Preparing Or Revising Your Estate Plan?
Congratulations! We say that because it puts you among a growing savvy group of Australians who know that life is too complex to prepare a will without considering the bigger picture.
Don’t get us wrong, a will is the cornerstone document of an estate plan, but, it only addresses assets we own personally. There are assets many of us control that cannot be included in a will. And, preventing challenges by a beneficiary you chose to exclude needs to be dealt by an estate plan.
Some of us jointly own an asset with another person as tenants in common. Others have a business partnership. Both Scenarios call for estate planning.
Many of us have superannuation and insurance benefits, once again calling for consideration as part of an estate plan.
Some of us have estranged but legally eligible beneficiaries, calling for clever estate planning and asset structuring to prevent challenges.
The last thing any of us want is the courts over-ruling our decision to distribute our assets as we choose. A successful estate plan provides peace of mind for you and comfort for your family long after you are gone. It maximises the value and longevity of your legacy. And, it doesn’t cost a fortune to implement.
A basic approach to planning your estate ignores both nasty threats and brilliant opportunities for your beneficiaries.
You don’t have to spend a fortune on it. The idea is to pay only for what you need.
In some cases (not all), you might need to re-structure your assets. In other cases a relatively simple estate plan is all that’s required. Some people need a standard will and an enduring power of attorney. Some need more. It depends on your circumstances.
You won’t know for sure exactly what you need without expert professional estate planning advice.
Expert experience in and knowledge of Tax Law, Superannuation Law, Trust Law, Estate Law, Commercial Law and Succession Law provide a solid platform for sound advice, planning and drafting of documents.
Although we can help you start working it out with out “Supercharge Your Will And Estate Plan” 3 -part series (5-7 Minutes each)
Estate planning involves making a plan to ensure the assets you own and control are transferred to the next generation in the best way possible.
A well-devised estate plan will:
Circumvent or impede estate challenges.
Allow flexibility in the management of inherited assets by beneficiaries.
Minimise tax payable by beneficiaries
Protect assets from third party claims.
Can you spare a 5-7 minutes over the next 3 days to learn a little more?
Our three-step service helps people create bigger longer lasting legacies relatively quickly.
Too Busy? With your permission we will do the heavy lifting for you
In a short 20 minute obligation free discussion we can set you on the right path. If we are a good fit for each other and our affordable fixed fees are agreeable we we’ll move forward with professionalism and discretion. Did you know that we can contact your financial service providers and collaborate with them directly to save you time? We can with your authorisation.
Want more detail about the estate planning process?
Our clients engage us for single documents, all or part of this service depending on their needs.
Expand the headings to learn about our comprehensive estate planning review process.
We have prepared a number of free educational videos and downloads to help you understand what estate planning and will-making involves. If you are just starting to consider this, kick-start your journey herWe also offer a free Estate Planning Blue Print Session with a Liberty Law staff member or associate on Skype or by telephone. We get to know you, your circumstances, and how you want ownership and control of your property to be passed on. That way we can highlight some available options for you to move forward.
Our 20-minute Estate Planning Blue Print Session will cost nothing, apart from 20 minutes of your time. Your options will be clearer and you will know the best way to progress with your will and estate planning.
Why is the Blue Print Session free? So you can determine if Liberty Law is a good fit for you, and, so we can determine if you are a good fit for the services and expertise we offer. Regardless of the outcome the Liberty Law Next Steps information pack is yours to keep.
Planning and Strategy Consultation with a Liberty Law lawyer
At Liberty Law we appreciate the importance of estate planning. We understand a thoughtfully conceived plan may significantly impact your family for generations to come. The value and longevity of your legacy depends on good planning. Whether you have substantial assets, an expensive home, significant superannuation benefits or more modest assets, planning pays.
In a Planning and Strategy Consultation, we analyse your specific situation and make appropriate recommendations.
We maximise flexibility for your beneficiaries and legally minimise their taxes. Our recommendations focus on placing protective barriers around inherited assets, to help repel claims by estranged partners and creditors against your beneficiaries after they receive a legacy.
We also determine the answers to some key questions, which may include:
Who has the power to manage your finances and distribute your assets once you are gone?
How much flexibility should your beneficiaries be given, in relation to their inheritance?
How should a beneficiary’s inheritance be gifted? Into a trust or to the beneficiary directly?
Which of your assets form part of your deceased estate and will be available for distribution under your will?
Which assets do you control, but do not form part of your deceased estate, requiring special consideration?
Who might make a claim against your estate and what are ways to mitigate that risk?
Who decides where your superannuation benefits will be paid and will this be done in a way to minimise tax?
Who will be your decision maker in the event of incapacity and should that person’s decision-making power be limited?
Who will advocate your wishes regarding medical treatments or resuscitation if you are ever seriously ill and unable to communicate?
How will you transition control of family trust arrangements, so one person does not exploit a position of power and take more than you intended?
How will you protect the nest egg you have provided to vulnerable or disabled beneficiaries?
Following your Planning and Strategy Consultation we provide a detailed written report and recommendations of the estate planning documentation you should prepare to achieve your desired outcome.
During the session:
- We ask a series of questions to assess your situation holistically.
- We clarify your priorities and wishes.
- We flag and discuss your potential risks and opportunities.
- We answer questions or concerns you may have regarding your estate planning.
After the session:
- We send you a written report and include recommendations.
- We include a fixed fee proposal for us to prepare any recommended documents.
- We follow up with a call to answer any questions you may have.
- We confirm if you want us to prepare some or all of the documentation.
Liberty Law lawyers prepare your documentation after appropriate consideration of your circumstances and based on your instructions. We offer quality wills, sophisticated wills incorporating testamentary trusts, and associated estate planning documents to fulfill your needs.
You might need a simple set of documents such as:
A will, power of attorney and an advance care directive.
Perhaps a more complex set of documents such as:
A sophisticated will incorporating a testamentary trust, a binding death benefit nomination or documents to address the transition of control in respect of non-estate assets.
In addition to the legal documents, we offer a suite of documents to assist with the smooth transition of your wealth, such as executor information packs and guidelines to assist your beneficiaries in their time of grief.
Liberty Law is a firm of licensed Australian legal practitioners focused on wills and estate planning, so you can trust that you will receive the highest standard of documentation.
Document storage, access, and revision service
We offer our clients free storage of their documents in a secure and fireproof environment with electronic access to copies when required.
As circumstances often change, a will or estate plan might require revision over time. We provide guidance notes to identify future events that could trigger a need to review your documents.
Our information hub and optional news bulletins also deliver information on changing laws, to keep you up to date and help you understand when document revisions might be necessary.
We also offer an ongoing monitoring and revision service for an annual fee and can make smaller revisions to documentation as requested.
The documents we provide may include some of the following and others not listed.
Protective and Disability Trusts
Superannuation Proceeds Trusts
Strategies to impede estate challenges
Superannuation Death Benefit Nominations
Powers of Attorney
Advance Care Directives (living will)
Executor Support Documentation
Liberty Law Legacy Pack for Beneficiaries
TOP 8 Common Will and Estate Planning mistakes. Solved.
Why attract unnecessary taxes or unwanted claims against your estate. Find out why so many Australian’s make mistakes and how to avoid joining them.
Estate Planning FAQ
There are many tax implications arising from a death. One important object of a comprehensive estate plan is to ensure tax liabilities are minimised when death inevitably occurs.
Estate assets are a person’s individually owned assets at the time of their death.
Non-estate assets are assets a person has control over, or has a right to benefit from, but does not individually own at the time of their death.
Different tax considerations apply to estate assets and non-estate assets. Estate assets are subject to tax rules that apply specifically to deceased estates. General tax laws apply to non-estate assets (such as assets held in a family trust) relevant to those assets and transactions arising from those assets.
Here are a few common examples of how failing to plan might lead to an unexpected and unwelcome tax liability:
- Generally a capital gains tax exemption applies to sale of a primary residence during a person’s life. But what happens when a person’s primary residence is transferred to an executor or a beneficiary? The exemption only applies when specific conditions, are satisfied. Failing to understand these conditions, and where applicable including appropriate provisions in a will may result in a tax liability.
- Superannuation death benefits are tax free, but only if paid to persons that are a deceased member’s “dependants” under tax laws. The tax levied upon payments made to “non-dependants” under tax laws, depends upon the component parts of the death benefit. The tax payable could be as high as 30 percent plus the Medicare levy. Proper planning may identify opportunities to structure a person’s affairs in such a way that minimises tax payable on death benefits.
The Cost
The cost of estate planning varies depending on the complexity of a person’s circumstances and their wishes for the transition of ownership and control of assets.
It also depends on which estate planning documents are necessary to implement a person’s wishes.
A comprehensive plan involves much more than the preparation of a will. It also addresses all non-estate assets and often involves drafting testamentary discretionary trusts and formulating strategies to protect assets from claims – both during the administration of an estate and subsequently, once a beneficiary has received an inheritance.
Some individual documents forming part of an estate plan may cost just a few hundred dollars. That may be all that’s required in some circumstances. However, a more comprehensive plan for a client with substantial assets, a desire to minimise taxes and protect legacies from claims, may cost several thousands of dollars to implement.
Our free Blueprint Session outlining general information, or one-hour consultation with specific recommendations applicable to your individual circumstances, enable us to collect necessary information to provide a fixed price proposal relevant to a client’s needs.
The Value
The information that appears above, under the heading “who needs an estate plan” highlights some problems arising from a failure to plan.
You should also consider the value an effective estate plan represents, in light of opportunities to:
- Save beneficiaries thousands (sometimes hundreds of thousands) of dollars in tax.
- Avoid significant depletion of estate assets from a family provision claim (estate challenge).
- Place an asset protection shield around the assets gifted to your beneficiaries, safe from challenges by third parties.
We welcome the opportunity to demonstrate how effective estate planning can create significant value relevant to your specific circumstances.
Preparing your own will is fraught with danger. Also, considering the threats ignored and opportunities missed by DIY will-makers, the perceived savings often represent false economy.
Often DIY will-makers don’t get past first base, as they don’t understand which assets in their ownership or control are included in their deceased estate. Only assets falling within a person’s deceased estate are available for distribution under a will. While DIY will-makers often assume all their assets have been covered, significant assets are often ignored.
Tremendous estate planning opportunities exist to maximise the value and longevity of a beneficiary’s legacy. Opportunities which are typically missed by DIY will-makers include:
- mitigating the impact of will challenges
- minimising tax payable on the transfer of estate assets and on subsequent income generated from those assets
- safeguarding gifted assets from loss or depletion where a subsequent challenge is made against a beneficiary.
Estate planning can be very complex. The drafting of will clauses, even in the most basic will, must be very precise and drafted with a full appreciation of the law. Otherwise, intended provisions may be ambiguous or completely void, resulting in disputes and depleted estate assets being available for distribution after the cost of litigation is deducted.
Countless court cases illustrate mistakes made by DIY will-makers.
Can you spot why the following example clauses might result in a major headache?
- “I leave my house to A, all the house contents to B and the balance of my estate to C”
- “I leave $100,000 to the St Mark’s Cathedral”.
- “I leave all my estate to my 4 children A, B, C & D in equal shares”.
- “I leave my son X the sum of $10 as we have been estranged for the last 20 years. I leave the balance of my estate to my daughter. Y”
- “I leave my business to X”.
- “I leave everything to my spouse A, but if she dies before me, then everything to my children”.
How did you go? See comments below
There are no second chances when it comes to making a will. The will takes effect once you die. It’s too late to make corrections once you’re gone.
What did you miss?
- What if there was an expensive sports car in the garage? Is that considered part of the house contents? Who gets the car, B or C?
- How can you leave money to a building?
- What if A & B are independent adults and C & D are dependent minors. If the estate included death benefits of $500,000 received from a superannuation fund, along with $500,000 in other assets, an opportunity to save thousands in tax has been squandered by failing to structure correctly.
- Leaving a token amount to someone you are trying to exclude does not work. X may challenge the estate and get significantly more than $10. If the dispute settles at mediation, the legal fees depleted from the estate could be $50,000.00. If the matter goes to court, the legal fees could be substantially more.
- If the business is operated through a family trust (as many small businesses are), it does not technically belong to the will-maker and can’t be left in his / her will. Separate estate planning documents must be prepared to deal with the business.
- If A is a second or third wife and the will-maker has various step-children, was it intended that the step-children be included?
There is no clause you can insert in a will, which prevents an eligible person from making a claim.
You can, however, take measures to lessen the impact of a claim, reduce a claimant’s chances of success, or even make their claim futile.
Examples of strategies that may be implemented, as part of an estate plan include:-
- Transferring an asset to a preferred person, during your life.
- Transferring a property from your sole name, into joint names with your preferred recipient means the property does not form part of the deceased estate and is not included in the pool of assets subject to a claim.
- Assets held in a discretionary trust do not form part of your deceased estate and are not included in the pool of assets subject to any claim. Accordingly a strategy may involve transferring assets into a trust during your life and ensuring your preferred person takes control of that trust upon your death.
- Preparing a Binding Death Benefit Nomination in relation to superannuation death benefits enables payment directly to a dependent and accordingly the benefit does not form part of your deceased estate and is not included in the pool of assets subject to any claim;
- If a Binding Financial Agreement is made with a spouse (including a de facto) during your life, the content of that document is taken into account by a court if the surviving party to the agreement makes a claim. This may be particularly relevant to people in blended families that seek to protect the interests of children of a first marriage.
Note, things get a little more complex in NSW, as that State’s Succession Act enables a court to treat certain property transferred within 3 years prior to a person’s death (not forming part of their actual deceased estate) as forming part of a deceased person’s “notional” estate. When a claim is made, the court looks at both the actual deceased estate and the notional estate, when assessing the pool of assets potentially available to a claimant.
A will governs the distribution of assets held in a deceased person’s estate. It does not determine what happens to non-estate assets.
Non-estate assets are assets a person has control over, or has a right to benefit from, but does not individually own at the time of their death.
It is not always straightforward to determine which assets fall outside the estate. Some examples follow:
- The deceased’s share of a property that is held as a joint tenant (in this case the surviving joint tenant/s are entitled to the deceased’s share irrespective of what the deceased’s will provides).
- Superannuation death benefits – (distribution of benefits is governed by the fund deed and the trustee of the fund is the most likely decision maker regarding how benefits will be disbursed unless a valid Binding Death Benefit Nomination has been prepared, in which event the deceased fund member decides how benefits will be disbursed).
- Assets held in a discretionary (“family”) trust – (the trust continues to operate upon the death of a beneficiary and the trustee decides which surviving beneficiaries will benefit from the trust and receive distributions from the trust).
- Insurance benefits when the nominated beneficiary differs from the deceased – (the beneficiary is entitled to the benefits and accordingly the deceased’s will is not relevant).
- Franchise Assets – (the franchise agreement will typically govern what happens to these).
For starters, every person over the age of 18 years, that has legal capacity, should have a will.
Even young adults, with no significant assets, may have significant wealth to pass upon their death. This often occurs because of compulsory superannuation and in particular, because life insurance is often incorporated into superannuation death benefits. So in addition to having a will, most adults should also plan on how their superannuation death benefits are to be paid.
People that have a business or assets in a family trust need to consider how control of those assets will transition upon their death.
Some problems that arise, where a will has not been prepared or other associated planning matters have not been addressed, include:-
- Assets owned or controlled by a deceased person do not get divided and dealt with in the manner he or she would have preferred. This may particularly apply in the case of blended families.
- Disputes may arise leading to costly litigation and significant depletion of assets;
- Failure to have a will or associated estate planning documents may result in considerable delay and expense associated with estate administration.
- Significant taxes, that could lawfully be avoided, may become payable by beneficiaries.
- Inherited assets may be squandered by a beneficiary or lost due to claims by creditors or estranged partners.
ADVANCE CARE DIRECTIVES
An Advance Care Directive (sometimes referred to as a Living Will and having a slightly different name in the various states and territories throughout Australia) is a document containing a statement of your directions that need to be considered before medical treatment decisions are made on your behalf.
ASSET PROTECTION
Asset protection is about how you own, control and manage your assets in a way that minimises the loss of those assets if a claim is made against you by a creditor, bankruptcy trustee or an estranged wife or de facto partner.
BENEFICIARY
A person who derives some benefit or advantage arising from the terms of a trust, will, or life insurance policy.
What is a testamentary trust?
A testamentary trust is a trust established within a will. The terms of the trust are documented in the will itself. The trust sits dormant while the will-maker is alive and then comes into effect after the will-maker dies.
The drafting of a will containing a testamentary trust involves the preparation of a far more comprehensive and sophisticated document compared to a standard will. Typically the document will be very detailed, but don’t let that put you off. The advantages can be substantial for your beneficiaries.
Wills containing these trusts are not new. They have been around for hundreds of years.
The costs are generally insignificant when compared to the benefits
Because the trust does not come into effect until the will-maker’s death, a will of this nature does not create ongoing compliance costs during their life.
The person benefiting from the trust, however, must typically lodge a separate tax return for the trust in each year it operates following the will-maker’s death. A testamentary trust usually operates, at the primary beneficiary’s discretion, for up to 80 years from its commencement.
The cost of establishing a testamentary trust, and the subsequent compliance cost borne by its beneficiaries, are usually insignificant compared with the benefits. Of course, with the flexibility built into trusts, they can typically be wound up at any time if no longer offering benefits for the beneficiaries.
Visit our testamentary trusts tax benefits page to access examples how beneficiaries can save hundreds of thousands in tax over 10 years after you die
The advantages are substantial
Compared to a standard will, these more sophisticated wills containing testamentary trusts offer substantial advantages for nominated beneficiaries, including:
- flexibility in the way inherited assets are managed and enjoyed
- the potential for substantial tax savings
- asset protection benefits
- protection for vulnerable beneficiaries.
Access asset testamentary trust asset protection benefits here
Learn how to protect your beneficiary’s gifted assetsfrom relationship breakdown here
Pre-determined flexibility for beneficiaries
A well-drafted testamentary trust generally permits an intended primary beneficiary to indicate whether all, or just part of their inheritance, is placed into the trust, unless the will-maker specifically directs otherwise. Most beneficiaries seek to have their entire inheritance placed into the trust, however, there is flexibility to bypass it.
You can have the document prepared to remove this flexibility if circumstances dictate. For example, if the trust is established for a vulnerable beneficiary incapable of prudently managing money, it might be wise to have the trust managed by an independent person indefinitely.
Unless the will-maker specifically directs otherwise, a testamentary trust often contains broad powers and gives the intended primary beneficiary abundant flexibility to use and enjoy assets held in the trust. This way, the beneficiary benefits from the inherited assets as though they had been gifted to the person directly, but also receives the many benefits described here.
Learn how to protect potentially vulnerable beneficiarieshere
Testamentary trusts are different to discretionary (“family”) trusts
Unlike a testamentary trust, a discretionary (family) trust is established by someone during their lifetime. The benefits of the discretionary (family) trust can be enjoyed by both the person that established it and other nominated beneficiaries. A trust of this nature might be established for many reasons, such as asset protection, estate planning purposes or for potential tax advantages.
There is one key similarity between discretionary (family) trusts and testamentary trusts, that is, the beneficiaries of each obtain similar asset protection benefits.
Some key differences between a testamentary trust and a discretionary (family) trust are:
- A testamentary trust comes into effect after death, so the will-maker establishing it receives no benefit from it during their lifetime. All of the benefits are created for the beneficiaries named in the will.
- There are substantial tax benefits available through testamentary trusts that do not apply to discretionary family trusts.
Under the Income Tax Assessment Act, a concessional tax treatment applies to testamentary trusts providing an opportunity to minimise tax through the use of a testamentary trust, that is not available through the use of a discretionary (“family”) trust.
Distributions of income to children under 18 years of age, from a discretionary (“family”) trust, are taxed at abnormally high penalty tax rates. This is to prevent the use of such trusts to split the trust’s income among children (under 18) for the purpose of tax minimisation. However, income generated from assets held in a testamentary trust is taxed differently. A special concessional tax treatment applies to children under 18 who are taxed as though they were adults. The penalty tax rates do not apply. This opens an opportunity to make substantial tax savings.
A testamentary trust can lawfully be used to split the trust’s income among multiple beneficiaries, including children under 18. The collective tax burden paid by the beneficiaries on income generated from inherited assets placed in that trust is generally much lower than the tax an individual would pay on assets received directly on inheritance.
Learn more about the tax concessions unavailable to family discretionary trusts but available to creators of testamentary trusts by downloading the examples here
An executor (also called a “personal representative”) is the person or persons nominated by a will-maker to carry out the wishes of the will-maker including, for example, obtaining authority from court (if required) to administer the estate, managing estate assets, valuing property, paying debts and lodging tax returns, dividing and distributing the estate to individuals or trusts created under the will.
ESTATE ASSETS
A person’s individually owned assets at the time of their death.
Estate planning involves devising a plan, implementing a strategy and preparing documents to ensure property in your ownership and control is dealt with according to your wishes after you die.
A well devised plan will typically address ways to:
- Circumvent or impede estate challenges.
- Control the level of flexibility a beneficiary should be given, to manage their inherited assets.
- Minimise tax payable by beneficiaries.
- Protect transferred assets from third party claims.
FAMILY PROVISION CLAIM
A claim made by an eligible person, such as a spouse or child of a deceased person (or other eligible person as determined by law) to a court seeking to have a will-maker’s wishes overruled. The object of such claims is for provision or extra provision to be made from the estate (or in NSW, notional estate) of the deceased person, for the ongoing maintenance of the claimant.
NON-ESTATE ASSETS
Non-estate assets are assets a person has control over, or has a right to benefit from, but does not individually own at the time of their death.
POWER OF ATTORNEY (AND ENDURING POWERS OF ATTORNEY)
A power of attorney is a legal document under which a person (the Principal) gives another person (the Attorney) the authority to make decisions on their behalf.
A General Power of Attorney is used to appoint someone to make financial decisions on your behalf for a specific period or event. For example you might appoint your lawyer to sign land transfer documents on your behalf for two weeks while you are travelling overseas.
A general power of attorney only applies if the Principal has decision making capacity. If the Principal has an accident or illness and that results in a loss of capacity, the general power of attorney no longer operates.
An Enduring Power off Attorney, on the other hand, is a power of attorney that continues to operate if the Principal loses their capacity. Accordingly, this form of power of attorney is typically included in the suite of documents relevant to estate planning.
An enduring power of attorney can be used to appoint someone to make financial and/or personal decisions on your behalf.
PROTECTIVE TRUSTS
A protective trust is a special trust established under a will, in the situation where the will-maker has concerns about a beneficiary’s capacity to adequately manage their inheritance. This might arise, for example, because the beneficiary has a disability, has addiction problems or is a spendthrift.
Depending upon the wishes of a will-maker, the will creating a protective trust might ensure only income is available to the beneficiary, from the trust. In the alternative, the will may also allow capital payments. The overall intent generally being to ensure the ongoing care and support of the beneficiary.
SPECIAL DISABILITY TRUSTS
Special disability trusts are established to provide for the current and future care and accommodation needs of a family member with a severe disability. These trusts receive favourable tax treatment.
A special disability trust can be established during the creator’s lifetime, or may also be created through a Will and in that case, it is set up on the death of the will-maker, from assets in the deceased’s estate.
A special disability trust must be created using a model special disability trust deed prescribed by social security rules and there are ongoing compliance obligations that must be complied with.
SUPERANNUATION DEATH BENEFIT NOMINATIONS
Under superannuation law, the trustee of the superannuation fund that holds a member’s entitlements has a discretion to decide which of a deceased member’s dependents shall receive the member’s death benefit. Considering a member’s benefits usually accrue over decades and often also includes a life insurance component on death of the member, the value of these benefits can be substantial.
Signing a Death Benefit Nomination form provides instruction to the trustee, as to which of a member’s dependents they prefer to receive the benefits. However this form of nomination is not binding and the trustee retains a discretion to make a different distribution.
A Binding Death Benefit Nomination differs from other nominations, as it overrides the trustee’s discretion. With this form of nomination, assuming it is compliant with law and the terms of the fund’s deed, the trustee is bound to pay your death benefit in the manner you have nominated.
A superannuation proceeds trust is a trust established within a will or by a deed, after the death of a person that is entitled to receive proceeds from a superannuation fund. The trust is established for the purpose of receiving the benefits from a deceased person’s superannuation fund tax free.
A testamentary trust is a trust established under the terms of a will. The trust comes into effect when will-maker’s dies and the terms of the trust are contained within the will.
As a testamentary trust is contained within a will, its creation generally occurs when the person seeking to establish the trust prepares their will. However, this type of will involves drafting a document that is far more comprehensive and sophisticated when compared to a standard will.
Wills containing these trusts are not new. They have been around for hundreds of years.
Because the trust does not come into effect until the death of the will-maker, having a will of this nature does not create any ongoing compliance costs during the will-maker’s life. The person benefitting from the trust, however, will typically need to lodge a separate tax return for the trust each year after the will-maker’s death. This compliance cost is usually insignificant in comparison with the benefits arising from the trust.
When compared to a standard will, these more sophisticated documents offer substantial advantages for nominated beneficiaries, including:-
- flexibility in the way inherited assets are managed and enjoyed;
- the potential for substantial tax savings; and
- asset protection benefits.
These trusts may also be structured to protect legacies gifted to vulnerable beneficiaries, who are not capable of managing money in a prudent manner.
Unless the will-maker specifically directs otherwise, a well drafted testamentary trust generally permits an intended primary beneficiary to indicate whether all, or just part, of their inheritance, is placed into the trust. Most people will benefit from the entire inheritance being placed into the trust, however, flexibility can be incorporated to enable the trust to be bypassed if necessary.
The flexibility to bypass the trust may be excluded, for example, where a will-maker is establishing a trust for a vulnerable beneficiary that is not capable of prudently managing money.
Unless the will-maker specifically directs otherwise, a testamentary trust also typically contains broad powers and gives the intended primary beneficiary abundant flexibility to use and enjoy assets held in the trust. This way, the beneficiary benefits from the inherited assets as though they had been gifted to the person directly, but also has the added benefits described above.
How do these trusts differ from a discretionary (“family”) trust?
The trust beneficiaries included in a testamentary trust obtain asset protection benefits, similar to those enjoyed by the beneficiaries of a discretionary (“family”) trust established during a person’s life.
A principal distinction, however, is the concessional tax treatment that applies to distributions made to beneficiaries of a testamentary trust.
Distributions of income to children under 18 years of age, from a discretionary (“family”) trust, are taxed at abnormally high penalty tax rates. This is designed to prevent the use of discretionary (“family”) trusts to split income amongst children for the purpose of tax minimisation.
However, income generated from assets held in a testamentary trust is taxed differently to income generated by a discretionary (“family”) trust. As a result of section 102AG(2)(a) of the Income Tax Assessment Act, a special concessional tax treatment applies.
Children under 18 years of age named in a testamentary trust are entitled to be taxed as though they were adults. The penalty rates applicable to discretionary (“family”) trusts do not apply.
Accordingly, by using a testamentary trust, the primary person intended to benefit from a gift under a will is lawfully able to “split” the income generated by inherited assets amongst various family members. Because a separate tax-free threshold applies to each individual recipient of the income (including children), the overall tax burden paid by them collectively on an inheritance income is generally much lower than the tax that would otherwise apply, if a single individual had received all the income.
Refer to specific examples in our Knowledge Hub to see how these tax benefits work.
Establishing a trust involves creation of a relationship where a person (or company) known as the trustee is under an obligation to hold property for the benefit of other persons, known as the beneficiaries.
The terms upon which the property is managed and the nature of the trustee’s obligations are typically determined by the terms of a trust deed, entered into at the time the trust is established.
In this arrangement, the trustee is the legal owner of the property held in trust and the beneficiaries hold a beneficial interest in the trust property. A beneficial interest is a right to receive benefits in connection with the assets held in trust by the trustee.
A will is a legal document by which the will-maker expresses their wishes as how their estate assets are to be distributed upon their death and who will manage the will-maker’s estate pending final distributions being made. The person or persons named as intended recipient/s of a share of the estate are known as the beneficiaries. The person or persons named to manage the estate pending final distributions are called the executor/s.
The Cost
The cost of estate planning varies depending on the complexity of a person’s circumstances and their wishes for the transition of ownership and control of assets.
It also depends on which estate planning documents are necessary to implement a person’s wishes.
A comprehensive plan involves much more then preparation of a will. It also addresses all non-estate assets and often involves drafting testamentary discretionary trusts and formulating strategies to protect assets from claims….both during the administration of an estate and subsequently, once a beneficiary has received an inheritance.
Some individual documents forming part of an estate plan may cost just a few hundred dollars. That may be all that’s required. However, a more comprehensive plan for a client with substantial assets may cost several thousands of dollars to implement.
Our free Blueprint session, outlining general information, or one hour consultation, with specific recommendations applicable to your individual circumstances, enable us to collect necessary information to provide a fixed price proposal relevant to a client’s needs.
The Value
The information that appears above, under the heading “who needs an estate plan” highlights some problems arising from a failure to plan.
You should also consider the value an effective estate plan represents, in light of opportunities to:-
- save beneficiaries thousands (sometimes hundreds of thousands) of dollars in tax;
- avoid significant depletion of estate assets from a family provision claim (estate challenge);
- place an asset protection shield around the assets gifted to your beneficiaries, safe from claims by third parties.
There are many tax implications arising from a death. One important object of a comprehensive estate plan is to ensure tax liabilities are minimised when death inevitably occurs.
Estate assets are a person’s individually owned assets at the time of their death.
Non-estate assets are assets a person has control over, or has a right to benefit from, but does not individually own at the time of their death.
Different tax considerations apply to estate assets and non-estate assets. Estate assets are subject to tax rules that apply specifically to deceased estates. General tax laws apply to non-estate assets (such as assets held in a family trust) relevant to those assets and transactions arising from those assets.
Here are a few common examples of how failing to plan might lead to an unexpected and unwelcome tax liability:-
- Generally a capital gains tax exemption applies to sale of a primary residence during a person’s life. But what happens when a person’s primary residence is transferred to an executor or a beneficiary? The exemption only applies when specific conditions are satisfied. Failing to understand these conditions and where applicable, including appropriate provisions in a will, may result in a tax liability.
2. Superannuation death benefits are tax free, but only if paid to persons that are a deceased member’s “dependents” under tax laws. The tax levied upon payments made to “non-dependents” under tax laws, depends upon the component parts of the death benefit. The tax payable may be as high as 30% plus the Medicare levy. Proper planning may identify opportunities to structure a person’s affairs in such a way that minimises tax payable on death benefits.
A claim (known as a family provision claim) may be made to court against a deceased person’s estate by an eligible person, such as a spouse or child of a deceased person (or other eligible person as determined by law)
Where a claim is successful, a will-maker’s wishes are essentially overruled by the court and the claimant is awarded provision (or extra provision) from the deceased person’s estate (in NSW, including their notional estate). In order to receive provision (or extra provision) from an estate, the claimant generally needs to show the court funds from the estate are necessary for their ongoing maintenance or support.
Eligibility to claim differs slightly from State to State, however below is a guide to eligibility requirements in Queensland, Victoria and New South Wales:
In Queensland, the following persons are eligible to make a family provision claim in accordance with the Succession Act (Qld):
- The deceased’s spouse (including a de facto);
- The deceased’s child (including biological, adopted and step children); and/or
- A dependant that has been wholly or substantially maintained by the deceased at the time he / she died (such as a parent or any person under the age of eighteen who was being maintained by the deceased, regardless of their relationship with the deceased).
In Victoria, the following persons are eligible to make a family provision claim in accordance with the Administration and Probate Act (VIC):
- A person who was the spouse or domestic partner of the deceased person at the time of the deceased’s death
- A person who was a former Spouse or domestic partner of the deceased person as at the date of death, who was able to take proceedings against the deceased under the Family Law Act and who did not take such proceedings and was prevented by the death from taking the proceedings, or, who did take proceedings and could not finalise them because of the death of the deceased;
- A carer, if they were in a “registered caring relationship” as defined under the Family Law Act 1975 with the deceased.
- A child of the deceased being:
– under 18 years of age;
– A full time student aged between 18 and 25;
– with a disability (as defined in Section 90 of the Administration and Probate Act);
– a step-child, or adopted child of the deceased, subject to the categories listed above;
– an adult child who can demonstrate he or she is not capable by reasonable means of adequately providing for their own proper maintenance and support; or
– an “assumed child”. This is where the child was treated by the deceased as a natural child.
- Grandchildren (including step grandchildren or adopted grandchildren) of the deceased, provided the grandchild was dependent on the deceased in the same way that a child is dependent on a parent.
- A member of the household of the deceased person, provided they have been wholly, or partly, dependent on the deceased for their proper maintenance and support.
In New South Wales, the following persons are eligible to make a family provision claim in accordance with Section 57 of the Succession Act 2006 (NSW):-
- The deceased’s spouse at the time of death (including a de facto spouse);
- The deceased’s former spouse;
- The deceased’s child;
- A person who was wholly or partly dependent on the deceased;
- A person who was a grandchild of the deceased, or a member of the household of the deceased
- A person who lived in a close personal relationship with the deceased at the time of death.
Are there ways to avoid a challenge against your will?
There is no clause you can insert in a will, which prevents an eligible person from making a claim.
You can, however, take measures to lessen the impact of a claim, reduce a claimant’s chances of success, or even make their claim futile.
Examples of strategies that may be implemented, as part of an estate plan include:-
- Transferring an asset to a preferred person, during your life.
- Transferring a property from your sole name, into joint names with your preferred recipient means the property does not form part of the deceased estate and is not included in the pool of assets subject to a claim.
- Assets held in a discretionary trust do not form part of your deceased estate and are not included in the pool of assets subject to any claim. Accordingly a strategy may involve transferring assets into a trust during your life and ensuring your preferred person takes control of that trust upon your death.
- Preparing a Binding Death Benefit Nomination in relation to superannuation death benefits enables payment directly to a dependent and accordingly the benefit does not form part of your deceased estate and is not included in the pool of assets subject to any claim;
- If a Binding Financial Agreement is made with a spouse (including a de facto) during your life, the content of that document is taken into account by a court if the surviving party to the agreement makes a claim. This may be particularly relevant to people in blended families that seek to protect the interests of children of a first marriage.
Note, things get a little more complex in NSW, as that State’s Succession Act enables a court to treat certain property transferred within 3 years prior to a person’s death (not forming part of their actual deceased estate) as forming part of a deceased person’s “notional” estate. When a claim is made, the court looks at both the actual deceased estate and the notional estate, when assessing the pool of assets potentially available to a claimant.