The basics of estate planning

Posted on May 23, 2018 by Terry Morgan   |   Categories: Wills & Estates

Estate planning is a strategy to ensure that your estate passes to your intended beneficiaries in the most tax efficient way and to minimise the potential risk of the will being challenged or a family provision claim being commenced.

There are really two types of will.

The first one is a very basic will which essentially contains the minimum requirements and is drafted quickly without consideration of tax implications or any complex gifts. These types of will appoint an executor and trustee and then make provision for their chosen beneficiaries in absolute or simple gift form.

Whilst that may suit the needs of many, the disadvantage of using this type of will is that the beneficiary will have no choice but to take their inheritance in their personal name. Where the inheritance includes income it will be taxed accordingly. For example, a rental property income will be taxed at the personal tax rate of the beneficiary and could push them into a higher tax bracket.

In addition to this problem if any of the beneficiaries were to inherit and subsequently divorce or separate from their long term partner their inheritance could be vulnerable in family law proceedings.

The second type of will is one which includes a testamentary trust. A testamentary trust is used to give asset protection to a beneficiary and take advantage of a potentially significant tax effective structure.

Such protection may be necessary because a beneficiary needs to be protected from their own lack of judgement or from being taken advantage of by someone else, potentially through litigation.

You may be wondering why wouldn’t everyone have a testamentary trust?

Well, given the complexity of a testamentary trust it is more expensive to set up than a simple will. Usually somewhere between $2,500 and $5,000 as opposed to around $500. A lot of people consider that this expense is unnecessary given the size of their estate or the means they currently have available to them.

We advise that a testamentary trust should always be used in at least the following cases:

1. Where a beneficiary will inherit an income or income producing assets;
2. Where a beneficiary is already earning or is likely to earn a significant amount and is in a high tax bracket;
3. Where asset protection is needed or desired; and
4. Where the beneficiary will require protection from themselves or third parties.

No advice about wills or estate planning is complete without mentioning enduring powers of attorney and enduring guardians.

An enduring power of attorney essentially allows someone else to act on your behalf in relation to all things financial. An enduring power of attorney needs to be made when you are of sound mind and will continue should your capacity be lost. Once your capacity is lost it is not possible for you to revoke or change a power of attorney.
An enduring power of attorney can be expressed to commence immediately, or for a specified period of time or alternatively it can come into effect once a medical practitioner determines that you require assistance.

As stated, a power of attorney will allow you to delegate all your financial responsibilities to another. Things such as operating bank accounts, signing documents on your behalf, and managing property, including selling or borrowing against a property if this is determined to be in your best interests or done upon your instructions. An attorney would also step into your place in legal proceedings if necessary.

Finally, an enduring guardian is similar to a power of attorney in that it allows you to delegate your decision making powers; this time in relation to your medical, health care and treatment decisions. A further difference is that an enduring guardian will not operate until such time as you have lost capacity to make your own decisions.