Estate Planning – Planning for your future needs

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Estate Planning involves much more than just having an up to date will. It is important to ensure that your assets are distributed in the most effective manner and without adverse tax consequences for your beneficiaries.

Last week our focus was on the top 3 reasons for having an estate plan. We also discussed joint tenancy, tenancy in common, and assets owned by a company held in trust.  If you missed this article you can still read it by clicking on the link here.

This week we discuss planning for your future needs, testamentary trusts and tax effective estate planning.

Planning for your future needs.

You should also be planning for your own future requirements. For example, there may come a time when you’re unable to make decisions for yourself because of a loss of capacity. To assist here, you need to nominate an enduring power of attorney. This trusted person is someone you appoint to make financial and property decisions on your behalf.  Nominating an enduring power of attorney before you get to the ‘loss of capacity’ stage is important as you can’t nominate one after this happens. Remember that a regular power of attorney becomes invalid upon your death or if you lose the mental capacity to make your own decisions. An enduring power of attorney, however, will allow your trusted person to act on your behalf if this happens and you are no longer able to manage your financial affairs.
You may also wish to nominate a medical power of attorney, also known as an enduring guardian, who can make medical decisions on your behalf.

Testamentary trusts.
A testamentary trust is a trust established by someone’s will. It comes into existence only when that person dies. Including a testamentary trust in your will can be useful for making tax effective distributions to beneficiaries under the age of 18, caring for children or a dependent who is incapacitated, and preventing beneficiaries from inappropriately spending their inheritance.

Tax effective estate planning.
The disposal of assets in accordance with your will may have tax consequences, including CGT, that you should consider when drafting your will and creating your estate plan. There are many strategies you can use to help make your estate plan as tax effective as possible for your dependents and beneficiaries. Some of these strategies include:

  • ensuring the proceeds of an insurance policy paid from a superannuation fund is paid to dependents as this would be tax free;
  • distributing an asset (rather than the proceeds of the sale of that asset) to a beneficiary to defer any CGT liability;
  • using discretionary trusts can help minimise the tax a beneficiary pays on receipt of an inheritance; and
  • using testamentary trusts can be an effective way to provide an inheritance to young children.

Insurance cover: According to statistics, Australia has a large underinsurance problem. It found that if couples in their mid-thirties with young children relied on the default cover in their super fund, then only 30 per cent of their life insurance needs were covered.

Tax: There are many tax time bombs found in estate planning. For instance, an asset you leave one child may be subject to capital gains tax while an asset left to another may be exempt. This could result in each child receiving very different inheritances when you thought you were leaving them equal shares. Also, the tax payable on some benefits may depend on each beneficiary’s personal circumstances.

Asset ownership structures: Different structures offer different benefits. For example, a testamentary trust comes into effect at the time of your death and can help protect your assets against any claims that arise if your children become divorced or bankrupt. They can also be used to reduce tax and provide for young or disabled children. Other structures include companies, self-managed super funds and family trusts.

Your wishes: You may want to give additional direction to those you have given powers of attorney. For example, an anticipatory direction lets you list what medical treatment you want or don’t want, if you can no longer make those decisions yourself. Similarly, an advance healthcare directive (or living will) details the type and extent of healthcare you wish to receive. You may also want to spell out your desires regarding your funeral arrangements, rather than have your family second guess what you would have wanted.

Estate planning can be complicated, but it’s important to do things properly so that your family can avoid any potential legal issues – especially as regulations change over time.  At a time when your loved ones are coping with a loss, don’t leave them with additional hurdles to overcome.

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General advice disclaimer – General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

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