What does estate planning involve?

An estate plan includes your will as well as any other directions on how you want your assets distributed after your death. It includes documents that govern how you will be cared for, medically and financially, if you become unable to make your own decisions in the future.

You must be over 18 and mentally competent when you draw up the legal agreements that form your estate plan. Key documents might include:

• Will

• Superannuation death nominations

• Testamentary trust

• Powers of attorney

• Power of guardianship

• Anticipatory direction

If you have made a binding nomination in your super or insurance policies, the beneficiaries named in those policies will override anyone mentioned in your will. If you have a family trust, the trust continues and its assets will also be distributed according to the trust deed, no matter what is written in your will.

You should ask a legal professional to check your estate plan. A good estate plan should minimise the tax paid by your heirs, and help avoid any family squabbles.

Non-estate assets, including superannuation and trusts, require different and separate paperwork, although they are completed at the same time.

Estate planning requires careful consideration and legal input but, unfortunately, all too often the basic principles are blurred by legal jargon, which can make decision-making less than ideal.

Your Will should consider your current situation and, as such, it may require periodic updating.

You should not only consider who you will bequeath your assets to, but also what happens on their death to ensure that you are happy with that distribution, too. Many people want to consider what happens on the death of whom they are leaving assets to.

Normally, there are no taxes on death, but this is not always the case for shares and superannuation.

You need to consider how, and to whom, these assets are to be distributed to as taxes can apply.

Your Will needs an executor to implement your wishes but there is a legal requirement in its administration, which means you should also consider a Plan B if the chosen Executor is no longer available (or wants the responsibility) when the time comes.

You should also give your family permission to seek independent professional assistance, especially for the more complicated estates.

What about Will disputes?

Our legal system allows people to contest an estate distribution and legal fees are paid out of the estate.

This means that you must consider all options, including giving a valid reason why a black sheep in the family, for example, is excluded from your Will so the court understands your wishes.

Of course, the excluded party would also need to show a level of dependency or need, but in most cases, this is relatively simple to prove.

Unfortunately, too many people focus on only who is receiving what in their Will, which can ultimately disadvantage your beneficiaries.

This is especially the case when it comes to asset protection, family breakdown or a more flexible income distribution when the dire Minors Tax of 66 per cent can be applied.

And that’s another reason why you should consider “how” your wealth is distributed more than the “who” and the “what”...

A Will which incorporates a testamentary trust means that your descendants or beneficiaries do not actually receive ownership of your assets, but they will control them.

You can either leave your estate directly to your family, or chose a different how i.e. use a Testamentary Trust.

A Testamentary Trust will ensure your wishes of “who gets what” is carried out, but it also protects their inheritance as well by giving your family control of the trust, not ownership of the estate assets. For example, if they are sued, there is a barrier that protects the assets.

Likewise, in the event of a relationship breakdown, these assets will likely not be included in a Family Law Court settlement.

Plus, they can distribute income across their family, including to children who will be taxed at adult rates, not the punitive Minor Tax rates.

As part of your estate planning, you should consider not only a Will, but also an enduring power of attorney, should you be unable to make decisions due to illness or injury, as well as guardianship requirements for any minor children.

A Testamentary Trust should also be considered in defacto or married couples to allow one partner’s assets to be more effectively distributed to the surviving party and their family members when they, in turn, pass on.

It’s important to realise that assets owned jointly will automatically pass to the other person on death, but tenants in common assets flow through to the estate of that surviving party.

Leaving shares in your estate can result in major tax liabilities if the recipient is living overseas at the time of your death because Capital Gains Tax will apply.

And that’s another example of where a Testamentary Trust can provide protection of your assets for the next generation.

At the end of the day, there is nothing we can do about the reality that we will all one day die – although, of course, no one likes to think about it. Wealth creation is all about growing, protecting, and passing on your assets in the most efficient and effective manner.

Unfortunately, all too often, having the wrong type of Will can eat into the wealth you have created over the course of your life – when it could have been quite easily avoided.

Want to know more about protecting your assets from tax pitfalls? Find out how you can save thousands on your investment property by avoiding these common mistakes… 

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