Estate planning can often feel like navigating a maze of legal jargon and complex decisions. Yet, understanding the terminology and concepts involved is crucial to ensure that your wishes are honoured and your loved ones are protected. Whether you're drafting a Will, managing superannuation or considering tax implications, every detail matters.
In this article, we'll break down key estate planning terms and concepts so you can feel better equipped to make informed decisions.
Will
Regularly review your Will, ideally whenever significant life changes occur, such as a death or divorce or annually. Neglecting to do so can result in severe consequences.
Assets outside your Will
Certain assets, such as superannuation and property held as joint tenants, are not covered by a Will and cannot be bequeathed through it. The superannuation trustee determines the beneficiaries of the superannuation funds, while assets held as joint tenants automatically pass to the surviving owner.
Member death benefit vs member benefit
A superannuation member benefit is paid during a person's lifetime and is generally tax-free. In contrast, a superannuation death benefit is paid after death and may be subject to a 17% death tax, which can be avoided with proper planning.
Age Pension
If the age pension is a consideration, exercise caution when drafting your Will. Many pensioner couples mistakenly leave all their assets to each other, which can result in the surviving partner exceeding the single pension cut-off and losing the entire pension and benefits. A well-drafted Will can prevent this issue.
Tax advice
Seek tax advice, as death does not trigger capital gains tax (CGT); instead, the liability is transferred to the beneficiary, who will pay CGT upon disposing of the asset. It may be advantageous to sell assets before death. Note that capital losses cannot be used after death. If there are capital losses, consider selling assets with gains before death to offset these losses.
Enduring powers of attorney
An enduring power of attorney remains valid if the donor loses capacity but ceases upon the donor's death. There is a common misconception that "enduring" means it continues after death, which is not the case.
Executors
When appointing an executor, ensure the person is willing and capable of fulfilling the role. Executors must manage the estate efficiently and promptly. If you're asked to be an executor, consider the responsibilities carefully, as it can be demanding and may involve personal liability.
Testamentary trusts
Testamentary trusts are effective in ensuring beneficiaries do not lose control of their inheritance, especially if they struggle with managing money, are in challenging relationships or run their own businesses. Control remains with the trustee, not the beneficiaries.
Investment bonds
Also known as insurance bonds, investment bonds are useful for leaving money to a specific person in a manner less likely to be contested under the Will.
Overseas assets
With many Australians having foreign ties, overseas assets being inherited are increasing. This area is complex and mistakes can lead to significant tax consequences. Expert advice on both Australian and international tax laws is essential.
Overseas beneficiaries
If you have children living abroad who're considered overseas residents for tax purposes, it is often better to leave them cash rather than assets like property and shares, which may lead to capital gains tax issues in their country of residence.
Advance Care Directive
An Advance Care Directive is vital for controlling your medical treatment during the final stages of life. Ensure it is easily accessible, as it may be needed on short notice.
Prepaid funerals and funeral bonds
If you have arranged prepaid funerals or funeral bonds, include all relevant details with your estate planning documents. It is too late to address these arrangements after the service has occurred.
How Gallagher can help
Wherever you are on your financial journey, from early career to retirement, we can help you plan and adjust to changes when 'life' happens.
From busy individuals to those with complex business or personal situations, our advisers can help you achieve your financial goals by bridging the gap of where you are today and where you want to be tomorrow. Get in touch today.
