Getting Estate Planning Right - The Essential Steps

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Getting Estate Planning Right – The Essential Steps

To preserve and enhance the value of a person's wealth (whether owned personally or via other means such as superannuation or family trusts) and to avoid adverse consequences for intended beneficiaries in the event that the person dies, it is important that estate planning be properly addressed and regularly reviewed. Essentially that means that the planner and the planner's advisors need to ensure that 7 keys steps are undertaken:

The Essential Steps

1.         Objectives

2.         Circumstances

3.         Funding

4.         Options & Impediments

5.         Strategy

6.         Implementation

7.         Review

Traditionally, a Will was the major focus for documenting a person's estate planning. These days, with progressive and ongoing changes to the way personal, investment and business wealth is owned and taxed, a person's Will has become just one (usually, but not always important) part of the process of implementing and achieving estate planning objectives.

Crucial estate planning decisions are now often made, intentionally or inadvertently, in the choice of financial products such as superannuation and insurance and in the ownership structures chosen for investment and business assets, the protection of assets and the minimisation of tax.

Failure to give attention to, or to implement, estate planning can lead to a reduction in the wealth passed on to intended beneficiaries or even cause unnecessary tax liabilities or the foregoing of pensions. It can even result in benefits passing to the wrong beneficiaries, eg estranged or unethical children or other relatives, former spouses, creditors. There seems little point diligently accumulating wealth if the wrong person ultimately benefits. Failure to take estate planning considerations into account can also lead to beneficiaries taking potentially successful actions against financial, legal and other professional advisors.

To be successful, estate planning needs to be consistent with a person's formal or informal wealth accumulation, asset protection, retirement, career, business and/or business succession plans.

Essentially there are 7 steps for estate planners and their professional advisors, legal and non-legal, need to undertake. A checklist of issues that frequently need to be addressed in each of those steps is set out below:

STEP 1 - Identify and prioritise OBJECTIVES

  • Who (or what) does the estate planner want to benefit?
  • In what order of priority; and
  • Identify any specific objectives, eg the support of a spouse in retirement; the education of children and grandchildren; the care of a young or otherwise vulnerable relative; the future control of a family or other business.

STEP 2 - Assess current and likely future CIRCUMSTANCES

  • Of the estate planner - how are assets ultimately owned or controlled, eg family home, superannuation, family trusts, joint tenancies, cross ownership of insurance, etc;
  • Of the intended beneficiaries - particularly important if the beneficiaries need protective arrangements, eg if they are very young, infirm, financially at risk or personally vulnerable;

Beneficiaries who are financially at risk include people:

  • Who have given significant personal guarantees; or
  • Whose business or profession carries significant risk, eg medical practitioners

Where possible potential changes to circumstances should be catered for, particularly as documents and decisions may be irreversible, eg if a person dies or loses the capacity to make independent decisions.

STEP 3 - Ascertain adequacy of SHORT and LONG TERM FUNDING for achieving objectives

  • The extent of the funding available will determine to what extent the estate planner's objectives can be achieved.
  • Sources of funding include:
  • Existing assets;
  • Wealth accumulation and preservation plans;
  • Retirement plans;
  • Asset enhancement plans, eg ensuring that business assets such as goodwill will retain value on the death of a business principal; and
  • Life insurance cover for death or incapacity to ensure beneficiaries are provided for or that a business can continue to operate.

STEP 4 - Assess OPTIONS and identify IMPEDIMENTS

  • The ability of the estate planner to transfer wealth effectively will be constrained by legal constraints, eg the ability of hostile members to challenge the terms of Wills, the absolute discretion of those superannuation fund trustees not subject to binding death benefit nominations.
  • Income tax will enhance certain options (eg because of superannuation concessions, excepted income tax rates for relatives such as children or grandchildren who under 18 years and capital gains discounts).

Other trust assets is usually particularly attractive for assets that are likely to appreciate.

  • Capital gains tax laws will further the choice of ownership of assets associated with a business, eg business premises, as there are significant concessions for "active" assets.
  • For superannuation funds, the capital gains tax rate of 10% that otherwise applies does not apply when the fund is paying pensions.
  • Lump sum superannuation retirement and death benefits are subject to tax at 16.5% or up to 31.5% if paid to a dependant or (via a deceased estate) to a other than a dependant for income tax purposes, ie a "death benefits" dependant.
  • Income tax will also limit the effectiveness of other options, eg restrictions on the terms of non-arm's length loans, family trust elections and deferred tax liabilities, eg on retained profits passing to shareholders.
  • Asset protection issues are often a priority for people concerned to ensure that as far as possible the wealth they pass to their intended beneficiaries is retained in the event that there is a breakdown of the intended beneficiary's domestic relationship.
  • Asset protection issues are also often a priority for people whose occupation carries a financial risk or who have intended beneficiaries with that risk.
  • Ownership of assets may need to be changed, eg to fund pensions or testamentary trusts, to achieve asset protection or to pre-empt challenges to a Will or the payment of superannuation benefits.
  • Eligibility for means tested pensions can be impacted by the choice of a surviving spouse as the executor of the estate and by benefits paid to beneficiaries.
  • (For estate planners with family controlled businesses), the ability and feasibility of family members to take over those businesses.

STEP 5 -The STRATEGY - Formulating the estate plan

Once the objectives, circumstances, funding, options and impediments have all been identified, a strategy can then be worked out for identifying what can be achieved for the estate planner and how best to achieve the estate planner's wishes:

  • If appropriate, this can include the establishment of a savings or wealth accumulation strategy (often as part of wider asset protection or retirement planning); and
  • It can be very useful for a written estate plan to be prepared - often drafted as part of a wider financial plan by a financial planner - and for the estate planner's accountant and lawyer providing input and feedback.

STEP 6 - IMPLEMENTING the Estate Plan

Without implementation, estate planning is a waste of time. Implementation may involve a number of actions or the use of a number of products, eg:

  • The immediate or progressive building up of an investment portfolio;
  • (Where appropriate and possible) taking out life and other forms of insurance cover;
  • The preparation of Wills - it is important that the estate planner ensures that key attributes are included, eg an adjustment clause to cover unequal superannuation or non-estate distributions, a gearing clause, the provision for a suite of testamentary trust options, nomination of preferred advisor (if any);
  • The preparation of enduring and possibly other powers of attorney;
  • Changing joint asset ownership, eg from joint tenancy to tenancy in common;
  • The binding or advisory nomination of preferred beneficiaries to the trustee of a superannuation fund;
  • A switch to a self managed (excluded) or other superannuation fund if there is concern about how the existing trustee might exercise its discretion;
  • Amendments to the trust deeds for both self managed superannuation funds and family trusts to ensure that future control and powers of appointment are properly exercised (eg if 2 or more children are to share control);
  • Arranging for other people, eg children, to become members of a self managed superannuation fund so that assets can remain in the fund after a member dies;
  • The immediate or provisional (eg irrevocable on death) winding up of family trusts, superannuation funds and other entities;
  • The "tidying up" (with the concurrence of the relevant beneficiaries) of unpaid trust allocations;
  • Realignment of the beneficial ownership of insurance policies , eg a switch from cross to self or superannuation ownership of personal life insurance so that a testamentary trust or pension can be funded;
  • Ensuring that life and other insurance proceeds generate excepted (concessionally taxed) income;
  • The preparation and funding of business succession, pre nuptial or pre relationship or other agreements; and
  • (Sometimes) the immediate or progressive transfer of assets (including insurance) out of personal names into non-estate ownership such as spouses, family trusts or superannuation, eg to forestall challenges or achieve asset protection.

Adequate records, eg a CGT register certified by a registered tax agent, need to be kept to ensure that capital gains tax liabilities can be ascertained and minimised.

STEP 7 - Ongoing REVIEW - estate planning needs to adjust for changes

  • In the personal, financial or business circumstances of the estate planner or the intended beneficiaries;
  • In wealth accumulation, retirement, career, business and/or business succession plans; and
  • To tax and other laws - the estate planning implications of changes to tax laws in particular can be easily overlooked, particularly where professional advisors such as financial planners, accountants and lawyers are not aware of what each other is advising.

Too often the estate planning services provided by lawyers and other advisors are only reactive to client initiative and clients are not kept up to date with developments affecting estate planning.

If you have any queries in relation to this please contact David Beale on 9957 3685 dbeale@rbhm.com.au or Katelin Whitley (Accredited Wills and Estates Specialist) on 9018 6404 kwhitley@rbhm.com.au

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