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Estate Planning in Australia: Essential Strategies

Written by

Adam Montana

Published

November 2017

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About the Author

Adam Montana Altus Financial

Hello, I’m Adam, Principal Client Adviser at Altus Financial. In this guide, I'm going to walk you through the essential strategies necessary in estate planning.

If you have any further questions, please don't hesitate to get in touch with me personally by filling out the form at the bottom of this page.

Contents

  1. What is Estate Planning?
  2. When Should Estate Planning Begin?
  3. Wills in Estate Planning
  4. Estate and Non-Estate Assets
  5. Superannuation in Estate Planning
  6. Tax Strategies in Estate Planning
  7. Estate Planning When You Own a Business
  8. Common Estate Planning Mistakes

Introduction

Estate planning is an important responsibility. When done correctly, it can ensure a tax-effective transfer of assets after your death. It’s also one of the most important things you can do for your family. However, with a poorly considered estate plan, your assets may be distributed incorrectly to beneficiaries, incurring unnecessary taxes and causing family and legal conflict.

Australians have several estate planning strategies available to them. It’s a common misconception that the process involves only the creation of a Will. However, there are numerous other activities that are critical in the planning process. The designation of beneficiaries and legal guardians, tax minimisation, power of attorney, power of guardianship, testamentary trusts, advance health directives, executors and superannuation each play an important role in an effective estate plan.

This video outlines the key concepts involved:

In this guide, we cover the fundamental concepts of estate planning, including wills, estate and non-estate assets and timelines. We also outline ways Australians can minimise tax in estate planning and avoid common pitfalls.

Adam Montana

Principal Client Adviser

0414 158 334

adam.montana@altusfinancial.com.au

Estate planning is the process of preparing the transfer of assets and wealth to beneficiaries following your death. Wills often take the limelight in estate planning discussions, and while they are a critical document, your will is just one element of your estate plan. Likewise, tax avoidance is often thought of as the most important aspect of planning. But to focus on just this aspect is not an effective strategy. The Australian Tax Office itself warns Australians of this point;

“Beware of schemes that claim to have estate planning purposes but are merely tax avoidance arrangements. An effective tax governance framework includes processes for evaluating various arrangements and the tax risks involved."

In reality, estate planning is a holistic planning process that implicates all aspects of your finances, including legal, superannuation, tax, real estate, individual belongings and debts. For this reason, most Australians engage the services of a financial adviser throughout the estate planning process, including regular strategic review.

As with many other disciplines of financial planning, estate planning is most effective when it begins early. If you’re reading this guide, you’ve taken a commendable first step: research. While a wealth management adviser will be well-equipped to guide you through the entire estate planning process, it’s important that you develop a good understanding of the process yourself. This will empower you to make informed decisions about the best way to distribute your assets.

The Will can be considered the centrepiece of your estate plan. A comprehensive Will governs the distribution of your wealth and assets following your death, which is why it is essential that your Will be kept up-to-date and legally valid. Despite this, up to 45% of Australians lack a valid Will. Dying without a valid Will is referred to as ‘dying intestate’, in which case your assets will be distributed according to the inheritance laws of your Australian state or territory. Intestacy can cause a host of problems, including excessive taxes payable by your beneficiaries.

45% of Australians lack a valid Will

Executors

The naming of executors is critical in avoiding family contention after your passing. The executor, or executors, of your Will are responsible for making decisions on the management of your estate following your death. In many cases, executors are also beneficiaries. However, they are entitled to work independently of beneficiaries, without their instruction or influence. The executor organises the collection and distribution of assets and property, and also arranges to pay the debts of the deceased.

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Other duties of the executor include:

  • Notifying all beneficiaries included in the Will
  • Managing business interests of the deceased
  • Protecting the income of the deceased
  • Investing the money of the deceased which is not immediately required
  • Insuring property
  • Valuing the estate and documenting valuations, including personal effects, securities, real estate, debts due and owing
  • Completing income tax returns and gaining clearance from the ATO
  • Establishing trusts
  • Dividing the estate

Providing for Children

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If you have minor children, guardianship should be a critical consideration in your estate plan. If you pass away before your children reach self-dependence, they will require legal guardianship and financial support.

The dedication of a guardian in your Will is a highly personal aspect of the estate planning process. It’s important that you discuss this nomination with your spouse and with the proposed guardian. Also note that in the case of your death, the other parent will assume parental rights even if they have not retained contact with the child, if you are divorced, or if you never legally married.

In the case of dying intestate, step children do not automatically receive estate assets. If you have step children whom you wish to receive assets from your estate, you must name these as beneficiaries in your Will.

Naming Beneficiaries in Your Will

The naming of your beneficiaries should be given substantial thought. Family members and close friends are common beneficiaries, as well as charitable organisations. If you name a beneficiary who is under the age of 18, you may wish to set up a trust account until they reach adulthood.

You are not legally required to inform your beneficiaries of your plans, however this can be an effective part of the planning process in avoiding family conflict after your death.

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Your beneficiaries themselves have certain rights, including;

  • The right to be informed about the existence of the will
  • The right to a reading of the will by the executor. Note: the executor is not required to read the entirety of the will; only the nature and extent of the beneficiary’s entitlement
  • The right to be informed of tax liabilities involved in their entitlement
  • The right to be informed of any distribution delays affecting the transfer of assets
  • The right to be informed of any legal proceedings against the estate
  • The right to receive their entitlement of the will
  • The right to receive a Statement of Distribution from the executor

Estate assets are those that belong to you alone. These estate assets may include bank accounts, real estate, investment accounts, bonds, stocks, vehicles, personal effects and business interests.

Non-estate assets are not required to proceed through the probate process upon your death because they pass directly to your heirs. For instance, if you own a joint bank account with a family member, this will be transferred to their sole ownership following your death. Assets owned by trusts or companies, insurance and jointly-owned property are also considered non-estate assets.

Executors

Testamentary trusts are a trust for the Will which comes into effect when the person who has created the Will, dies. Testamentary trusts are generally set up to protect assets

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Testamentary trusts are beneficial when:

  • The beneficiaries are under 18 - 21 years,
  • The beneficiaries mental capacity has reduced,
  • You want to ensure the beneficiary uses their inheritance wisely,
  • You want to ensure family assets are divided accordingly as part of a divorce settlement,
  • You don’t want family assets to become part of bankruptcy proceedings,
  • A trust will be administered by a trustee who is usually appointed in the Will.

A trustee must look after the assets for the benefit of the beneficiaries until the trust expires. This might be a specific date such as when a minor reaches a certain age or a beneficiary achieves a certain goal or milestone, like getting married etc.

Superannuation death benefits do not constitute a part of your personal estate. According to the Federal Court of Australia;

“Superannuation is not an asset of the estate and a trustee is not bound to follow the directions of a will. Even if superannuation is specifically mentioned in a will, it does not make it an asset subject to the terms of the will.”

Superannuation death benefits are to be paid to dependants or to a legal personal representative, such as an executor. When superannuation death benefits are distributed to dependants, they are tax-free. However, a death tax applies when benefits are distributed to non-dependants.

There are no longer any actual death duties in Australia, however tax remains an integral part of any effective estate plan. The way that your beneficiaries receive your estate assets will impact the taxes payable, which is why professional tax advice is important during estate planning.

For example, if your beneficiaries receive their inheritance in their personal name, they must pay taxes on the income generated from these assets at their marginal tax rate. Receiving assets through a testamentary trust can be a more effective strategy in the case of the beneficiary having a high personal marginal tax rate, a spouse who receives a low income, and children with no taxable income.

Testamentary trusts allow beneficiaries to divide income generated from their assets among those included in the trust. This is effective in dividing income tax evenly among beneficiaries of the trust who have a lower marginal tax rate. Furthermore, income generated from the assets in a testamentary trust can be subject to lower tax rates when it is distributed among minors.

This video outlines other tax strategies you can use in estate planning.

Estate planning can take on an extra dimension of complexity when the transfer of business interests is involved. Buy/sell agreements are an effective way to address these challenges, and will take precedence over a will. Buy/sell agreements are contracts entered between business partners, allowing surviving partners to ‘buy out’ the other in the case of their death. These are frequently linked with life insurance, whereby the surviving partner can leverage the policy to afford the buyout.

It is clear that estate planning is interlinked with succession planning, in the case of transferring business ownership. For more information on succession planning, download your free copy of our popular Succession Planning 101 guide in the side bar.

Legal Professional:

Preparing an estate plan, including a Will, power of attorney and advance medical directive (and, perhaps, a revocable trust as well), is a legal process that requires the professional skills and the advice of an estate planning attorney. Your attorney will want to understand your needs, ideas and goals in order to draw up documents that will meet your personal objectives.

Your Altus Adviser:

Facilitates the entire process, identifies your personal and business objectives, identifies and covers insurance-funded trigger events, assesses policy ownership for estate and tax issues, briefs and facilitate legal firm, ensures your personal estate links to a business insurance plan.

Your Altus Accountant:

Knows you extremely well, usually knows your family issues, knows your entity structures and asset & debt positions, manages taxation implications, may provide any business valuation required, briefs your Altus Adviser, helps manage funded succession & restructuring.

Legal Professional:

Prepares shareholders’ agreements, buy/sell agreements, estate and trust documentation. Liaises with your Altus Accountant and Adviser. Identifies any additional estate risks in the business structure.

Estate planning is a comprehensive process, and one that can easily derail without professional advice. Common succession planning mistakes to avoid include:

  • Failing to update your Will
  • Delaying the process
  • Failing to consider superannuation
  • Forcing your wishes on beneficiaries without consultation
  • Failing to plan for beneficiary taxes
  • Failing to consider debts
  • Leaving assets that are not owned or jointly owned
  • Not giving the choice of executor due though
  • Failing to seek professional advice

The best way to avoid these estate planning mistakes is to enlist the services of a professional adviser.

At Altus, our Estate Planning Experts have helped countless Australians create a strategic and comprehensive estate plan, and operate with understanding and sincerity. To discuss your estate planning needs, get in touch with us today.

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Estate Planning in Australia: Essential Strategies
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