Estate Planning

What is Estate Planning?

An estate plan is essential for you. Often, we find that individuals oversimplify an estate plan to a Will for allocation of assets upon death. In fact, an estate plan is much more than that. Many people require assistance in managing their affairs long before death and have complex family and asset structures which can significantly impact the value of wealth distribution upon death.

Estate planning allows due process and consideration of your unique circumstances and relationships with family and in business. In doing this, Wills, powers of attorney, trusts and other structures can be put in place to maximise distribution with minimal tax consequences.

Here we discuss some of the areas of estate planning that may help you in creating your plan. Real value will be in the collective guidance from your adviser, accountant and legal representation in customising the use of these tools to your needs.

How does it work?

Wills

A Will is a legal document outlining the distribution of your Estate on death. You do not have to have a Will. But if you choose not to, you run the risk of your assets being distributed by the government which may not align with your wishes.

There are a few important points to highlight about Wills:

1. There are several requirements that need to be met for a Will to be valid:

• You must have the mental capacity to make a Will and be over 18 (unless special approval sought).
• You must intend to leave instructions for the distribution of your assets and act without pressure, influence or coercion.
• You must understand what you are doing and have reviewed and approved the Will.
• It must be in writing. You must sign it and two witnesses must sign it in presence together.

2. A Will may be automatically revoked through marriage or divorce, or by the preparation of a new Will.

3. There should be adequate provisioning for dependents.

4. You can provide instructions for the care of children and your preference for funeral proceedings.

5. You nominate the Executor of the Will in the Will.

6. Wills can be challenged by family members or dependents as recognised by law.

7. Not all assets automatically form part of your Estate and therefore are governed by your Will. Examples include super funds and insurance policies proceeds (unless they nominate the Estate as the beneficiary).

Advance care directive

To give confidence that your decisions about medical treatment will be respected, you can complete a formal advance care directive which covers an instructional directive (which will provide specific directives about treatment you consent to or refuse) and/or a values directive (which will describe your views and values).

In the directive, you are generally required to:

• Appoint a medical treatment decision maker. This is someone who will make decisions on your behalf when you no longer have decision making capacity.
• Appoint a support person. This is someone who will assist you to make decisions for yourself, by collecting and interpreting information or assisting you to communicate your decisions.

Advanced Care directive Substitute Decision Maker

Choosing your substitute decision-maker is important. It is a good idea to think carefully about who you want to take that role. Your decision-maker will make decisions about your medical treatment if you can’t.

Your substitute decision-maker should be somebody:

• you trust
• who is over 18 years
• who will listen to your values and preferences for future care
• who will be comfortable making decisions in difficult situations

You can also choose a second person as an alternate decision-maker. They will step in if your first decision-maker is unable to make decisions on your behalf.

If you want to formalise your choice of a substitute decision-maker, you need to complete the relevant form that’s used in your state or territory.

Testamentary trusts

A testamentary trust is a trust that is written in your Will. It takes effect after you die and it's administered by a trustee, who you usually name in your Will. The trustee looks after your assets until your beneficiaries can get access to them which is set out in your Will, and is either when:

• A child reaches a certain age, or
• A beneficiary achieves a specific goal (for example, they get married or earn a qualification).

You may want to consider setting up a trust if your beneficiaries:

• Are minors (under age 18), or
• Have diminished mental capacity, or
• May not use their inheritance well.

Another reason to consider a trust is to avoid family assets being:

• Split as part of a divorce settlement, or
• Part of bankruptcy proceedings.

Superannuation Funds

The trustee of your super fund has absolute discretion over who they pay death benefits to as long as they are a dependent as defined by law. You can make death benefit nominations within your super fund to direct the trustee to allocate according to your wishes. You can make the nomination ‘binding’ by using a non-lapsing (doesn’t have to get renewed) binding nomination. Not all funds offer them so choose wisely. Make sure it is witnessed correctly and you have nominated eligible dependents or your Estate. If you nominate your Estate, your super then forms part of your Will allocation. Some funds offer lapsing, binding nominations and you will need to update your nominations every three years.

Powers of attorney

A power of attorney is a document where you give someone else the legal right to look after your affairs for you. It's important to nominate someone that is trustworthy, financially responsible, and likely to be around when you need them. Medical incapacity prior to death is more common than people think and is one example of the importance of having a power of attorney.

There are different types of powers of attorney:

• General power of attorney: This allows someone to make financial and legal decisions for you. It's usually for a specified time — for example, if you're overseas and can't manage your affairs at home. If you become unable to make decisions yourself, a general power of attorney becomes invalid.
• Enduring power of attorney: This allows someone to make financial and legal decisions for you and if you become unable to make decisions yourself, an enduring power of attorney will still be valid.‍
• Medical power of attorney: This allows someone to make medical decisions for you if you ever become unable to do so yourself. It doesn't allow them to make other kinds of decisions.

Family trusts

A family trust is used to manage and protect assets whilst having discretion over when, and to who, distributions are paid to. Family law can look through such trust structures as required to meet certain proceedings such as divorce however, some level of protection remains.

What are the benefits?

• Family trusts may provide protection of assets in the event of, for example, bankruptcy. This helps manage concerns about future events and the impact on family members of the Trust.
• The trustee of the Trust will have discretion as to how and to whom they pay income and assets of the Trust, which can assist in managing tax for beneficiaries.
• Franking credits from share dividends can be passed directly to beneficiaries.
• Assets held in the Trust may be quarantined (except in NSW) from challenges to an estate from disgruntled beneficiaries.
• The trustee is free to distribute Trust income to as many beneficiaries as possible, and in proportions that take best advantage of those beneficiaries' personal marginal tax rates. The beneficiaries then pay the tax on distributions made to them.
• Unlike a superannuation fund, adding assets within a Family Trust can be done with no asset cap.
  

What should I be thinking about?

There are assets that may not necessarily form part of your Estate when you die, meaning your Will may not automatically provide direction for where, how, or to whom these assets are distributed. The immediate one that comes to mind is your super fund.

• The trustee of your super fund has absolute discretion over who they pay death benefits to as long as they are a dependent as defined by law.
• You can make death benefit nominations within your super fund to direct the trustee to allocate according to your wishes.
• You can make the nomination "binding" by using a non-lapsing (doesn’t have to get renewed) binding nomination. Some funds offer lapsing, binding nominations and you will need to update your nominations every three years.
• Make sure it is witnessed correctly and you have nominated eligible dependents or your Estate. If you nominate your Estate, your super then forms part of your Will allocation.
• A Trust does not have to pay income tax on income that is distributed to the beneficiaries but does have to pay tax on undistributed income.
• Trusts can be complex and time consuming to administer. It costs money to set them up and there are ongoing legal and accounting fees.
• You will require legal advice on the establishment and inclusions of the Trust Deed. The costs may be significant and should be considered in light of the benefits the Trust can provide.
• Trust income is assessable for Centrelink purposes and may impact beneficiary Centrelink entitlements.
• Circumstances change and your preference for allocation of the assets and income of the Trust may also change. It is important to review the Trust regularly to ensure it continues to reflect your wishes.
• Transferring existing assets in-specie to the Trust may trigger capital gains and therefore a tax liability for the owner of the asset. Please seek professional tax advice prior to transferring any assets.
• Transaction costs will be payable on the transfer of assets into the Trust.

This information is of a general nature. It does not consider your personal objectives, needs or situation. It does not represent legal, tax or personal advice and should not be taken as such. If it has been provided to you with a Statement of Advice (SoA), you should rely on the personal advice in the SoA.

Care has been taken to provide up to date and accurate information relating to the subject area however BR Advice Pty Ltd (ABN 30 612 056 523, AFSL 488655), Blue Rock Private Wealth Pty Ltd (ABN 95 166 927 055, AFSL 452733), Blue Rock Private Wealth (Melb) Pty Ltd (ABN 48 652 202 698, ASIC AFS No. 1298365) and their representatives make no representation as to its accuracy or completeness.

Published: September 2022.

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