25 Estate Planning Considerations For The BOFY
Estate planning is the classic Important Not Urgent task on our to-do lists. It is simply one of those things that needs to be done and is always at the bottom of our priority lists. The best way to get it done, and done well, is not to do it yourself. Engage a professional and that will force you to address it.
“A son can bear with equanimity the loss of his father, but the loss of his inheritance may drive him to despair.” Niccolo Machiavelli
Following is a list of mistakes, insights and considerations to help you get the ball rolling for the beginning of the financial year.
1. Not having a will
How many times have you heard this one before? It is the obligatory mistake on all lists. The older you get the more likely you are to have gotten around to writing a will. It is young families that are most exposed to this mistake, with the hustle and bustle of life, work, raising kids, they are the most likely to have not put a will in place.
2. Jointly held assets
Joint tenancy will override your will!
If you own a property in joint tenancy with another, on your death your share of the property will automatically go to the other, regardless of what your will says. Whereas if that property is owned as tenants in common, then your share will form part of your estate.
As for shares, managed funds or joint bank accounts, usually joint tenancy is assumed.
3. Forgetting about tax consequences
This is a common mistake, and normally the result of no professional advice. It normally occurs in respect to property but can just as easily relate to shares.
A simple example would be two brothers inheriting 3 properties from their mother’s will. John was left the family home worth $800,000 and Andrew was left 2 investment properties (as he worked interstate and wouldn’t live in the family home) worth $800,000 (the debts had all been paid off). The mother was trying to be fair in the context of who would benefit most from the different assets while at the same time giving them an equal share of the estate.
What she had forgotten was that the two investment properties had been bought for a combined $400,000 15 years earlier and had an unrealised capital gain of $400,000. John was inheriting a tax free asset while Andrew inherited approximately $100,000 CGT liability.
4. A will that is not clear
If the language is ambiguous and your directives are not clear, it can leave the estate open to dispute.
5. Wrong witnesses
Amateur hour again. Do not get a beneficiary or their partner to witness the will. It simply opens up the will to dispute and contest.
6. Not using testamentary trusts effectively in a Will
One of the most powerful estate planning tools is the Testamentary Trust (or put simply, a trust that is “born” out of a Will). DIY wills will most often not include Testamentary Trusts.
They can be used to house wealth and assets for beneficiaries. The Trustee of the trust can have the power to direct income and capital as the trustee sees fit (within the parameters of the Deed).
Income to minors from testamentary trusts is taxed at adult rates rather than penalty minor rates. This is particularly important if you have young children and a considerable asset base on death (possibly created by proper amounts of life insurance).
7. Where is the will?
Don’t go to the trouble of writing a great will, then not letting the executor know where the will is. This isn’t hide and seek. Make it easy for the executor to get their hands on the latest will.
8. Keep your will up to date
As your circumstances change, check whether your will needs updating. Was it written in a way that required constant updating or is it written with adequate flexibility to deal with your life’s changes? Things to keep an eye on are:
• Sale of significant assets
• Setting up a Family trust
• Purchase of new assets
• Taking out a loan
• Restructuring your affairs
• Restructuring your super or SMSF
9. Make sure you have addressed dependents
Not adequately providing for dependents may give them the ability to contest the will.
Get professional advice if you want to exclude a dependent from your will.
10. How to handle debts?
Does your will deal with debts appropriately. Does it specify that all debts are to be paid off before distribution? Or is your intention to pass on an asset with debts attached?
11. Property held in trust
If you have assets held within a family trust, the trustee controls those assets. Assets within a trust do not form part of your estate and your will can not be used to direct those assets.
Who is going to look after the kids? An all too often mistake and omission from the will. If you have a couple of primary school kids, who will look after them if you are both gone?
Have you spoken to that person and gained their agreement? Are they named as guardians in the will? If not, you might be leaving it up to the courts to decide.
13. Not understanding how your superannuation will be distributed
Your super is potentially not part of your estate and potentially will not be directed by your will.
Have you completed death benefit nominations with your super fund? Or have you directed your super fund to pay your super to your estate? Have you considered the tax consequences of each approach? Taxation to dependants is different than non-dependants.
14. Direct share portfolios
A common mistake is leaving a direct share portfolio behind without adequate records of the history of that portfolio. The cost base for each parcel of shares.
Imagine that you inherit a parcel of Westpac shares from your parent that held them for 20 years. With two decades of dividend reinvestment, the occasional sell down and top up. Trying to reconstruct the history of that parcel is a nightmare, but it needs to be done so that proper capital gains tax calculations can be made.
Now imagine there are 20 stocks in the portfolio! It is a long and costly exercise that can be avoided if you pass on adequate records to your beneficiaries.
15. Who is the executor?
Choosing the right executor can be hard. Here are questions to ask yourself and them:
• Will they know what they are doing?
• Will they have the sense to get good advice along the way?
• Will they have the time to do the work?
• Do they want to be the executor?
It’s a good idea to choose someone younger than you so that they are unlikely to die before you.
16. Have you given your executor adequate powers
They will need to be able to sell assets and make a wide range of decisions. Your will needs to give them adequate powers so that they don’t need to resort to court applications.
If you are separated (but not divorced) your Will is still active. A common mistake is to forget to write a new will once you are separated but not divorced.
When you remarry your old will is revoked. Remember to put in place a new will.
19. What is a Residue?
If you have left specific amounts to specific people, once everything is distributed there might be an amount left over. Especially if you have written your will some time ago and the value of your assets and estate has risen.
This left over (which could be sizeable) is the Residue and if not dealt with in your will properly could leave part of your estate in intestacy and subject to state laws regarding distribution.
20. Death of a beneficiary
Does your will deal with the death of a beneficiary? On your death, if one of your beneficiaries has pre deceased you, does your will still function?
21. Passing wealth to children
At what point do you want the assets to “vest” in their name? Do you want them to gain full control of the wealth and assets at 18 or 25 or later? How will you will make that happen?
22. Life insurance policies
If personally owned, have you made a nomination on the policy, if so that will override the will? If not, the policy will be paid to “the owner” and if the owner has died then to their estate and ultimately directed by their will.
If that same policy were inside your super fund, the trustee of the super fund can be directed by a death benefit nomination (either a binding or non-binding nomination).
23. Death Taxes
It is assumed that we don’t have death taxes in Australia, and on the face of it that is true (they were abolished in 1978). That being said, we have two other forms of taxes that quietly lurk within your asset base.
Capital gains tax is inherited (as discussed earlier). If you bought an investment property for $350,000 and on your death it was worth $550,000, then whoever inherits that property is inheriting its cost base of $350,000 (which means they are inheriting the built in CGT liability). If your daughter sells that property straight after she inherits it she will pay about $50,000 in CGT. If she keeps it and sells it 10 years later when it is worth $750,000, at sale her cost base will still be $350,000 and she will have a gain of $400,000.
On your death, if you have superannuation, then adult children (non-dependants) will pay 15% plus mediocre levy on the “taxable component” of your super. So let’s say you have $1m in super of which $500,000 is “Taxable Component” then an adult child will pay 17% or $85,000. Do you have a plan to deal with this?
24. Your self-managed super fund (SMSF)
You are the trustee of your SMSF. Have you thought through what will happen, or what you want to happen? Who will set into your shoes as trustee? Will the SMSF need to raise cash to make a payment to a beneficiary?
25. Do you have the right type of Power of Attorney?
Estate planning is not only about death. It is also about the control of your assets while you are still alive. Here we are in the domain of the Power of Attorney.
Is your POA a General POA or an Enduring POA? A General POA ceases when you lose your mental capacity. An Enduring POA “endures” after you have lost mental capacity and allows the Attorney to make financial decisions on your behalf.
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Top 10 Estate Planning Mistakes to Avoid
Personal estate planning is one of the most critical but often overlooked aspects of our personal and financial lives. Even when we do get around to it, without professional guidance and advice, there is a long list of mistakes that should be avoided.
Frank Paul is Chief Operating Officer & Head of Advice Services with Spring Financial Group. Frank has over 20 years' experience in financial planning and investment advisory.
|Frank has extensive experience in private client advising and the management of financial services operations. Frank is actively involved in the recruitment and management of advisory personnel and heads the advisory panel. He holds a Master of Commerce (Financial Planning) and a Dip. Financial Planning and has authored literally dozens of financial education publications.|