Estate planning involves making a plan for what happens to your assets after you pass away. This can include legal requirements such as writing a will, which helps you express how you want your assets to be dealt with.
Regardless of whether you have a large number of assets or a modest pool, you’ll want to ensure your valuables and wealth are transferred to your preferred beneficiaries, and preferably in a tax-optimised way.1
What to consider when estate planning
Keep these things in mind when planning your estate.
The importance of having a will
If you die without having a will (dying intestate), this means your assets are transferred and distributed according to the applicable inheritance laws in your state or territory.1 Without a will, your assets might not pass onto your preferred beneficiaries in the way and amount you want.2
Dying without a will could mean the transfer of your assets are not optimised for tax, especially capital gains. It could also result in your assets ending up in the hands of people who are bankrupt or in a family dispute, which could see your assets distributed to unintended recipients such as those outside your family.2
A will protects the interests of your family and other beneficiaries, and it could help your loved ones avoid costly legal disputes over your assets. You can also use your will for non-asset-related issues such as appointing guardians for minor children and appointing trustees for trust assets.3
Estate vs non-estate assets
One of the most important concepts to understand as you get started with estate planning is the difference between estate and non-estate assets.
- Non-estate assets are those assets not considered part of your estate and can’t be included in your will. They’re usually things you don’t have legal ownership over or things you own jointly with another person or entity.4
Estate assets are items owned by you. This includes any kind of real property (real estate, buildings, land), cash; and intangible personal property like stocks, royalties, and copyrights. Estate assets can also be things like digital assets, jewellery, cars, and artwork.4
While you can include your house in your will, if you own your home as a joint proprietor with another person, your share of the property automatically passes to the other joint proprietor when you pass away. However, if you are tenants in common, you can specify your share of the house to pass onto your beneficiaries. You need to have the title changed if you want to change from a joint proprietorship to a tenants-in-common ownership structure.3
Superannuation can be classified as both a non-estate or an estate asset. Which category it falls under depends on whether your super fund pays the benefit to your estate or directly to your beneficiaries. If your super fund pays the benefit directly to your beneficiaries, it’s a non-estate asset. If it’s paid to your estate, it’s an estate asset. This is usually because your super fund allows for binding death nominations, and you have made a nomination to have the benefit paid to your estate.4
Your executor is another person you’ll want to choose with care as he or she will be responsible for executing your will. The executor manages the distribution of your assets, obtains probate (to allow major assets to be distributed), and collects debts and investment income where necessary. He or she will also be responsible for claiming your life insurance benefit if you haven’t made a binding nomination in your super or direct policy, selling assets if required, and protecting the assets of the estate. Executors can also be beneficiaries.3
To appoint an executor, consider those who are trustworthy and likely to be around when you need them.
Setup a trust: testamantary trusts
Trusts are invaluable tools in estate planning. A testamentary trust is any trust created through a will. They are usually discretionary trusts, which means the trustee is allowed to decide how assets are divided among beneficiaries.
This type of trust helps protect the inheritance left to beneficiaries. With a testamentary trust, the appointed trustee is required to look after the trust assets for the benefit of the beneficiary (or beneficiaries).5
The flexibility of a trust allows you to place restrictions on beneficiaries or alternatively give them control.5 The trustee has the option to pay out assets from the trust to beneficiaries in the most tax-efficient way for each beneficiary.1
Since the role of the trustee is central, you will want to make sure your trustee is someone you are confident will fulfil their obligations and responsibilities towards the beneficiaries.
If you have very young children as beneficiaries, you could benefit from using a testamentary trust as this allows you to appoint guardians for your beneficiaries through your estate plan. Another example is where the beneficiary is at risk of bankruptcy, litigation, or other types of legal action. The trust in this case could be used to protect the beneficiary’s inheritance.5
The role of insurance policies
Insurance policies that pay out a large benefit amount such as life insurance, can be valuable tools for estate planning. The benefit amounts can be used to pay for capital gain tax liabilities. Alternatively, it could be used to buy out business partners, or repay large debts.2
Estate planning is important regardless of your age and level of wealth. Done right, it ensures your intended beneficiaries receive what you want them to in a tax-effective way, and it can help protect minor children and other dependents. Always seek professional advice for your estate planning when it comes to creating a will, choosing executors and setting up testamentary trusts.
Always update your estate plan periodically as your situation changes,1 and consider integrating the right insurance products into your strategy.
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