Wealth Intelligence

No One Plans to Die. But You Should Plan For It.

Ensure your assets go to whom you want.  And not to the ATO!

The saying goes: "the only certainties in life are death and taxes"! In our advising experience, an ‘almost’ certainty is that most people avoid talking about death.  While they don’t mind talking about taxes, especially reducing them.

Yet this reluctance to discuss our eventual demise can lead to messy and costly estate outcomes, which can also lead to protracted legal disputes.

In this article, we highlight some common 'traps’ (or errors) we see and then highlight some 'tips' or good practices to consider. And lastly, we will cover a successful estate planning outcome that came to the surface after a conversation with one of our Strategists.

Traps and errors

1. Thinking your superannuation fund member balance is part of your will

Your superannuation assets are not part of your estate.  They reside in a separate entity to you and that entity is legally controlled by trustees. Those trustees have the power to decide who gets ‘your’ member benefit. To direct the trustees, you must complete a death benefit nomination, preferably a binding nomination. And if that nomination is non-binding, the trustee will have the discretion as to who receives the death benefit (subject to superannuation law).

2. Jointly held assets are not part of your will

Simply, assets you own jointly (e.g. in a joint bank account) will automatically go to the other joint owner unless the asset is held as ‘tenants in common’.

3. Assuming trust or company assets are part of your will

Assets held within family discretionary trusts and companies are not part of your estate (and so do not form part of your will). So, it is important to determine who controls these entities upon your passing. For a company, you may deal with the ownership of its shares via your will. While in a trust, there are defined roles that determine ultimate control of the trust, which can be amended in accordance with the rules of the trust (its deed).

Yet, it should also be noted, a loan provided personally to a family trust or to a company is an asset of your estate.

4. Not taking tax into consideration especially when directing particular assets to a particular beneficiary

Firstly, some good news! Unlike some countries, we don’t have an estate tax. However, we do have tax consequences that need to be considered and taken into account in your estate planning.

Tax consequences when beneficiaries eventually dispose of inherited assets may depend on the nature of the asset and when it was purchased. For example, if you were to bequeath a property to one beneficiary that was purchased prior to September 1985 (when the Capital Gains Tax rules were established) the cost base of the asset will be its value at the date of death (so that only future gains will be taxed). While another asset of same value purchased after September 1985 will transfer to the beneficiary the original cost base with higher embedded tax costs. (Special rules apply to the bequeathing of your home).

5. Not considering the use of a testamentary trust

Instructions to form a testamentary trust can be included in your will to be activated upon your death. Testamentary trusts can be useful as a means to protect your beneficiaries and they can also provide tax benefits when income (of the assets held within a testamentary trust) is distributed to beneficiaries (e.g. under concessional tax rules for those under age 18).

If the estate is large enough, then the will should consider providing for the ability to have multiple testamentary trusts.

Six tips

1.  Think carefully about the beneficiaries – their financial abilities, their risks (personal and professional) and need for capital or income.

2.  Use an estate planning legal professional in collaboration with your Strategist, to get the right documents prepared.

3.  Consider a Letter of Wishes – a non-binding document that helps to explain your will and some of your thinking behind the decisions you have made. It may also direct how some personal items should be distributed.

4.  Consider a meeting with your beneficiaries to explain your will. This can be a difficult conversation for some – your Strategist can suggest an approach.

5.  Establish a safe place that contains a file of your important documents, including details of bank accounts and web-based accounts.  And tell your executors where it is!

6.  Update your will regularly (at least every 5 years or upon the occurrence of significant events).

A case study of success

A client was named in the will along with his three siblings as beneficiaries. Each would receive an equal share of a sizeable estate that included shares and property.

Our client sought our advice on how to invest the proceeds. However, we noted that he intended to purchase his siblings’ share of one of the properties in the estate. The parties initially considered that each property should be sold at auction to maximise value and avoid disagreement.

We guided our clients through a range of matters that were not immediately apparent:

  • He would have to pay stamp duty of around $40,000 to acquire his siblings ¾ share of the property.

  • By executing a Deed of Family Arrangement and renegotiating the distribution of the estate (foregoing  some cash and shares for a higher proportion of the property assets) stamp duty could be avoided.

  • It would be necessary to agree on the fair value for the property with his siblings - using independent qualified valuers, if needed.

The above matters were discussed with their legal professional.

We also recommended that testamentary trust distributions be made to their son who was still in high school and these proceeds be used to pay school fees. The distributions were paid to their son tax free, but would otherwise be taxed at 47% if paid to him directly.

Our advice to our clients reflected a deep understanding of their circumstances and a willingness to explore a range of solutions for them. But it was only possible because they engaged with us thoughtfully and openly about these matters.

A case study in failure

First Samuel had a client who didn't take estate planning advice.  A blend of overseas investments and multiple beneficiaries and families made for complexity, but manageable complexity.  Unfortunately, advice was not taken.  The result was, in short, the estate paying significantly higher tax than might have been the case and suffering significant legal costs!

Final Thoughts

As the saying goes: “You can avoid reality, but you can’t avoid the consequences of avoiding reality.”

Death is a reality and avoiding its consequences may leave your estate in a mess, both financially and emotionally for your beneficiaries.

One of the most important high profile cases that bears this out is that of Robert Holmes a Court – at one time the richest Australian - who died without a will and meant his estate was divided in accordance with WA law leading to his wife receiving 1/3rd of the estate (with the remainder divided equally among their four children). The irony? He was a lawyer.

If you would like some guidance around these matters, please speak to your Strategist who can assist you to begin to formulate your wishes in collaboration with an estate planning legal professional.