Estate Planning
Estate planning is more than just writing a Will and certainly isn’t something that should be left until the last minute. It’s an important part of the financial planning process, so as to ensure that the assets accumulated during an individual’s lifetime are distributed in accordance with their wishes upon their death.
A common misconception is that the assets of an estate will automatically pass to a spouse or family member on death. However the following assets, which can be of substantial monetary value, may not necessarily form part of a person’s estate:
- The family home (if owned as joint tenants, it automatically passes to the remaining joint tenant);
- An individual’s superannuation entitlement (e.g. a person’s death benefit); and
- The proceeds of life insurance policies (depending on ownership).
Without an appropriate record of how you intend to distribute your assets, there is the risk that intended beneficiaries may receive little, or none, of your estate. Estate planning is a complex area and appropriate professional advice should therefore be obtained before making any decisions in this area.
Wills
It is important that you should have a Will in force which is appropriate to your wishes, thereby avoiding dying intestate (that is, without a legal Will) and the additional trauma this may cause to loved ones surviving you. Matters to receive attention include:
Beneficiaries – not only those who you would like to receive all or part of your estate when you die, but those who will benefit if your first choice beneficiary (or second or third) predeceases you. This is particularly important in the case of your children and their children.- Executors – you should choose both an executor who is unlikely to predecease you and an alternative executor. We feel it is important that the executor be someone in tune with your wishes. The technical side of managing a deceased estate is easily handled, provided your executor is aware of the services provided by professional solicitors, financial planners and accountants.
- Trustee – it is possible that some assets may be held for some time on trust for beneficiaries who have not yet reached the age you nominate for them to receive the bequest. You should nominate a trustee for these assets and also set guide-lines regarding authorised investments.
- Specific bequests – you may wish to consider leaving certain items to specific individuals. This may also have some Capital Gains Tax benefits, and it may avoid the need for the executor to sell an asset of the estate.
Your Parents
You should check that your parents’ wills are valid, current and in accordance with their present wishes. They may wish to consider leaving the bulk of their estate directly to their grandchildren, as you would intend to pass it on anyway. This course of action could be effective in reducing stamp duty costs and other costs.
Also, it may be worthwhile suggesting that your parents grant an Enduring Power of Attorney to you or some other appropriate person in the event that they become no longer able to handle their own affairs. Losing capacity (such as Alzheimer’s) can be difficult to manage and would require you to seek legal and medical professional services to determine capacity, before taking over the management of affairs. A Power of Attorney correctly executed prior to loss of capacity is a much easier proposition for all involved.
Power of Attorney
A Power of Attorney is a formal document by which one person appoints another to represent him and/or act on their behalf. It may be specific, for example, a power granted to operate a nominated bank account or sell a named property, or it may be a general Power of Attorney in which case the Attorney can act in the place of the person granting the Power of Attorney in all matters and things that an Attorney may lawfully do and perform as an Attorney.
An ordinary Power of Attorney is revoked and should not be acted upon when the person granting the Power of Attorney becomes mentally incapable of looking after his or her own affairs.
Enduring Power of Attorney
An Enduring Power of Attorney is much the same as an ordinary Power of Attorney with one distinct difference – it is not automatically revoked by the legal incapacity of the person granting the Power of Attorney.
Reasons for Appointing an Enduring Power of Attorney
The most striking situations would arise where a person suffers injuries in an accident leaving that person with a mental incapacity or where a person suffers a stroke and can no longer either physically or mentally attend to the management of his or her affairs. The other obvious situations occur when the elderly lose that mental and physical capacity they once had in the prime of their life. At that stage they need someone to attend to their affairs and be able to act fully and effectually in a legal manner.
Please note that after you have lost your mental capacity to act in legal matters, it is then too late then to appoint a person as your Enduring Power of Attorney.
Appointing an Attorney
You should appoint someone who is mature, responsible and who you trust completely without reservation.
Couples in their youth through to the middle age bracket should consider appointing each other. The elderly should consider appointing either one or two (jointly and severally) of their children. There is no restriction as to who can be appointed. However, it is most important that the proposed appointment be fully discussed with the person or persons proposed to be appointed.
Procedure for Appointing an Attorney
We strongly recommend that your Enduring Power of Attorney be properly drawn up by a solicitor. A solicitor can take instructions from you and advise you in relation to the preparation of such a document. They will ensure that the document is executed in the correct manner to ensure its valid, which is particularly important when you come to use your Power of Attorney. If you do not have a suitable Solicitor to assist you with your estate planning affairs, please contact one of the friendly staff at JBS for an appropriate referral.
Revoking a Power of Attorney
You may revoke an Enduring Power of Attorney at any time in the future if you wish, provided that at the time you have the necessary legal capacity; that is, provided that your mental health is such that you can act in a legal manner on your own behalf.
Testamentary Trusts
The term testamentary trust is used to refer to a discretionary trust created under a will. The range of possible beneficiaries as well as the powers given by the trust are virtually infinite. The usual provision is for the spouse and infant children of the deceased to be named as beneficiaries, although, depending on the circumstances, this may be extended to the grandchildren of the deceased as well as other classes of beneficiaries.
As with any other discretionary trust, the trustee of the testamentary trust (usually the executor of the estate) has the power to distribute the income and capital of the trust amongst the beneficiaries in whatever proportions and at such times as he thinks appropriate. The trust usually comes to an end once all beneficiaries are of full age and capacity, or at some specified time (e.g. 21 years from the date of death). The trustee normally has the power to distribute all of the capital and income before this date – which effectively brings the trust to an end. They can however, last for up to 80 years and be used to pass down wealth through generations.
The primary advantage of a testamentary trust lies in the treatment of its income. Income of testamentary trusts (and indeed any income that results from a will or intestacy) is ‘excepted trust income’ and is dealt with separately under tax laws. Consequently, income received by a minor under a testamentary trust is effectively taxed at the same rates as normal individual taxpayers, including being able to utilise the tax free bracket. The opportunity to split income between minors is obviously a significant benefit of a testamentary trust. Of course, the trust only comes into existence on the death of the testator.
The other advantage of a testamentary trust is its flexibility. Rather than deciding before death how an estate is to be distributed, a person can effectively delegate that task to his or her executor to carry out after death. The executor is normally in a much better position to assess the consequences for a particular beneficiary of a distribution, and can maximise the benefit both to the estate and for the beneficiary. Obviously, it is important that the person chosen to carry out this task is someone the testator can trust, and who is capable of making the appropriate decisions at the appropriate time.
Nomination of Superannuation Beneficiaries
Nominating beneficiaries on superannuation and pension accounts will enable members to choose who receives their retirement proceeds in the event of their passing. Without a nomination, it’s then up to the trustee’s discretion to determine who receives what portion of the proceeds. Another benefit of nominating beneficiaries is the ability for members to nominate dependent beneficiaries, who will receive the proceeds tax free, as opposed to non-dependent beneficiaries, who will be taxed on the taxable component of the proceeds.
Different Types of Nominations
It’s important to know the different types of nomination, which are available.
A Non-Binding Nomination – This is considered more of a directional document to the trustee on who the proceeds should go to. It is still up to the trustee to make the final decision on the distributions of the retirement proceeds.
A Binding Nomination – This is considered a legal document and requires the signature of the applicant as well as 2 other witnesses. The trustee MUST follow the instructions on a valid binding nomination. Members are only able to nominate their spouse, former spouse, children and financial dependents or those whom they have an interdependency relationship with as a beneficiary. In the scenario where they do not wish to nominate anyone specifically, a nomination to their estate is possible. Parents are not eligible to be nominated as beneficiaries. This nomination lapses after 3 years and therefore must be regularly renewed.
Non Lapsing Binding Nominations – A non- lapsing, binding nomination is binding on the trustee like a traditional binding nomination, however as the title would indicate, it doesn’t lapse. This means that you must keep your affairs up to date or your estate could be distributed as per your old wishes (such as at a time when you were previously married or when you didn’t have kids).
Reversionary Nomination – This method applies to Account Based Pension accounts. A person may nominate their spouse as a beneficiary and in the event of their death, the pension income stream simply continues to the nominated person. The nomination must be made during the application of the Account Based Pension.
Tax Implications
There are a number of tax considerations that will impact on how much beneficiaries end up receiving from an estate, such as income tax, capital gains tax (CGT) and land tax. This is why it is particularly important to seek professional advice in relation to your estate planning matters. The wrong structure or distribution could see a beneficiary with a high tax bill, inequity in net distributions or leaving certain beneficiaries with no benefit at all.
This information is intended to form general comments only and does not constitute advice. No investor should rely solely on this information when making investment decisions. This information does not take into account the investment objectives, financial situation or the particular needs of investors. When making investment decisions investors should consult their adviser, who can assess their particular needs and circumstances.