Estate Planning News

We work with our clients to help them create, protect, and eventually pass on their wealth to future generations.

Read our insights on the latest news, trends and changes related to estate planning advice.

Estate Planning now that you have children

It’s often not something that you want to think about, what happens if you were to pass away prematurely. It’s a conversation that is pretty hard to have but one that is important to discuss. We always hope that it never happens but as planners, this is one of the most important conversations we can have with clients, especially with those that have just had children.

Getting a proper estate plan doesn’t have to be a long and super expensive process but it’s something that is vital if you have children. Whilst we would never recommend it, even having a post office style will kit is better than having nothing. The important thing is that both parents discuss what they would like to happen and then have something in place for these wishes to be carried out.

 

Choosing who will look after my children if I’m gone

Guardianship is likely one of the most important decisions you’re ever going to have to make. As I said at the start, it’s not something you want to think about but we always need to plan for a worst case scenario. A legal guardian is an adult designed to care for your minor child in the event both parents die before your child reaches adulthood.

Having a will and proper guardianship in place is crucial as without it, the likelihood is that there could be multiple people from both sides of the family wanting to look after your children and then potentially a lot of long and expensive court battles to sort it out and no one wants that.

To appoint a legal guardian you must name the person (or persons) as the chosen guardian in your will. Obviously make sure you have a chat to the person you are thinking of choosing first to make sure they are willing to take this on as it is a big responsibility and not always nice to give someone that news as a surprise after your passing. You may also wish to provide alternative guardians in your will if your first choice is unable or unwilling to take on the role at the time of your passing.

 

Choosing how your assets will be given to your beneficiaries

Another important reason as to why you need a will once you have children is that you will need to set up not only that your assets will likely go to them but how they will receive the funds. It’s likely that if you were to pass away prematurely you might not want your children receiving all the funds at age 18, as a lot of people are now opting for an older age or choosing for the children to receive an income from the funds rather than a lump sum.

A lot of people are now opting for testamentary trusts in their wills. Testamentary trusts are created via a will to provide a greater level of control over the distribution of assets to beneficiaries. This provides an amount of ‘control beyond the grave’ so to speak.

 

Another reason why more and more parents are liking the idea of a testamentary trust is from an asset protection perspective. If your child is currently in a de facto relationship or married or could potentially be in one in the future and you pass away without setting up a testamentary trust, then your estate forms part of their marital pool. This means that if there is a relationship breakdown, your assets will form part of the financial settlement. A testamentary trusts assets are excluded from this and therefore stay in the family blood line.

 

How can I get a will?

The best solution is to always go and see a lawyer to get a proper estate plan in place. They’ll be able to discuss with you your needs and wants and give you advice about how the will should be done and then put this into action. Costs can vary amongst different law firms so it doesn’t hurt to check out a few and see what option suits you best.

There are also plenty of online tools that you can use to start to think about a few of these things that we have discussed before going in for an appointment with a lawyer and doing some homework before can also save some money as a lot of lawyers charge in 6 minute increments so you want to have thought about these things before you get asked them in the appointment. If you want access to any of these worksheets, shoot me an email and I’ll be happy to forward them on!

As I said at the start, no one wants to think about leaving our child in a world without us but sometimes this can happen and we need to have a proper estate plan in place for their benefit. It doesn’t have to be super complex or take long but it needs to be put in place very soon if you don’t have one, to make sure that your wishes are carried out after you are gone.

 

 

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Estate planning – Your personal succession plan

There is often confusion surrounding the concept of estate planning, and too often people dismiss this as simply having a Will. But that is only part of the picture.

A complete estate plan allows you to deliberately plan for the future management of your assets, and to determine who will make decisions on your behalf should you become unable to do so in the future.

The first step to ensuring your estate assets are distributed as per your wishes, is to get a complete picture of your financial affairs including information about your financial position, structures and the important people in your life.

 

Important things to know about your Will

A Will is a key part of your estate plan, and when structured and executed correctly, it helps ensure the assets that form part of your estate are distributed the way you intended. This means that the right people benefit, and assets do not fall into the wrong hands.

Fun question. Did you know that a Will generally only applies to personally held assets? Most people assume (incorrectly) that their Will covers everything when they die.

What this means is that it may not deal with a significant portion of your wealth, including superannuation and insurance policies. These can bypass your estate and go directly to particular beneficiaries, who may have been nominated by you. To complicate things, you could also nominate that they go to your estate where they’ll be dealt with by your Will.

There are also other ownership structures which ensure that the assets never form part of an estate. Common examples of this are jointly owned assets or assets held in a family trust.

Estate planning needs strategies that address your whole situation and assets, not just those included in your Will.

 

How do I know if I need a personal succession or estate plan?

A common misconception is that personal succession and estate planning is only for older people or those with a lot of wealth. However, there estate planning implications for pretty much every asset you have regardless of the ownership. It goes a long way to looking after those you care most about after you are gone, and unfortunately we don’t always have a warning when our time is up. Estate planning is simply a part of good financial hygiene.

It doesn’t need to be complicated and getting the basics in place as a foundation has significant benefits. The basics that individuals prioritise having in place are:

  • Valid and current Will
  • Advance Care Directive
  • Enduring Financial Power of Attorney
  • Appointment of Medical Treatment Decision Maker
  • Appropriate superannuation and insurance beneficiary nominations
  • Appropriate arrangements and supporting documentation in place to pass on control or distribute any assets that aren’t part of your estate.

 

The benefits of a well constructed personal succession plan are significant

While you won’t be around to see the benefits, you will be creating significant benefits for those you care about. What we hear from clients is that it provides peace of mind that they have this together, and not creating headaches for their loved ones. Common benefits include the following:

  • Confidence that your children will be taken care of with appropriate guardians.
  • Greater certainty on what assets go to who.
  • The timing of certain assets being controlled in the case of younger beneficiaries.
  • Reducing the amount of your estate lost via tax payable.
  • Reducing the risk of your estate being successfully challenged.

What are the risks of NOT having an estate plan?

If you don’t have an appropriate and well constructed personal succession or estate plan, then you risk your wishes not being carried out. Also, your intended beneficiaries may receive less than they could have with an appropriate plan in place.

Dying without a valid Will, you die intestate. There is specific legislation which dictates how your estate should be divided and distributed. This differs depending on where you live, as the laws of the state or territory will decide how their estate is administered. This may not align with what you would have wanted.

Also important to note that not having a valid super or life insurance death benefit nomination means that you are leaving it to chance as to who receives the proceeds. This issue can be compounded if you also don’t have a valid and appropriate Will. The benefits that you have accrued or have been paying premiums for may go to unintended recipients.

Often less front of mind is the loss of capacity. What would you like to happen if you were suddenly to suffer a condition or accident which meant you were not able to look after yourself? You want to ensure that you have appointed your preferred and trusted person to manage your affairs and make decisions on your behalf when you are not able to do this yourself.

 

How we can help

We can work with you to understand your current situation and more importantly, what matters to you. We can then provide the necessary advice to put in place appropriate strategies which are designed to achieve your objectives in a tax-effective manner. Our role can also include facilitating and project managing specialist legal and tax professionals where appropriate.

If you want to have a chat with one of our financial planners about your estate plan, then find a time that suits here.

 

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The In’s & Out’s of Testamentary Trusts

A testamentary trust can be a great way that people can protect their beneficiaries through their will and should form an important part of any good estate plan. They are quite popular as they allow people to have some form of control beyond the grave. There are many benefits to them but there are also things you should consider before putting them into your will.

 

What is a testamentary trust?

 

A testamentary trust is a type of trust that is named in the will and comes into effect upon death. The trusts are set up in order to hold assets and are looked after by a nominated trustee, who distributes the trust’s assets to beneficiaries. The manner in which the trustee distributes the assets depends on the type of the testamentary trust.

 

There are a number of different types of testamentary trusts, but two of the most common ones are:

  • Beneficiary controlled testamentary trusts: This is a trust where the primary beneficiary has the power to appoint or remove Trustees. They can also appoint themselves to manage their inheritance inside the trust.
  • Protective testamentary trusts: With this particular trust, the will-maker appoints a Trustee who is not the beneficiary to manage the beneficiary’s share of the estate through a trust. This allows the beneficiary to benefit from the estate but does not allow them control or own their share of the estate. This can be particularly useful where a beneficiary is vulnerable or disabled but does not qualify for a Special Disability Trust.
  • Special Disability Trusts: The purpose of this type of trust is to assist immediate family members and carers who have the financial means to do so, to make private financial provision for the current and future care and accommodation needs of a family member with sever disability and receive means test concessions.

 

Reasons to incorporate testamentary trusts in your will

 

 

Protection of assets

 

A major advantage of testamentary trusts is the protection of the assets. The assets are essentially owned and controlled by the Trustee meaning that this separation between who owns and controls the assets and the potential beneficiaries will protect the beneficiary to a degree if they were to be sued or become involved in any legal action.

 

Similarly if their was to be a breakdown of marriage between the beneficiary and their partner, the trust would provide far greater security than if the assets were held in the beneficiaries name.

 

If a beneficiary was to have financial difficulties such as bankruptcy, then the assets held by the trust can in some circumstances by protected from the potential creditors.

 

The degree to which the available protection will hold up varies and is subject to the changes that may occur in law, so you should ensure you get professional advice and make clear what you are seeking to achieve.

 

 

Tax advantages  

 

The Trustee is able  to distribute the income, capital gains and franked dividends among all of the beneficiaries in the most tax efficient way possible. One of the main points with a testamentary trust is that minors are treated as adults from a tax perspective and are therefore able to benefit from the tax free threshold, low income rebates and varying tax brackets.

 

 

At risk beneficiaries

 

As mentioned above, a protective testamentary trust has the ability to protect potential at risk beneficiaries. An example of this may be a potential beneficiary that has a history of drug abuse and the person who’s estate it will be does not want to give them full control over the assets. The Trustee is able to drip feed some of the funds to the beneficiary in a way that the person who’s estate it was would have wanted. This can provide more certainty and also specify the purpose for which certain assets are used for.

 

 

 

Considerations of setting up a Testamentary Trust

 

One of the main considerations that people should look for before setting up a Testamentary Trust is to be aware of the potential tax implications of holding some assets in the trust such as the family home along with the taxation rules for superannuation death benefits if the trust beneficiaries are not confined to dependants.

 

Another thing that people should be aware of before setting one up is the administrative costs that are associated with having a trust. You need to make sure that there will be value for the costs that you are paying.

 

These considerations should form part of your broader estate plan. As always, you should seek professional advice and where appropriate, engage your beneficiaries to discuss why are you doing this so you are all on the same page.

 

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What happens to your SMSF when the unexpected occurs?

Your SMSF is a long-term plan. Much can happen during this time including illness, incapacity or death of a member.

It is best practice to have contingency plans in place to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member are you happy to continue with the SMSF

Outlined are some issues to consider planning for as trustees. Leaving the planning to when, and if an event happens may be too late.  

Death 

Think about where you want your superannuation to go on your death. The introduction of the $1.6 million transfer balance cap means larger sums of money may need to leave the superannuation system sooner, as a result planning has never been more critical. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.

The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member. It also details how death benefits are to be handled by you and your fund.

A lot of careful consideration needs to be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are drafted appropriately to achieve these requirements.

Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.

You may also consider appointing a corporate trustee. If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming. A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate planning of its members.

Diminished or loss of capacity

Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required. This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF. 

Member leaves the fund 

How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset or introduce a new fund member to allow the exiting member to transfer out of the fund.

Separating couple

Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, and specialist advice may be needed.

Reviewing your insurance 

SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member. Your insurance cover may be essential if an unexpected event occurs.

In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.

Administration of your SMSF

If an unexpected event occurs you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members.

As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).

How can we help?

If you need assistance with planning for an unexpected event or reviewing your current strategies, please feel free to give me a call to arrange a time to meet so that we can discuss your particular circumstances in more detail.

 

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What happens to SMSF benefits in the event of a divorce?

Divorce or relationship breakdowns have a significant impact on superannuation benefits as a result of the potential changes to individual member accounts. As the underlying circumstances of each relationship and corresponding superannuation benefits are unique, it really is a case by case scenario as to what the final outcome will be. Don’t start stressing just yet as it doesn’t always have to be complicated, and just because someone you know is still wearing some battle scars from their SMSF breakup isn’t indicative of what you will experience. From experience, the outcomes and time taken to reach these vary greatly. Key influences are how amicable the parties are, and how clear their documentation is in detailing what happens for a relationship breakdown.

 

So why is super such a key battleground when navigating a relationship breakdown?

Simply it is the economics. Super is one of the largest assets outside of the family home, so it makes sense that there is a significant focus placed on how the benefits are treated and divided as part of a divorce settlement. The Family Law Act 1975 details that superannuation interests form part of the definition of ‘property’ and can be divided in the event of a marriage breakdown (this also applies to de facto couples separating after 1 March 2009). The ramifications are that part of a members benefit which is currently invested in line with the fund’s investment strategy may be required to be transferred out of the fund to an ex-spouse.

The impact of divorce on an SMSF is significant and in extreme cases may result in the most appropriate action being to wind up the fund. Most commonly it is merely a matter of an ex-spouse leaving a fund or a splitting order requiring part of the remaining member’s balance to leave the fund. While simple even the rolling out of one member’s benefit can reduce the total size of the fund to a point where the economies of scale are no longer viable for an SMSF. Also, to free up the necessary cash to pay out the benefit assets may need to be sold. This adds complexity due to timing and potential tax consequences.

 

What are the key tension points?

We also see points of tension arise regularly where unlisted assets are involved which are to remain in the fund and there is disagreement on the valuation. Ultimately this is not an exhaustive list, but it does highlight the additional expenses and risks involved with SMSFs in a relationship breakdown.

Another tricky situation to navigate is the existing relationships with professional advisers such as financial advisers and accountants. In many cases, it may not be feasible both spouses to remain as clients of the current advisers and decisions will need to be made as to who retains the relationship. An alternative may be that a new neutral adviser is required for ongoing advice and services which are joint in nature. Unfortunately, divorce proceedings in some cases can drag on for several months and as a result, stretch across multiple financial years. The ongoing administration of the fund still needs to be completed, so making a decision as to who the fund will be engaging to complete this is something that cannot be deferred until a settlement is reached.

What are the options?
Ideally, the members of the fund would have a binding financial agreement which incorporates a superannuation agreement. This sets out the terms of how the superannuation benefits will be dealt with in the event of a relationship breakdown. By having this in place, it saves time, costs and frustration of having to come to terms after the fact when emotions may be running high.

If there is no superannuation agreement in place, then court orders will be required to split the super benefits. These court orders can take two forms:
Consent orders where a separating couple does not have a binding financial agreement but have reached an agreement on how their property should be divided.

Financial orders are required where a separating couple cannot reach an agreement on how their property should be split. The court then makes a decision and can issue a financial order to divide the couple’s assets based on what they deem appropriate given the individual circumstances.

Once one of the above outcomes are reached, then there may be a splitting order applied to superannuation benefits. It is important to note that superannuation rules, including preservation, still apply.

It is always advisable that Trustees seek legal advice from the lawyers who are assisting them with the settlement to see what the requirements are.

What happens if you can access your super?
There is a silver lining if you have access to your super benefits as a result of satisfying a condition of release or the benefit contains an unrestricted non-preserved component. You have more optionality for the funds. The advantage here is that you may have the option to receive the funds personally and not be limited to transferring the benefit within the superannuation system.

What happens if you can’t access you’re super?
Your benefit will need to be retained in the fund or rolled into another complying superannuation fund. A splitting order doesn’t change the preservation rules or components of your superannuation benefit, and if you are under preservation age, then the funds will need to remain in the superannuation system albeit with a new provider.

Tax implications if it’s shut down?
Depending on your age and working status, this can differ greatly. In accumulation phase, if assets are required to be sold to fund a payment out of the fund or a full wind up, then capital gains tax may apply. The amount will be 15% of the gain with a 33.33% discount applied for assets held for more than 12 months, bringing it down to 10%. This will impact both members benefits as the fund will need to factor in the tax before paying benefits out of the SMSF.

You can benefit from the CGT exemption that is available for assets in retirement phase. Timing is key here, and as a result, members should be sure to explore options for timing the sale of assets before making any transaction. In particular, if the members of the fund are close to preservation age, then there may be significant tax advantage on agreeing to delay the sale of any SMSF assets until the members can move the funds into retirement phase to access the CGT exemption.

What actions should you take?
If you are going through a relationship breakdown and have a self managed superannuation fund, then you should seek independent advice as soon as reasonably possible to best understand your options and what actions are required. If you have any queries about the points discussed above, then please feel free to reach out to me for a chat at pete@pekada.com.au.

 

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