Avoid an Estate Planning disaster
One of life’s greatest fears is passing. Even worse is passing and your estate slipping out of your loved one’s hands. This can come in the form of taxes, beneficiary having poor financial management skills, a beneficiary being pursued by creditors or a beneficiary falling out of a relationship and the family court intervening. Falling out of relationships could be your children, but don’t dismiss your widow moving into a future relationship that just doesn’t work out. 

Some Key Considerations – Superannuation 

Superannuation by default is not dealt with through your will unless you specifically request your super monies to go to your estate with your super provider or it ends up there in accordance with your super fund’s rules because you have no valid nomination in place. So don’t fall for the trap of thinking your superannuation will be directed per your will. Ensure you have appropriate nominations in place to provide some certainty your super will be directed per your wishes.  

While Australia, unlike some countries, does not have “death taxes”, be warned there are some taxing events to be conscious of with your superannuation. Components of your super can be taxed at 17% if you don’t have any financial dependents when you pass. A classic example is if your partner pre deceases you and your superannuation is left to adult children they will invariably be subjected to a taxing event. While we don’t know when we are going to die, one important consideration is withdrawing super before the inevitable. By passing assets onto beneficiaries from outside the superannuation environment, there will be no tax payable. As sad as it is this is a very effective tax saving strategy for those with a limited prognosis.

Your Will 

There are two general ways to structure a will.

The first and more common type, are what are often called “simple wills’’. Under this approach, assets are left to the beneficiaries of the estate in their own names. This approach provides none of the protection or tax efficiency many are looking for but can be appropriate in many scenarios, for example where:

  • the size of the estate is such that any other structure would be unwarranted
  • the risk status of the beneficiaries is low (family law, creditors, financial literacy etc)
  • the beneficiaries do not require tax planning strategies. In this regard, any income earned from their inherited assets will be taxed at their marginal rate.
The alternative approach is to embed testamentary discretionary trusts (TTs) into your will. Under this approach, your assets are left into a TT to manage for the benefit of a range of beneficiaries. This approach has become more popular in recent times due to the asset protection and tax planning opportunities it affords. A will including a TT can be appropriate in many scenarios, for example where:
  • The relative size of the estate is such that it warrants protection from third parties and from the beneficiaries themselves
  • The risk status of the beneficiaries is medium to high
  • The beneficiaries require tax planning strategies 
Ultimately, the approach taken should be based on advice and your personal circumstances of the clients.

Example Of Testamentary Discretionary Trust In Action

John and Karen are financially comfortable and have 3 young children. John passes unexpectantly and leaves Karen $2M in life insurance. This was to be held in a TT which Karen controls for the family in conjunction with another trusted relative. Karen continues to work part time. Karen is able to direct approximately $60k of earnings from the assets in the TT to the children ($20k each) tax free. This is a much better outcome than earnings sitting on top of Karen’s salary and paying tax at her marginal tax rate. 

Karen later falls into a relationship that ends in family court proceedings. As Karen is not the sole controller of the trust, the TT provides a hurdle for her ex partner to access estate monies that have been set aside specially for Karen and the children she had with John. 

Karen is an environmental consultant working with developers. Karen’s advice is questioned by a developer which results in an economic loss case. Again the TT proves a hurdle for any creditors to access estate monies. 

Different strategies benefit individuals differently depending on their own circumstances.  It is recommended you speak to a financial adviser about your situation if you have any questions. For more information, please contact Financial Adviser John Mujic on 1300 795 515 or email jmujic@prosperity.com.au.

This communication contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Prosperity Wealth Advisers (ABN 32 141 396 376) is an authorised representative of Prosperity Wealth Advisory Services Pty Ltd, Australian Financial Services Licensee (533675).

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