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Hudson Financial Planning - Estate Planning

Estate Planning: 4 Things You MUST Consider

Written by Kris Wrenn – Senior Adviser

I’ve often said to my clients that Insurance is a very unique product, in that you pay good money for it, but hope you will never use it! Estate planning expenses, i.e. paying for a Will, is a similar premise, in that you yourself will never directly benefit from it. To the loved ones you leave behind, however, it is very important, and if you plan correctly your assets, investments and possessions will be distributed in the exact manner that you desire, and without anyone being able to successfully contest the outcome.

What I see as an adviser however is that an alarmingly large number of Hudson members do not currently have a valid Will, or that they have used a “Will-kit” instead of using a solicitor, or that they set up a Will, but do not consider related implications, such as Superannuation and how proceeds from this do not necessarily get paid to your estate if you do not have beneficiaries named on the Super account. Below I have put together a list of 4 key areas that all individuals should consider when they think about their own estate planning needs, the reasons why and the potential strategies available:

1/ The obvious one. Do you have an up-to-date, valid Will?

Anyone over the age of 18 that has any assets to speak of should have a Will. A basic Will can be very inexpensive to arrange (under $500) and can last a lifetime. They then cost more if the situation is more complex (children from previous marriages, etc), or if there are children under 18 and a trust is desired etc.

Without a Will, you will die “intestate”, and the laws of your particular State will dictate how your funds will likely be distributed. Furthermore, it is more likely to be able to be challenged, potentially by ex-spouses or estranged family members.

What happens if you have no spouse or children? … In this case the general hierarchy of entitlement is: parents, siblings, nieces & nephews, grandparents, aunts and uncles, cousins, and finally, “The State”.

With a Will you can dictate who will receive your assets – property, possessions, cash in the bank, shares, car, jewelry. You can also dictate who will look after your children. Finally you can express your wishes with respect to your funeral and burial/cremation selection.

Note: a will does not cover assets owned jointly. The surviving joint owner(s) of a property for example will automatically own the deceased owners share.

Small changes to a Will can be made with a codicil in the event of a change (marriage, divorce, new kids, etc).

2/  Not so obvious. Have you ALSO set up a binding Death Nomination OR Reversionary Beneficiary for your Super / Pension account?

If not, you need to, as Super is not automatically paid to your estate to be distributed according to your Will. Although there is a good chance they will pay to the estate, it is ultimately at the discretion of the trustee. Unless, you have one of the aforementioned arrangements in place, in which case they are legally bound to distribute assets as you have specified.

Things to note:

  • You can only name a Spouse, child under 18, financial dependent (adult children residing with parents), or someone you have an interdependet relationship with. If you don’t have anyone in that category, or if you don’t want to name someone in that category, you can name “Legal Representative”, and your Super will be distributed along with your other assets as per your Will, assuming you have one.
  • Insurance policies held inside Superannuation will, in most cases, be included here, so the amount we are talking about may be considerably higher than just the Super balance, making naming a beneficiary even more important.

3/ Consider the tax consequences relating to your assets being distributed.

Unlike in some other developed countries (e.g. the UK) there is no “inheritance tax” in Australia, however, this doesn’t mean that beneficiaries can’t be hit with other forms of tax.

For example:

  • Applicable Unrealised Capital Gains are often effectively “inherited” along with an asset such as an investment property or shares.
  • Superannuation funds that are inherited by non-financial dependents incur tax of 15%+medicare. This is only on the “taxable component”, but it is worth noting that the majority of most people’s Super is made up of “taxable component”. Employer contributions and salary sacrifice for example add to the taxable component.

STRATEGIES – Consider the following strategies to combat the above:

1/ At some stage in life, if possible, Superannuation funds can potentially be withdrawn from Super and re-contributed as a personal, non-concessional contribution. This means they will form part of the tax-free component and, adult children for example, that inherit Super, will not pay tax. This strategy is known as “recycling the taxable component”.

2/ Similarly, insurance benefits from Super are tax-free if paid to a spouse or dependent (under 18, or financially dependent under 25), but NOT to non-financial dependents. But, if you set up Life policies outside Super, however, they are generally tax-free regardless of the beneficiary.

3/ A CGT liability can be deferred if the beneficiary is given an asset itself, rather than the proceeds from the sale of that asset.

4/ You could consider setting up a testamentary trust to receive an estate, which could then distribute proceeds across multiple individuals over multiple financial years. It is very important to discuss such an arrangement with your solicitor when setting up your Will.

4/ Do you have an Enduring Power of Attorney (EPOA) assigned?

When setting up a Will you can (at additional cost) set up an EPOA. This is someone you appoint that can manage your financial affairs on your behalf, even if you are incapacitated, and they can legally act on your behalf until you pass away.

You can also have an “Enduring Power of Guardianship” that enables a person to make medical and lifestyle decisions if you are mentally unable to do so. It is obviously very important to choose someone you trust and to understand the risks in giving someone else control of your affairs.

If you wish to speak to an Adviser at Hudson Financial Planning, please call direct on 1800 804 296 or submit a contact form directly on our website.

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