Is estate planning for you?
If there are people or causes you would like to look after when you die, then estate planning is for you – regardless of how wealthy you are or how old you are.
Effective estate planning:
- Ensures your assets go to the people you want to leave them to.
- Maximises the after-tax value of your assets.
- Makes it as easy as possible for the people you leave behind to handle your affairs without you.
You should seek professional legal advice in relation to estate planning from a solicitor specialised in this area of the law in light of your personal circumstances.
A will is a legal document that enables you to direct who is to receive what from your estate, and on what terms, after your death. To ensure that your will continues to reflect your wishes, you should review your will regularly and update it as your circumstances change. You can do this either by revoking your will and replacing it with a new one, or by amending it.
A will is a key part of effective estate planning but it is not the only part. As you can see from the list below, you may own or control assets that can not be governed by a will.
Assets governed by a will
A will can only dispose of assets that form part of the deceased’s estate. These include:
- Assets you own personally.
- Your shares in a company.
- Your share of any asset you own as tenant-in-common.
- Any superannuation death benefit or life insurance policy proceeds paid to your estate.
- Your interest in any partnership assets, unless agreed otherwise.
- Life insurance proceeds where you own the policy on your life and no beneficiary has been nominated.
- The right to recover any funds owed to you.
- Any rights you hold under any contract or agreement.
Assets not governed by a will
- Assets you own as a joint tenant, as these pass automatically to the surviving joint tenant(s).
- Assets held in a trust of which you are a beneficiary; the trust deed governs what happens to these assets.
- Assets owned by a company (even if you are a shareholder) as only the company can deal with its assets.
- Superannuation death benefits or life insurance policy proceeds paid directly to a beneficiary.
Who can make a will?
To make a valid will generally requires “testamentary capacity.” In Australia, this means you must be:
- Of sound mind, memory and understanding at the time the will is made or when instructions are given to the lawyer to prepare a will.
- Generally a person must also be 18 years of age or over. There are exceptions to this requirement under special rules for:
- Members of the Armed Forces in active military service.
- Minors who are married or about to get married and minors permitted by the court to draw will.
Revoking your will
A will, or part of it, may be revoked at any time. For a voluntary revocation to be effective, the will-maker (testator) must have the intention to revoke the will and have the same testamentary capacity as is required for the making of a will.
A will may automatically be revoked, in part or in full depending on the jurisdiction, in the following situations:
- Upon marriage;
- Upon divorce;
- By the making of another will, or part of a will;
- By written declaration; or
- If the will is destroyed with the intention of revoking the will.
If you die without a will
If you die without a will, you are said to die ‘intestate’ and your estate will be administered according to the intestacy laws of the applicable State or Territory. Where there are no surviving relatives, your estate may pass to the relevant State and Territory Government. This means that your assets could pass to a beneficiary that you would not have wanted to benefit from your estate.
Appointing your executor
Your executor is the person who will be responsible for administering your estate after your death. When you make your will, you nominate the person who will perform this role. It is advisable to ask the person first and be sure the burden and responsibility of this role is clearly understood. If the person you have in mind is also a beneficiary, that is not a problem as beneficiaries are not excluded from acting as executor.
Nominating a guardian
Nominating a guardian to care for your minor children is an important choice. This role is generally performed by a family member or someone that you would trust with the upbringing of your children and who would be prepared to take on this responsibility.
Power of Attorney
A power of attorney is a document empowering another person to act on your behalf. It should only be given to someone you trust since it involves you passing on important and legally recognised powers, rights and entitlements. All powers of attorney may be revoked by the maker (donor) at any time whilst they have mental capacity. You should ask your solicitor if a power of attorney is appropriate for your circumstances.
There are different types of powers of attorney, including:
- General – where the attorney is able to do all of the things in relation to your property and financial affairs on your behalf. However, this power ceases if you lose mental capacity.
- Enduring – where the attorney is able to do all the things in relation to your property and financial affairs on your behalf. This power continues if you lose mental capacity.
- Limited – where you restrict the things that the attorney is able to do on your behalf, or you restrict the time for which that person will be your attorney.
- Medical – where you authorise someone to make medical decisions on your behalf when you are unable to.
- Guardianship – where the guardian is able to make personal and lifestyle decisions on your behalf when you are unable to.
Each State has its own rules for powers of attorney. Some States also have Advanced Health Directives that enable you to give directions about your medical treatment if you are ever unable to.
Will your estate be taxed?
The tax which may potentially have the greatest impact on the value of your estate and its distribution is capital gains tax (CGT).
CGT is payable when you dispose of certain assets which have increased in value. The transfer of assets to your executor or a beneficiary on your death does not trigger CGT, however a CGT liability may be triggered when the executor or beneficiary of your estate sells the asset.
There are strategies that can minimise the CGT liability. You should discuss these with your tax adviser.
Binding death benefit nominations
As previously mentioned when a person who has been a member of a superannuation fund dies, the amount payable from the fund does not generally form part of their estate and as such is not distributed via their will. Where there is no death benefit nomination or a non-binding death benefit nomination, the trustee of your superannuation fund will use their discretion to distribute your benefits, in accordance with the superannuation fund’s trust deed. This includes to whom and in what form, i.e. as a lump sum, pension, etc.
Most superannuation funds now allow for binding death benefit nominations, which give the members the ability to nominate who receives their benefits. This is binding on the trustee of the fund.
Binding death benefit nominations provide that a superannuation death benefit, including any life insurance owned within your superannuation fund, is paid to your nominated dependant or the legal personal representative of your estate, not at the trustee’s discretion.
Death benefits may be paid as a lump sum or a pension or a combination of both. However after 1 July 2007 death benefit pensions can no longer be paid to non tax- dependants.
A testamentary trust can be useful in producing tax effective income for minors.
A testamentary trust is established by your will and only comes into effect upon your death. Its purpose is to manage estate assets in accordance with your objectives and the needs of the beneficiaries. It offers flexibility as well as taxation and asset protection benefits. You should obtain legal advice from a solicitor specialised in estate planning on the benefits of testamentary trusts.
Interested in speaking with a financial adviser?
Contact Capital Advice Partners on 02 8920 3488 or use the form on the right today.