While taxes can be managed throughout our life, planning for one’s own death is more complex and difficult.
The first issue is having a will. When asked if they have a will, more often than not people answer ‘no’, and even when the answer is yes, it is often followed by ‘but it hasn’t been updated for years and no longer reflects my circumstances’.
Nobody likes to contemplate their own mortality but not recognising the inevitable means it is unlikely people will develop a sensible estate plan. Without estate planning, the likelihood is that your hard-earned wealth won’t pass into the right hands once you’re gone. Inadequate estate planning can also be a heavy burden and cost for family members, at an already distressing time.
A will is the critical first step to ensuring your estate is distributed according to your wishes. Without one, the law sets out who receives the estate and a court controls distribution.
A well structured will is therefore the best safeguard to ensure the wealth you have built is transferred smoothly.
There are some key points to consider when preparing a will. These include:
- Nominate executors who are likely to survive you, who have an understanding of financial affairs, and understand your wishes clearly. To be on the safe side, alternative executors should also be nominated in case the first executor dies before you.
- Nominate beneficiaries for your estate and, again, nominate second choice beneficiaries in case something happens to the original beneficiaries.
- Understand what assets are covered by your will. As discussed below, assets owned by a family trust or your superannuation fund require separate documentation.
- Leave bequests as a sum of money or a percentage of your estate rather than specific assets, as there is a risk that some will no longer be owned when the estate is distributed.
- Nominate money to be held for beneficiaries under 18, like funds for children’s or grandchildren’s education in testamentary trusts.
It should also be noted that the rules governing wills and estates vary from state to state and territory and overseas assets may need a separate will.
Tax effective distribution
A will can also establish a testamentary trust that becomes active on death and which can be a tax effective tool for distributing your estate. A discretionary testamentary trust enables a trustee to decide the best distribution of capital and income to beneficiaries, taking into account their tax situations.
Power of Attorney
While discussing a will it is also important to address the issue of Power of Attorney. This can allow affairs to be conducted in an appropriate way when you can no longer make sound decisions.
Attorneys are not permitted to do anything illegal while operating under a Power of Attorney. Nor can they prepare a will on your behalf, or transfer the Power of Attorney to someone else unless they have been specifically granted that right under the original Power of Attorney.
There are three types of Power of Attorney to consider:
General Power of Attorney
Provides restricted or unrestricted authority over financial affairs, except when they apply to health care, but the power of attorney lapses if you lose mental capacity.
Enduring Power of Attorney
Provides restricted or unrestricted authority over financial affairs until you die, except concerning health care. It continues even if mental capacity is lost.
Enduring Medical Power of Attorney
Provides authority to make decisions about medical and other needs if you are unable to make those decisions. It can also be known as Advance Care Directive or Advance Care Plan.
Superannuation
Superannuation generally does not form part of an estate because the superannuation trustee must distribute funds according to the fund’s Trust Deed.
These funds, known as a death benefit, include the withdrawal value of the superannuation account and any life insurance payable from the fund.
To control the distribution of the death benefit, a Death Benefit Nomination must be made. These are instructions on how and to whom benefits should be paid.
There are two forms of Death Benefit Nominations – binding and non-binding.
For both, a death benefit may only be paid to a dependant as defined in superannuation legislation, or to a legal personal representative – the executor or administrator of an estate.
Reversionary pension
Those receiving a pension from their superannuation fund may wish to have this pension converted to a reversionary pension in favour of a surviving spouse.
As can be seen, estate planning is a complex area. It’s a good idea to discuss your situation with advisers who can provide financial, taxation and legal advice, and who understands current legislation and how it will affect the treatment of your estate.
Disclaimer
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.
