Estate Planning

Issued 1/07/2016

For advice documents received prior to this issue date, please contact your financial adviser to obtain a copy of the appendix relevant to your advice document.

Estate Planning involves the establishment of legally binding arrangements to ensure that the ownership and control of your assets is transferred to the appropriate people at the right time.

An effective Estate Plan will assist you to:

distribute your assets in an efficient and cost-effective manner
minimise challenges to your Will and potential family disputes
minimise the tax implications of the distribution of your assets
protect your estate from claims arising from the possible divorce or bankruptcy of your children, if applicable, and
provide for beneficiaries that may not be able to manage assets themselves.

Wills

A Will is a legal document that directs how your assets are to be distributed after your death. When preparing a Will, the following important areas need to be considered:

Objectives - It is important to consider who you would like to receive all or part of your estate assets, and whom you wish to benefit should your first choice beneficiary (or subsequent beneficiaries) predecease you. This is particularly important in terms of children and grandchildren.
Executor(s) - When you make a Will, you must nominate an executor. The executor is responsible for the entire administration of the estate until the final distribution of assets is made to the beneficiaries. It is important that the executor is someone who is likely to survive you and who clearly understands your wishes. Nominating an alternate or successor executor is also sensible, as the primary executor may be unable or unwilling to fulfil the responsibilities of the role. The executor can be a person or trustee organisation.
Trusts - Funds may be held in trust for beneficiaries for a number of reasons including for those who have special needs, such as a disabled child, and those who have not yet reached the age you nominate for them to receive the bequest, such as a child under the age of 18 (minor). You should nominate a trustee for these funds and set guidelines regarding the type of investments he or she can make on behalf of the minor.
Specific gifts - You may wish to leave certain items to specific individuals. This may have some capital gains tax and stamp duty implications.
Specific amounts/percentages - As an alternative to leaving a specific asset to an individual(s), consider bequeathing a monetary value or a percentage of your estate, as there is the risk that an asset may not be in existence or divisible at the time of distributing the estate.
Ownership - You need to know exactly what assets can be dealt with by a Will. For example, any jointly owned assets such as real estate or investments cannot be dealt with by a Will. These assets pass automatically to the surviving joint owner.
Taxation - You need to consider the taxation implications of your Will. An inappropriately drafted Will can have a detrimental effect on the beneficiaries from a taxation perspective.
Centrelink and DVA implications - If your surviving spouse or other beneficiaries are receiving Centrelink or DVA benefits, you need to consider how distributions via your Will might affect their ongoing entitlements.
Cost - The cost of having a Will prepared professionally versus the cost of a self-prepared Will or indeed no Will at all.

While you can make your own Will, drafting a valid Will may not be as straightforward as you think.

You should consider obtaining professional assistance from a solicitor, the Public Trustee in your state or territory, or a trustee company.

Updating your Will

It is recommend that you update your Will periodically to ensure that it continues to reflect your wishes or any changes in your circumstances, for example due to bereavement or divorce. It is important to note that a Will is rendered invalid by marriage but not in the event of divorce. Divorce does not automatically cancel a Will. If you want to change your Will due to divorce, you will have to make a new Will. Nevertheless, under the governing laws of most states of Australia, divorce revokes any gift that is made to a former spouse and their appointment as executor, trustee or guardian.

Storing your Will

You should keep your Will in a safe place. It may also be sensible to give the executor a copy of your Will and tell them where the original is located.

Guardianship

If you have young children, your Will can be used to nominate a guardian who would take care of the children in the event of your death. You may also consider nominating an alternate guardian in case your guardian cannot fulfil the role.

Life interests

If you would like a particular person to have the use of one of your assets (such as your home) until that person dies, your Will can create a life interest in that asset. The person has full use of the asset, but as they do not own the asset, they cannot sell or dispose of it. On their death the asset is distributed to your beneficiaries in accordance with your Will.

What happens if you die without a Will?

Dying without a valid Will is known as intestacy. If you die intestate, your estate assets will be distributed, by law, in accordance with a prescribed formula depending on the state in which you live. The absence of a valid Will can also delay the administration of your estate. Potential beneficiaries who are not satisfied with the distribution formula may commence legal action to alter the distribution. This can be a long and expensive procedure that can be avoided with a properly structured estate plan and Will.

Powers of Attorney

When preparing your Will, it may also important to address the issue of Powers of Attorney. A Power of Attorney is a legal document that appoints one person (known as the attorney) to act on behalf of another person (principal) in relation to the principal’s property and financial affairs. The extent to which the attorney can undertake decisions/actions on behalf of the principal is governed by the terms of the Power of Attorney itself. The effect of a Power of Attorney is that all acts performed by the attorney will have the same legal effect as if the principal had performed them.

A Power of Attorney may only be granted by someone who is:

over the age of 18
of sound mind, and
capable of fully understanding the nature and purpose of the document that they are signing.

State/Territory laws regulate powers of attorney and each state has different laws. For example, some States/Territories allow medical enduring powers of attorney so that a principal can make medical decisions on your behalf if you lose the capacity to make them.

Types of Powers of Attorney

Broadly speaking, there are two types of powers of attorney as follows:

General Power of Attorney - allows the attorney to carry out any act concerning the affairs or assets of the principal, whilst the principal has legal capacity (or is of sound mind).
Enduring Power of Attorney - is a power of attorney that continues beyond the time that the principal becomes of unsound mind and is unable to conduct their affairs.

Features and benefits of an Enduring Power of Attorney

The main benefit of an Enduring Power of Attorney is that it will continue to operate in the event of legal incapacity of the donor of the power.

Enduring Powers of Attorney may be established for a specific purpose as described below:

Financial - where the principal gives the attorney the power to make financial and legal decisions for them, such as managing their banking, property or paying bills. If an individual does not have a financial enduring power of attorney in place and they do not have sufficient capacity to make financial and legal decisions, then an administrator (e.g. a relative, friend, solicitor or accountant) or an organisation (e.g. a State owned enterprise or a private trustee company) may be appointed to take control of their financial affairs.
Medical treatment – where the principal appoints the attorney to make medical treatment decisions for them, such as agreeing to medication or surgery. This power is required in a situation where the principal has lost the capacity to make decisions permanently, such as through dementia or an acquired brain injury from a car accident, or temporarily, by becoming unconscious as a result of an illness.
Guardianship - where the principal appoints a guardian to make personal and lifestyle decisions for them, such as where they live and the health care they receive. It is the only way a person can have control over who will make lifestyle decisions on their behalf if they are ever unable to do so themselves. An enduring power of guardianship cannot be used to make financial and legal decisions.

The actual name of the Enduring Power of Attorney may vary depending on the State or Territory.

Testamentary trusts

A testamentary trust is a trust created by a Will and becomes active at the time of your death. When a testamentary trust is included in a Will, upon death, the assets pass to a trustee. These assets are held on trust for the deceased’s beneficiaries, rather than passing directly to those beneficiaries.

Testamentary trusts have significant advantages, including the protection of the assets of your estate within a trust structure. In addition, if structured as a discretionary trust, the trustee is able to distribute income in a tax-effective manner. The Trust Deed provides guidelines for the payment of income and capital to the beneficiaries. Within the guidelines, the Trustee has discretion as to where these benefits are paid.

It is important that you assess the objectives of your estate and the purposes for which the income and assets are to be used. You should take time to discuss the issues in detail with a solicitor.

Advantages of a testamentary trust

Tax benefits (minors) - Ordinarily, trusts established by a person for the benefit of children or grandchildren under age 18 are subject to penalty rates of tax. In such a situation, tax at a minimum rate of 47% (and as high as 68% on a small part of the income) would apply to the portion of a minor’s assessable income exceeding $416 in a financial year. If a testamentary trust were used for the purpose of distributing estate income to minors, normal (and significantly lower) adult tax rates would apply.
Tax benefits (income streaming) - Under the terms of a properly constructed testamentary trust, the Trustee has the discretion to distribute different types of income to different beneficiaries in order to maximise the tax-effectiveness of the income distributions.
An example of this benefit is the ability of a trustee to allocate the net capital gain component of the trust’s net income to beneficiaries who have accumulated realised capital losses, as it is these beneficiaries who can then use their capital losses to offset the distributed capital gain. Discretionary streaming of the trust distributions can also be useful to distribute both franked and unfranked dividends to different beneficiaries for example.
Asset protection (creditor protection) - The testamentary trust can be set up so that certain beneficiaries receive the benefits of a discretionary entitlement to income from trust assets, but are not entitled to the trust assets. As such, if a legal claim were made against such beneficiaries, the assets held in the testamentary trust would generally not be subject to any creditor claims.
Asset protection (family law) - People are becoming increasingly aware that assets they give to their children under a Will may become assets of their children’s marriage and therefore, be subject to a property settlement should there be a breakdown of the marriage. In such circumstances, the testamentary trust can be tailored to ensure that a testator’s assets stay within their family for a period of up to 80 years after their death. The level of family law protection can be tailored to the specific circumstances of the client.
Catering for special needs of beneficiaries - A testamentary trust can provide for the maintenance, care and education of any person who is vulnerable because of age, intellectual or physical disability or who is otherwise incapable of managing their affairs.

Treatment of super

Your super is an asset that may or may not form part of your estate; however you should be aware that your superannuation is not distributed through your Will when you die. The trustee of your super fund has a legal right to deal with your super benefits at its discretion, depending on the trust deed (governing rules of the fund) and the existence of any nomination of beneficiaries made by you.

It is important that your nomination of beneficiaries for your super fund is up to date. Depending on the type of nomination you make (see below), the trustee of your super fund must either pay your super benefits in accordance with your nomination or at least consider your nomination when determining the distribution of your super benefits in the event of your death.

There are two ways in which you can nominate beneficiaries for super death benefit purposes. These are:

1. Make a binding death benefit nomination

A binding death benefit nomination provides you with some degree of certainty regarding how your benefits will be distributed in the event of your death.

A binding death benefit nomination is a written direction to the Fund, which states who is to receive your super benefit in the event of your death and in what proportion. Provided that the nomination is valid, it is legally binding on the Trustee. That is, the Trustee must pay your benefit to the beneficiaries you have nominated in the proportions set out in your nomination.

A binding death benefit nomination is only valid if all of the following apply:

The nominated beneficiary/ies is a superannuation dependant¹ and/or legal personal representative (otherwise known as your estate)
It is signed by you in the presence of two witnesses who are 18 years of age or older and not listed as a beneficiary/ies on the binding death benefit nomination form
It is signed and dated on the same day by both you and your witnesses.

UniSuper offers two types of binding death benefit nominations – lapsing and non-lapsing.

A lapsing binding death benefit nomination expires after three years and must be confirmed in writing every three years to remain valid.

A non-lapsing binding death benefit nomination doesn’t expire (unless you amend or revoke it).

Both lapsing and non-lapsing binding death benefit nominations can be updated or cancelled at any time, by completing a new binding death benefit nomination form.

Advantages

A binding death benefit nomination can provide you with a degree a certainty that your super death benefits will be paid in accordance with your wishes.
Binding death benefit nominations also have some estate planning benefits. For example, there may be tax advantages in ensuring that your super is paid to an infant child (as super death benefits received by a child under age 18 are tax-free) and other non-super assets bequeathed to an adult child.

Disadvantages

The main disadvantage is the inability of the Trustee to exercise discretion where your circumstances have changed and your nomination has not been amended to reflect this. For example, your family situation may have been altered due to births, deaths, children becoming independent, re-marriage, etc.

¹See ‘Who qualifies as a dependant?’ for the definition of dependant for superannuation purposes.

2. Non-binding death benefit nomination

A non-binding (or preferred beneficiary) nomination enables the Trustee to take into consideration your nomination, but it does not bind the Trustee to pay the benefit to the nominated beneficiary or beneficiaries. Payment of a death benefit can only be made to a dependant and/or the legal personal representative in accordance with the terms of the Trust Deed and superannuation law (see below).