Estate Planning Matters

As the population ages, new relationships between seniors are becoming common. As a result, I’m regularly asked what steps to take to prevent your assets going to the wrong person. There is no easy answer, and a further complication is that estate planning rules vary from state to state. However, if there is any chance of problems on the horizon, take expert legal advice sooner rather than later. Good advice now can save a fortune in costs down the track.

In any event, it’s useful to know some basic estate planning principles.

Assets in joint names, such as property, will usually go to the surviving partner irrespective of the terms of the will. One way around this is to hold any properties as tenants in common – you are then free to bequeath your share to a person of your choice. Though of course this is best implemented at purchase.

Next, you need to understand that your superannuation is not necessarily disposed of by your will – it is the trustee of your super fund who usually determines who gets the money. So consider a binding death benefit nomination, which specifies your chosen beneficiaries. Do take advice, as done wrong they can lead to unnecessary tax bills, and can still be challenged.

One super solution is to withdraw your money tax-free before you die, and deposit it in your bank account. This prevents possible challenges, and eliminates the possibility of the 17% death tax (levied on the taxable component of your fund left to a non-dependent). If this is your plan, you’ll still need good advice about what to do with the money. Options include making an absolute gift to someone of your choice, or investing the money in insurance bonds, which also sit outside the will and can be left to a nominated beneficiary.

Think about Harry, aged 85, a wealthy retiree now happily re-married after a nasty divorce, who wants to leave bequests to his children from both marriages. He is aware that there is acrimony between some family members, and it is important to him that his assets be split as he wishes, not eroded by family legal battles.

He invests $250,000 in his own name in each of five separate investment bonds, naming each of the five children as the beneficiary of one bond upon his death.  Because an investment bond is technically a life policy, the distribution of the proceeds cannot be challenged. Harry can sleep soundly, knowing he has solved the potential problem in advance.

Another option is an Inter Vivos Trust. This is a vehicle created by a living person for the benefit of another person. Also known as a living trust, this trust has a duration that is determined at the trust’s creation and can entail the distribution of assets to the beneficiary during or after the deceased’s lifetime.

A related possibility is to leave the money via one or more testamentary trusts. When the will-maker dies, the assets go to a testamentary trust (or trusts) and are not held by any of the beneficiaries personally. This keeps the assets separate in the event of divorce or bankruptcy, and has taxation advantages if everything goes well.

As beneficiaries of the testamentary trust, there is no restriction on using the trust’s money for the benefit of grandchildren, including expenses such as school fees and uniforms. That means the first $19,200 of such non–tax-deductible items could be paid from pre-tax dollars from the trust, instead of from after-tax dollars. Furthermore, when the children die, the grandchildren can continue to be beneficiaries of the trust.

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