5 Serious Mistakes in Estate Planning
5 Serious Mistakes
most people make with their estate planning affairs….
Mistake No: 1
Most people think that signing a simple Will is all that they need to
do to effectively arrange their estate planning affairs. They wrongly
assume that their Will automatically controls the distribution of all
their wealth on their death –
ASSETS YOU CAN'T LEAVE IN YOUR WILL
When
you buy real estate, shares and managed funds or open a bank account
with another person or persons then your decision on how to hold the
asset at the time of acquisition will govern whether you can leave it
in your Will.
When you acquire any asset with
another person you can nominate that you hold either as 'joint tenants'
or as 'tenants in common'. It is easy to confuse the two, and it is
important to be sure what type of tenancy you have in the asset. If you
hold the asset as 'joint tenants' then on your death your
interest in the asset automatically goes to the survivor, irrespective
of what you have said in your Will. If you hold the asset as 'tenants in common' then you can leave your share in the property any way you want to in your Will.
Where no nomination is clearly made the law will decide. In some states
the law assumes that you hold as joint tenants in others the law
assumes tenancy in common.
When you buy shares
or managed funds or operate a bank account with another person on the
basis that either of you can sign for withdrawals then a joint tenancy
is assumed and on the death of one the asset will automatically pass to
the survivor.
If you don't want an automatic
transfer on death to occur then you need to alter the terms of your
ownership on the title documents applying to the particular asset.
Just to add to the potential for confusion the tax office treats all
jointly held assets as if they were owned as tenants in common for
capital gains tax purposes.
Whoever controls the Trust will have the say as to what happens to the assets in the Trust.
If you have set up a Family Trust or a Self Managed Superannuation Fund
to hold investment assets then these assets can't be 'left in you Will'
because under the law although you may be the controller and/or trustee
of the Trust during your lifetime you are not regarded by the law as
the legal owner of the assets held in the Trust
You can't leave assets in your Will which are not legally owned by you.
What happens to the assets in Family and Super Trusts on the death of
the controller/trustee? - it depends on the terms of the Trust Deed.
Most Trust Deeds allow the controller to nominate his or her successor
on death. Sometimes this nomination can be set out in the controller's
Will. The Trust Deed needs to be checked to make sure that its
provisions actually 'dove-tail' with the controller's estate plans.
A common problem can arise where control of a Trust passes to 'the
children'. Unless the Will or Trust Deed contains special provisions to
ensure that all children share control by 'unanimous consent' it is
possible that a simple majority of children will exercise control in
their own interests by excluding some of their siblings.
- Shares in Private Companies.
Certain shares in private companies cannot effectively be given by
Will. The Constitution of many Family Companies contains provisions
which can restrict the right of a shareholder either to participate in
control or to have a share transfer registered. Once again the terms of
the Constitution of the Company needs to be examined to ensure that a
gift shares in a Will is capable of achieving the Willmaker's
intentions.
- Business Partnership property .
If you are in a business partnership you can't leave assets belonging
to the partnership in your Will. You can however leave your interest in
the partnership in your Will but once you need to examine what the
Partnership Deed says happens on the death of a partner. Many
partnership deeds allow for the surviving partners to take years to pay
out the interest of a deceased partner.
For many people their Superannuation account balance and any insurance
proceeds attached to their super represents their second largest asset
after their home. Most people are shocked to learn that their Will does
not necessarily direct what happens to their Superannuation on death.
Unless you have made a binding death benefit nomination the Trustee of
the relevant Superannuation fund has the initial power to direct where
your Superannuation goes. The Trustee’s decision can be challenged so
delays and disputes occur frequently.
Any
nomination given to your fund trustee should be reviewed and
consideration given to making a ‘binding nomination’. Note many
industry and public offer Superannuation funds do not permit making
binding nominations.
- The Proceeds of Life Insurance Policies:
If the owner of the policy has nominated a beneficiary of the policy,
the nomination takes precedence over the terms of the will. It follows
that, where a nomination is made, the proceeds of the policy do not
form part of the estate. If you wish the proceeds of the policy to go
to someone other than the nominee, the nomination must be changed. Each
policy should be checked to determine who has been nominated.
Mistake No: 2
People think that since Death Duties no longer apply that their estate
will not be subject to tax. The fact is that significant levels of tax
can apply to deceased estates.
Federal and State Death Duties were abolished in 1981. Taxes on lump
sum super payouts (including death payments) were significantly
increased in 1983. Capital Gains Tax was introduced in 1985.
- Capital Gains Tax - the back door death duty.
Today Capital Gains Tax raised on the disposal of assets in deceased
estates raises many times the amount that was ever collected under the
previous death duty regime. The reason for this is quite simple - while
under Capital Gains Tax laws death is not a 'deemed disposal', the
assets of most deceased estates are sold so that the estate can be
conveniently distributed usually to 2 or more beneficiaries. The sale
of estate assets almost invariably attracts Capital Gains Tax (up to
48.5% of the gain) whereas death duties were capped at 15%.
The standard simple Will provides no assistance for beneficiaries in
helping them minimise the incidence of taxation and quite frankly puts
most beneficiaries in the 'worst case scenario' tax position .
The use of 'Testamentary Trusts' in Wills can achieve significant
savings in Capital Gains and Income Tax as a trust structure allows
beneficiaries to reduce the level of tax by distributing tax gains to
family members on lower tax rates.
- Lump Sum Superannuation Tax .
If your Superannuation is being directed to someone other than a spouse
or dependant then prepare yourself for a tax shock - up to 47% of your
Superannuation death benefits could be lost to tax. The reason for this
is that Superannuation Tax laws treat a payment of your Superannuation
death benefits as an ETP - in much the same way as it would treat you
if you withdrew all your super while you were alive. The only
concession is if your super goes to a spouse or dependant no taxes
apply up to your Pension RBL ($1,124,384 as at 30 June 2003 ).
The average rate of tax applicable to Superannuation money left to non
dependant children can vary between 16.5% and 31.5% but can be as high
as 47%.
However all is not lost - with
proper planning your affairs can be structured during your lifetime it
is possible to eliminate or reduce ETP tax. A simple Will is not what
is needed - a qualified estate planner can advise on strategies that
need to be considered in the context of your overall estate and
financial plan to help you deal with Death Benefit Super taxes.
Mistake No: 3
People think that all lawyers are experts in estate planning. While
most lawyers could put together a simple Will, few have the training
and additional skills to advise on sophisticated estate planning
strategies.
GET EXPERT ADVICE
Getting your estate planning affairs in order is so much more than just
getting Will signed. Before you begin the process of documenting your
Will the following actions should be undertaken
- Your
asset position needs to be carefully researched (to work out who owns
what and what will be the Capital Gains Tax implications).
- your Superannuation fund trust deed needs to be examined and
consideration given to the most appropriate form of death nomination,
- your insurance arrangements need to be looked at to ensure that insurance is held in the most appropriate way,
- your income tax position and that of any tax structures holding your
wealth needs to be examined and the terms of trust deeds scrutinized
and perhaps amended to ensure that all of these documents are in
harmony with your requirements
- the taxation circumstances and asset protection needs of your beneficiaries needs to be professionally considered
Only after all of the above steps have been completed can it be assured
that your Will and other estate documentation will do what you want
them to do effectively.
The process requires a collaboration of your legal, financial and taxation advisers. Generally the potential savings in tax for the estate far exceed to cost of having the job done by experts.
Your
financial advisers are probably in the best position to help you
orchestrate the collaboration which will be necessary to achieve the
right result.
The involvement of solicitors who
possess a special skill set is necessary. The fees charged by these
firms generally reflect the special knowledge and skill they possess.
The legal fee component can vary depending on what is required.
Mistake No: 4
People think that once their Will is done that they can forget about
it. Keeping your estate planning affairs up to date is vital if the
right result is to be secured. Records need to be kept, reviews need to
be carried out and your estate planning strategies revisited regularly.
KEEPING YOUR ESTATE PLANNING AFFAIRS UP TO DATE
It has been said that the only certainties in life are Death and taxes.
Our experience suggests that a third certainty exists for us all and
that is - change.
It is important that
your estate planning affairs be reviewed professionally on a regular
basis. Every purchase or sale of an asset will have 'estate planning'
ramifications, every change in tax laws could have an effect on your
estate planning taxation strategies and so on.
For these and many other reasons change can undermine your estate plan unless a review process is put in place.
In our view a review should take place at least once every 2 years.
Mistake No: 5
The worst mistake that people make in relation to bringing order and
structure to their estate planning affairs is to put it off to think
that it can wait.
The Peace of Mind that comes from having everything in proper order.
The knowledge that all their estate planning affairs are in complete
order is a great comfort for most people. Proper planning, regular
review, access to good ongoing advice and the exercise of care in
keeping records relieves most people of the burden or worry and
provides great peace of mind for the whole family.
Read here to see an example of the impact of putting your estate planning off.
DISCLAIMER
Please note that this information should not be relied upon for
decision making or providing advice without seeking expert opinion.
Glenister & Co exclude all liability relating to relying on this
information.
|