Sylvia Liang, financial services partner with Nexia Australia, said in a recent webinar that failure to plan an estate may result in it being locked up in legal battles, or going to the government.
“[Not having an estate plan] has severe ramifications. For example, $46 million has been transferred to the NSW Trustee and Guardian over the past five years due to unclaimed estates or individuals who died intestate,” Liang said.
“Many planning decisions are tax-planning decisions, making sure that the money you leave behind isn’t necessarily reduced by tax. It also involves decisions about personal issues, how you deal with divorces and the consequences for children from a previous or new marriage. These may be tough decisions, but it’s better to make them now than leave them to lawyers to sort out later or leave them to grieving family members.”
Liang said if someone passes away without a valid will (dying intestate), their assets will be divided according to the rules of intestacy, which sets out the order in which eligible relatives will inherit the estate.
“Often, clients are concerned about ensuring that the inheritance they leave to their children is not open to attack if those children go through, for example, a relationship breakdown or divorce.”
“On the other hand, happily married couples often don’t consider what might happen if their widowed spouse were to remarry and start a second family. To have a proper estate plan, it is critical to ensure that you have a comprehensive understanding of the family dynamics and a detailed knowledge of all relationships that might impinge upon the overall estate plan.”
One of the best methods of ensuring this, she said, is through a testamentary trust established by a will and coming into effect upon the death of the maker of the will.
“There are three key benefits of a testamentary trust. The first benefit is asset protection. This could include relationship breakdown or protection from a creditor should a beneficiary fall into debt.”
“The second benefit is tax efficiencies, particularly for families with minor children. The third benefit is control over distribution, and this can be useful where the beneficiaries are young, have special needs or require financial assistance.”
Using a testamentary trust will depend on the individual’s particular needs and must balance the interests and concerns of the will maker to determine whether it is their situation.
“It’s imperative that you seek advice in this regard because this is a very complicated and complex area,” Liang said.
“Many clients are concerned about protecting their assets, they want to ensure that the assets remain within the family line and are used to benefit family members. With a testamentary trust, the assets are owned by the trustee, and the benefits of the income and capital of the trust pass to the beneficiaries.”
This separation of control and benefit, Liang added, allows the testamentary trust to protect assets from legal actions involving the beneficiaries.
“A good example of asset protection is relationship breakdown or divorce. Clients are concerned about their beneficiaries becoming divorced and their assets being split in the divorce settlement, so a testamentary trust may be able to provide protection if one of the beneficiaries is likely to be involved in divorce or separation proceedings in the future,” she said.
“A testamentary trust can be a useful mechanism to assist in protecting your assets for your direct bloodline. It is fundamental that you seek professional and financial advice about the content and structure of a testamentary trust.”
She continued that it is also important to understand what assets can be dealt with in a will as taxes and legal fees may “devour” the gifts intended for beneficiaries.
“Assets owned by you and another person as tenants in common are estate assets and are not affected by the law of survivorship. Your share or interest may be gifted or otherwise dealt with in your will in the same manner as the assets you own in your sole name,” she said.
“Super death benefits will only be dealt with as an estate asset via the will if the trustee of the super fund pays your benefit to your legal personal representative. Generally, the proceeds of a life insurance policy which is owned personally, are paid to the owner of the policy or any nominated beneficiaries.”
Regarding non-estate assets, Liang said jointly owned assets fall under the law of survivorship, so if one co-owner dies, the ownership will automatically pass to the surviving co-owner.
“The deceased’s interest in the asset is not governed by his or her will. However, establishing a life interest in an asset gives someone the right to live in, for example, the family home for the rest of their lives and when the life tenant dies, life interest ceases. The property can then be distributed as per the will makers’ wishes.”
“Assets held in a family trust are non-estate assets as they are not owned by the will maker specifically and cannot be dealt with in a will. Legal title to the assets rests with the trustee who holds it for the beneficiaries’ benefit.”
Liang said a trust allows an individual to control how and when assets are distributed, with benefits including flexibility in distributing income and gains, asset protection and potential tax advantages by distributing income to beneficiaries who may be in the lower tax bracket.
