a cousin or other relative and that person has children under the age of 18.

To demonstrate the wide use to which testamentary trusts can be put, it will be apparent that the concept can be extremely beneficial in the case of grandparents wishing to establish "education trusts" for grandchildren.

Capital Gains Tax - Capital gains can be "streamed" to one or more beneficiaries who are able to take better advantage of the five year averaging rule. Accordingly, the tax on capital gains ultimately payable on realised assets can be considerably reduced where one or more of the designated beneficiaries has a low income in the year of distribution.

Protection - Beneficiary protection from unforeseen creditors. If a beneficiary is experiencing solvency difficulties or is already bankrupt at the time of a distribution under a normal will, it is possible that the distribution may end up in the hands of creditors rather than being employed for the intended benefit of the beneficiary. This need not be the cause where a testamentary trust is used, as the beneficiary has no actual entitlement to a distribution until the trustee so determines. Accordingly, assets can be retained within the family free of adverse creditor claims.

Financial Management 

Incapacity - In the event that a beneficiary is temporarily incapacitated, testamentary trusts will enable the assets to be managed by the family for the benefit of the beneficiaries rather than having a portion of the estate controlled by an external agency. Also this specifically applies for a mentally disturbed relative. 

Social Security Planning - The use of testamentary trusts may allow for a optimum allocation of income and capital should considerations be relevant. The existence of a testamentary trust may allow pension benefits to be retained where they otherwise would be lost. Generally assets in a testamentary trust are not included in means tests. The benefits extend to beneficiaries who not only qualify for the age pension but also disability, sole parent and similar pension and Austudy.

Any other Issues?

Superannuation & Insurance Proceeds -Where testamentary trusts are used, the individual or his estate is preferably nominated as the beneficiary of superannuation or insurance proceeds. In this way flexibility can be retained as to the level of distribution to respective dependents, depending on the circumstances prevailing at the relevant time thus maximising the preferential tax status of the proceeds.

Business, Asset & Estate Planning - A will incorporating a testamentary trust generally will only form part of a total asset and estate plan. Family trusts, company interests, superannuation arrangements, buy/sell arrangements and prospective inheritances should all be considered in asset and estate planning.

Naturally, the ordinary trust law principles apply to testamentary trusts -The trustee of the testamentary trust can be any person chosen by the person making their Will. The trustee themselves may or may not be a beneficiary of the testamentary trust depending on the wishes of the persons making the Will. The powers of the trustee of the testamentary trust can be as broad or as narrow as the person making their Will wishes.

In summary, Estate Planning is far more than "making a will...." the establishment of a testamentary trust in a person's Will can be seen to have the following advantages:
flexibility and control the possibility of providing significant tax advantages due to tax effective income splitting arrangements between remaining spouse and children, cost effective savings as no stamp duty payable in setting up the trust.

Protection from unforeseen creditor claims against beneficiaries.
protection and financial management for beneficiaries with an incapacity. The ability to maximise the potential to qualify for social security.