While a thorny issue at times, it’s often worth having a discussion around wills and inheritance. Letting people know what is coming, or not, can avoid nasty surprises and expensive claims later down the track. Estate planning is a fundamental part of financial planning, with the main aim being to plan for the distribution of assets in an effective manner after death. An estate plan will seek to ensure a person’s assets are distributed in accordance with their wishes through a Will, superannuation nominations, life insurance and possibly testamentary trusts. While a financial adviser can facilitate and oversee the estate planning process, it is a collaborative process involving a lawyer to establish a Will – a legal document which sets out how a deceased’s assets and possessions are passed on. A tax accountant may also be required to advise on any tax consequences.

Have a little trust

In every family there could be a range of potential beneficiaries, some of whom may be too young to handle the proceeds of an estate. Other beneficiaries may be mentally impaired, or have a substance abuse or spending problem requiring careful oversight of how income or assets are passed to them.

A testamentary trust may be useful in such situations. A testamentary trust exists within a Will and comes into being upon death.¹ Instead of passing to a beneficiary, assets pass to a testamentary trust, administered by a trustee, for the beneficiary or beneficiaries.

For example, under a testamentary trust, the trustee could pay a regular income to a beneficiary rather than the beneficiary receiving all the funds in a lump sum.

Trusts are also used for asset protection. In the event a beneficiary got into financial difficulty, assets held within the trust ordinarily could not be reached by creditors.

Testamentary trusts are also useful should children get divorced and remarry. Assets held within a trust are generally excluded from property settlements.

Life insurance and superannuation

There are some assets which fall outside the Will, such as superannuation and life insurance.

Non superannuation life insurance benefits can be directed to nominated beneficiaries. The nomination is made directly with the insurance company and is generally paid to the beneficiary tax free.²

Superannuation can also be directed to beneficiaries outside of the Will. Where a superannuation fund allows, a binding nomination is made through the fund itself. In the event a binding nomination is not allowed the trustees of the fund decide who receives the money.³

Tax considerations

The tax office can end up doing quite well from inherited property and superannuation assets.⁴

With superannuation, the calculations around what tax may need to be paid by the beneficiary can be complicated and may require advice from a tax accountant.

The type of contributions made to the fund, including fully taxed (eg. employer contributions, salary sacrifice) and untaxed (eg. additional tax-free contributions), is also relevant. An adult, non-dependent beneficiary who receives super benefits could pay 0-30 per cent in tax depending on how the deceased made the contributions to the super fund.⁵

With property, care needs to be taken when beneficiaries inherit different assets. Consider one beneficiary inherits the family home, while another inherits the holiday house. The beneficiary getting the family home will generally not be liable to pay tax, while the beneficiary of the holiday house will probably have to pay capital gains tax when it is sold.

Tax issues may arise if a family home is transferred into a trust for asset protection purposes. The home may no longer qualify for the principal residence capital gains tax exemption and may be subject to stamp duty on transfer and ongoing land tax.⁶

Where a family home is passed on outside of a trust, the beneficiaries have two years to sell it before it becomes subject to capital gains tax.⁷ Always seek tax advice from a qualified tax accountant in regard to all of these issues.

Estate planning can be extremely complex depending on an individual’s circumstances. Financial advisers work collaboratively with other professionals such as lawyers and accountants to ensure a client’s wishes are met. Having the family’s blessing is a bonus.

(1) https://www.moneysmart.gov.au/life-events-and-you/over-55s/wills-and-power-of-attorney
(2) http://www.moneymanagement.com.au/professional-development/capability/insurance/onepath-matt-hughes-life- insurance-superannuation
(3) http://www.findlaw.com.au/articles/1459/superannuation8230who-gets-it-when-you-die.aspx
(4) http://www.superguide.com.au/smsfs/beware-the-dastardly-death-tax
(5) http://www.superguide.com.au/smsfs/beware-the-dastardly-death-tax
(6) http://www.yourinvestmentpropertymag.com.au/article/the-investors-guide-to-trusts-118760.aspx
(7) http://www.ato.gov.au/General/Capital-gains-tax/In-detail/Guides/Guide-to-capital-gains-tax-2012-13/?page=94