• Internal Code :
  • Subject Code : MAA319
  • University : Deakin University
  • Subject Name : estate planning and insurance

Introduction

Estate Planning

Estate Planning is a crucial part of financial planning process.  In the occurrence of individual’s death, it helps to ensures that wishes of deceased person are carried out. This consist of:  making sure that assets reach their intended beneficiaries , having a trusted administrator in place, it should be noted that not all assets are estate assets and only estate assets are distributed according to a will, where minors are involved, nominating someone who can take care minors if the worst was to happen.

Apart a will, proper estate planning also requires purchasing sufficient life insurance, naming transfer on death beneficiaries for retirement and other investment accounts, setting up trusts for heirs, allocating funds for different charitable organizations.

Examples of estate assets (covered by will):

Real Property, Cash investments, Loans made to the trustee of a trust, Shares held in a company, Personal belongings such as Cars & Jewelry, Interests in assets held as tenants in common, Income or capital allocated to you from a trust and so on

Examples of non estate assets (not covered by will):

Unallocated assets owned by a family trust, Assets held in trust, Superannuation benefits, Assets held with other parties as joint tenants, Account based annuities or pensions that have a reversionary beneficiary or a beneficiary under a valid binding nomination, Life Insurance proceeds.

Estate Planning 'To Do' List

  • Make sure you have current, up-to-date Will

  • File beneficiary forms

  • Appoint an Enduring Power of Attorney who can make relevant decisions if you are unable to make decisions yourself

  • Understand estate

  • Protect your children’ property

  • Have Guardianship and related instructions in place for your children. Financial arrangements could be made for guardians through insurance

  • Make Health Care directives

  • Consider a Trust

  • Make sure superannuation nominations are up to date and reflect your current wishes

  • Give copies of your relevant Wills, Power of Attorney, etc. to all the appropriate people (e.g. solicitor, financial planner, accountant, executor, children, etc.)

  • Estate Planning Black Box – prepare an electronic file that contains information regarding all of your bank accounts, superannuation accounts, investment, mortgages, title deeds, Wills, Powers of Attorney. Make sure your family and professional advisers know where this information is located

Estate Planning Aim

When we sit down to create financial plan, the motive is to understand hopes and dreams for the future, and providing a road map to get an individual from here to there. Estate planning process should be carried out in a holistic approach in order to alleviate problems in future.

Estate planning seem quite complicated process but in order to mitigate future problems & quarrel among those who were associated with deceased one , it can be break down into key elements which make it less daunting.

  • Wills

  • Power of attorney

  • Health Care or Medical Directive

  • Beneficiary Designation

  • Guardianship of children

  • Testamentary trust in some circumstances

  • Superannuation nominations

Will

A will is a legal document or an instrument that permits person to make decisions on how his estate will be managed and allotted. A particular person can choose who he wish to inherit your assets, rather than this decision being made by the laws of intestacy, he can choose to pass his certain belongings to certain individuals, he can ensure that the people you choose will administer your Estate.

Glance at - What asset are covered by your will

Estate assets are usually those assets which are held personally in ones name (i.e., wholly owned by an individual). When the person dies, only these assets are included in his estate. The distribution of these assets is directed by your Will. Non-estate assets are assets you control but do not own (or partially own). If another party has an inherent interest or authority in the asset, it is a non-estate asset. The succession of these assets must be individually addressed by your estate plan (and can usually be allocated to your estate if you wish) to ensure smooth and prudent distribution.

Guardianship of Children

The appointment of a Guardian is ought to be included in the Will as a safeguard in the event that both parents die before the child/children are 18 years old. The appointment of a Guardian also serves to mitigate the possibility of disputes between members of the family. The Court has an overriding discretion to appoint or remove a Guardian. It is the Guardian’s responsibility to make the important “life decisions” on behalf of the children until the kids turned 18. The Guardian must ensure that the children are adequately housed, clothed and educated. Careful consideration is therefore needed when appointing a person (or people) to take on this enormous responsibility.

Advance Care Directive

An advance care directive, or ‘living will’ can provide further instructions about your healthcare for circumstances where you can’t make decisions or are incapacitated. You can also designate a representative or an executor – usually a member of your family or a friend – to make decisions if you are unable to. ACDs can provide direction on when to end or limit life support which is important to some people. Making your instructions clear to your family may help ease the decision making burden in a crisis. The legal requirements vary from state to state.

Powers of Attorney

A Power of Attorney is a legal document or an legal instrument that gives another person the authority to act on your behalf when needed.

The Power of Attorney must:

That person should be over the age of 18

He/She should be of sound mind at the time of granting the attorney and capable of fully understanding the nature and purpose of the document they are signing

Not do anything illegal while operating under a Power of Attorney

Is unable to prepare a Will on your behalf or transfer the Power of Attorney to someone else unless specified.

There are three kind of attorney

General Power of Attorney:  Where one person gives another the authority to act on a specific transaction for a limited time such as buying a house whilst you are overseas. This authority ceases immediately if you become incapacitated or die. They are unable to act on your health care.

Medical Enduring Power of Attorney: This is limited to medical decisions. It does not however extend to special health decisions which include: sterilization; abortion; donation of body tissue; some psychiatric care and experimental medicine. If you wish to revoke the authority given under the Power of Attorney, you must have the capacity to do so and the original must be destroyed. A formal revocation of Power of Attorney must be registered in certain states.

Enduring Power of Attorney: This is similar to a General Power of Attorney except that it can start immediately and continue even if you become incapacitated. This is useful for situations where a person becomes incapacitated due to mental deterioration or coma. It is therefore extremely important that you only grant this power to someone (spouse / children /or any other family member) you can trust.

Testamentary Trusts

Testamentary Trusts are trusts that are established by your own Will and are created upon your death. They are generally funded by assets present of the Estate or from the proceeds of insurance policies and superannuation, if these are paid into the estate.  In some circumstances, the law will set up a Testamentary Trust when beneficiaries are unable to hold or deal with property in their own name i.e. in the case of minor beneficiaries (young children under 18).

The benefits of Testamentary Trusts include

The ability to protect assets from potential creditors and unforeseen relationship breakdowns is one of the major benefits. For example, should your spouse or child form a relationship in the future which breaks down over tim , if you have left assets to them in the form of a trust, the partner cannot directly access these assets. An inheritance held within a Testamentary Trust is less likely to be the subject of a Family Court order in the case of a marriage breakup. It may be regarded as a financial resource and have some effect on the terms of a property settlement but this is a preferable outcome to the property being at the disposal of a Family Court order.

The ability to share the assets with family members with reduced transfer costs and ease of access.  

Income tax minimization, particularly for minor children who are taxed at adult rates. The trustee of a non-fixed trust is able to stream the income to beneficiaries.

The trust is able to earn investment and business income.

Flexibility: crisis provisions can be included in the Will to trigger alternatives where a beneficiary becomes incapacitated, bankrupt or experiences family breakdown.

The ability to allow you to ‘rule from the grave’ by setting guidelines, such as age, education for children and grandchildren, income streams versus lump sums for spendthrift individuals etc.

Releasing certain beneficiaries from asset management responsibilities (For example, minors, the elderly, the incapacitated or the financially unsophisticated or gullible). The flexibility of a Testamentary Trust, especially if combined with a Memorandum of Wishes as to how the Trust should be administered, may be an appropriate arrangement.

The trustee has total flexibility to invest in whatever assets they wish (subject to the Trust Deed) and can draw on capital or income at any time.

Glance at The Present Scenario

Simon and Diane are an IT Contractor and accountant by profession respectively & a couple aged 55 and 52, having three children named Jade, Jet & Amber aged 17, 15, and 11 respectively. They live at 2 Munro Avenue, Brighton, VIC 318. Simon has a will where as Diane don’t. Simon has his former ex girlfriend, who has named as his enduring Power of Attorney. Flower is another child from Simon’s previous relationship and aged 22 years.

Now the matter of concern for Simon and Diane

  • Children’s education plan

  • Retirement plan of the survivor and the total estate is divided between their 4 children

  • An estate plan for Flower who is living with Stuart who works part time and they fear may

  • have a drug habit

  • A plan for their youngest child Amber who may have some undiagnosed issues as she struggles with school and had to repeat year 5

  • Plan for Diane’s parents since they are concerned that both of them suffered from dementia by the time they reached their 70’s

  • Basically to save tax which can be imposed on their estate as well as non estate asset. So their assets should pass onto their family in a tax-effective way

  • Diane is concerned that, if she died first, Simon might remarry and the children may be

Disinherited

My advice being a financial advisor:

Considering the estate assets and non estate assets of Simon and Diane, being a financial advisor I will suggest them to invest their assets in such a way where everyone gets equal part in their property in order to secure their future needs and tough time which they may face.

Following is the estate asset, non-estate asset, liabilities and net worth of Simon and Diane:

Assets

Estate ($)

Non-Estate ($)

Home owned as joint tenants

25,50,000

 

Superannuation investments (Simon); taxable component 45%

6,92,994

 

Superannuation investments (Diane); taxable component 59%

 

1,43,311

Shares all purchased post-2000 owned by the Simon Pool SMSF (they
were purchased in 2002 for $590,000)

21,00,000

 

UK Investment property inherited by Diane when her aunt Dorothy
died last year and has been valued as at 1 July 2019 for the UK
Sterling equivalent of $962,000

 

9,62,000

Investment property owned by The Simon Pool SMSF (acquired
January 2000 for $312,000)

11,20,000

 

Liability

 

 

Mortgage on home

9,79,342

 

Mortgage on investment property (The Simon Pool SMSF)

7,02,893

 

Net Total

4780759

1105311

They should invest their part of total worth in testamentary trust , since it has many benefits like :

Taxation saving –

Where beneficiaries under 18 taxed at normal and not penalty rates for minors “excepted trust income”

Asset protection- beneficiaries don’t own assets in a trust,

Creditors – Beneficiaries creditors can’t pursue assets,

Divorce – can have independent trustees appointed giving beneficiaries limited interest.

Beneficiary itself – trustees can ensure beneficiaries can’t squander their inheritance.

Versatility with streaming

Direct income to different beneficiaries whose marginal tax rates is lowest.

Other

Pre-tax income can be given to tax exempt entities such as charities.

Hence, it helps in tax planning & Capital Gains Tax Benefits

Testamentary trusts allow trustees to distribute and split the income of the trust with tax planning in mind.

Moreover, distributions from a testamentary trust to minors will receive the usual full tax-free threshold concessions, currently at $18,200 (as of January 2019). This tax planning benefit is considerable to beneficiaries who have children under 18 as they can pay for their children’s expenses out of pre-tax income. This is actually useful for things such as school fees or other extra-curricular expenses.

And when a capital gains tax asset passes from the executor (the person appointed to carry out the will) to a beneficiary ( spouse or children) , the law will disregard any capital gain made by the executor. The ATO views the trustee of a testamentary trust in the same way as a legal personal representative of the estate (for example, the executor).

Moreover, there is no tax on the transfer of cash proceeds of a life insurance policy or superannuation death payout. However, you should contact your accountant to discuss your particular circumstances.

Another advice is to put funds in Superannuation –

Definition of Superannuation

The dictionary meaning of word ‘superannuation’ is to become retired, to retire because of age or infirmity. Superannuation benefit is a retirement benefit offered by an employer to its working class. Superannuation is an organizational pension program created by the company for the benefit of its employees. It is also referred to as a company pension plan.

Benefit of Superannuation

Tax free investment on receiving of proceeds

Who Can Receive My Super?

Unless a binding nomination is in place, payment is made at the discretion of the trustee of the super fund

Trustee can only pay it to:

  • a “dependent” as defined under superannuation law; and/or

  • your estate

Who Can Receive My Super?

A “dependent” is defined under superannuation law to include:

  • your spouse

  • your children

  • a person financially dependent on you

  • an interdependent

So, none of the following can receive a payment from your superannuation fund (unless they are financial dependents):

  • Parents and grandparents

  • Grandchildren, brothers and sisters

How Can My Super Be Paid

Your superannuation death benefit must be paid as a lump sum unless the recipient is:

  • Your spouse

  • Financial dependent

  • Child under 25*

  • Child over 25 with a special disability

Who Selects the Death Benefits Recipient?

Options for directing death benefits include:

  • Trustee discretion

  • Binding nomination to be renewed every 3 years

  • Non-lapsing nomination

  • Hard-wire trust deed

  • Automatic reversionary

Binding nomination Compliant with SIS Reg

  1. 3 years renewal may add protection

  2. Cannot be contested

  3. Give certainty

Conclusion

Being a financial advisor there are two feasible elements in which Simon and Diane can put their assets and distribute the same and such two are Testamentary trust and Superannuation Fund where they can get maximum tax benefits. So now it depends how Simon and Diane distributes their property among their dependents and in which ratio they wants to divide since it will depend on the basis of the need and requirement of the nominee. As the major concern of both were that existing asset should be pass onto their family in a tax-effective way.

References

Robert C. Nisenson, L.L.C., On behalf of Law Office, posted in estate planning on Friday, December 22, 2017.

Book A Passion for Giving: Tools and Inspiration for Creating a Charitable Foundation

Superannuation and estate planning paper Published on 23 May 19 by NEW SOUTH WALES DIVISION, THE TAX INSTITUTE

James Leow, LLB Hons, CCH Master Superannuation guide and editor of the CCH Master superannuation Law and Practice

Simson, BA LLB LLM (comm law) , Barrister and solicitor of the supreme court of Victoria , estate planning

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