- The opportunity to dramatically improve the lives of their children with proper estate planning is being taken by an increasing number of Australian parents.
- There may very good reasons why you should take action now to implement some simple estate planning arrangements.
- The benefit to your children could be minimal, or could be worth hundreds of thousand of dollars, depending on your family’s circumstances.
It is sensible for you to start considering the various options available for your estate planning arrangements.
Who will receive your assets?
Whilst your priority is enjoying life and spending your children’s inheritance, you still want to ensure that whatever assets are left behind are enjoyed by the people that you choose to be your beneficiaries, usually your children and grandchildren. You now need to take additional care when preparing your Will and other estate planning arrangements, to maximize the likelihood that your intended beneficiaries will enjoy your assets rather than other people.
Other people who might try and take some of your assets include strangers that you have never met before. They could include people that you do know but do not like, and/or that don’t like you. They could also include people that your beneficiaries do know and do not like – or that don’t like your beneficiaries!
Some of these comments may seem rather strange, and we won’t discuss here the numerous scenarios that have occurred over the years – for now just accept that significant risks may exist, and that some of these risks can be managed.
What assets are dealt with?
The assets you leave behind can be divided into 2 categories: estate assets and non-estate assets.
Your Will only deals with how your estate assets are to be distributed after your passing. Your Will does not deal with your non-estate assets, and you have to take other action to ensure that your intended beneficiaries will enjoy these assets after your passing.
Non-estate assets include:
- assets owned by a Family Trust that you have an interest in;
- assets owned by a Company that you are a Director or Shareholder;
- your interest in a Superannuation Fund
Non-estate assets may also include property co-owned with one or more people as joint tenants, however we need to talk in more detail about this scenario.
Standard Will or Comprehensive Will?
You have the choice to either prepare:
(a) a standard Will which distributes your assets directly to your beneficiaries, or
(b) a comprehensive Will which might contain one or more Testamentary Trusts.
We prepare both types of Wills. The comprehensive Will contains a significant number of important and valuable benefits for your beneficiaries.
There are 2 types of benefits for your beneficiaries when a comprehensive Will is prepared:
- Taxation benefits
- Asset protection benefits
There may be income tax benefits as well as land tax benefits for your beneficiaries.
Income Tax Benefits
For some people, the cost of preparing the Will will be recovered within 2 months of the trust commencing, with the financial benefits continuing for years and perhaps decades. Consider a scenario where your adult children are employed or self-employed and earn a reasonable income. If your standard Will gifts assets directly to your children, the income earned on those assets will be added to your children’s yearly taxable income, and taxed at their marginal rate.
By way of example, a $400,000 property could earn an annual income of $20,000, and income tax might take between $8,000 and $9,500 each year. If you have grandchildren under 18 years, a comprehensive Will could direct the income to those grandchildren, and no tax will be paid. A potential saving of between $8,000 and $9,500 in tax for each and every year that there are infant grandchildren.
Land Tax Benefits
We have written about Land Tax in other articles. The same significant benefits can be enjoyed by your beneficiaries by using a comprehensive Will to enable properties to be owned by separate trusts – rather than in the personal names of your beneficiaries.
Asset Protection Benefits
It is common for parents to be unaware of the circumstances in which some or all of their child’s inheritance could be taken from them. Where a parent prepares a standard Will, once the parent passes away and their estate assets are transferred to their child, those assets becomes the child’s assets. Where someone has a legal claim against the child, all their assets (including what were the parents estate assets) may be at risk.
Using a comprehensive Will, the estate assets will not be owned directly by the child, but rather will be owned by the Trustee of the Testamentary Trust for the benefit of the child. This way, where any claim is made against the assets of the child – the assets in the Testamentary Trust should be protected.
Examples of the Risks
1. Family Court dispute
Where a child separates from their spouse, the Family Court may decide that the spouse should receive a significant portion of the matrimonial assets.
With a standard Will, these matrimonial assets might include the estate assets received by your child from your estate.
2. Debt owed to creditors
Where a creditor successfully sues your child and obtains a judgement for the payment of money, the assets owned by your child, which with a standard Will may include the estate assets, might be seized by the court bailiff and sold, with the proceeds of sale paid to the creditor.
Where your child is or becomes bankrupt at the time your estate is being administered, with a standard Will, instead of your estate assets being transferred to your child, they will be transferred to your child’s Trustee in Bankruptcy. The Trustee will sell the assets, and the proceeds of sale paid to the creditors. After all fees and selling costs are paid, any money left over will be paid to your child.
4. Business or professional risk
Where your child’s business or profession involves risk, they will often avoid owning assets in their own name due to the potential for legal action to be taken against. In these circumstances, notwithstanding how successful your child may be, the two scenarios above (risk of being sued by a creditor or bankruptcy) means that they could owe money to a creditor or become bankrupt at the time your estate is being administered, and therefore where a standard Will was prepared, your estate assets may be lost.
5. Mental incapacity or drug addiction
Where your child suffers from a borderline mental illness or disability where the appointment of a guardian would not be automatic, or where your child is at risk of becoming a drug addict, there is a risk, where a standard Will is used, that the estate assets could be lost through the actions of your child or through the actions of others exploiting your child’s circumstances.
6. Financial Management
Where your child is unable to make prudent financial decisions or is unable to control their spending, there is a risk, where a standard Will is used, that the estate assets could be lost through the actions of your child and others exploiting your child’s diminished financial capacity.
What action should you take?
It is strongly recommended that your estate assets be held by a Trustee of a testamentary trust – for the benefit of your child. Where you have more than one child or more than one beneficiary, you can create separate testamentary trusts in your Will for each child or beneficiary.