Three steps in an effective Estate plan
By Thomas Kidd
Generational wealth is an important consideration in most financial plans, with many parents seeking a balance between enjoying their retirement and ensuring security for their children. The Productivity Commission estimates that in the next 20 years, approximately $3.5 trillion in assets will be transferred between generations [1]. Is your estate plan in order? In this article, we look at three key considerations for effective estate planning.
Wills and Powers of Attorney
The first and most obvious step in planning your estate is to get your will written. This document will outline how you want your assets to be distributed when you pass away.
At first glance, this might seem like a simple task; for example, you might have two children and want to split the inheritance between them equally. But consider these potential complications to the issue:
Your home may need to be sold in order to equalize assets between the children; does this mean your surviving spouse or some other party will be forced to vacate?
You may have made a loan to one of the children; is this accounted for in your will?
The two children may have different levels of wealth and income; does this influence the way you divide assets between them?
Grandchildren and other extended family; should they be taken into account as well?
A well-prepared will can account for these variables and leaves no uncertainty in how your estate is to be managed.
Powers of Attorney are also important for ensuring you are properly represented should you become incapacitated. These documents lay out who can represent you and what decisions they can make.
In our experience, Powers of Attorney have proven vital for many older Australians experiencing mental or physical issues which can make it difficult to manage their finances. There are many variables to consider when establishing a Power of Attorney:
You may nominate a single person, or several. When several attorneys are nominated, you can require that they make decisions together, or allow any one of them to make decisions on your behalf.
The document can limit the power of attorney to decisions in a specific field. For example, you may allow someone to make medical decisions for you, but not touch your finances.
The document can include your wishes under particular circumstances, so that attorneys are obliged to act accordingly. For example, you can make specific requests to avoid certain types of medical treatment or living situations.
Care needs to be taken when establishing Powers of Attorney to avoid conflicts from arising. For instance, limiting access to your finances could also limit your attorney’s ability to make other decisions for you, e.g. where medical expenses need to be paid. Estate planning professionals deal with these questions every day and can help tailor an estate plan to match your needs.
Beneficiary nominations
Superannuation assets are treated a bit differently to other monies in your estate; you can make a nomination directly with your super fund for how these funds are to be treated. This can be beneficial because you may not want the funds to leave the super environment, particularly if you have a surviving spouse who relies on these funds for income. There are different types of nominations available depending on your super fund:
Binding/Non-binding – a super beneficiary nomination can be binding, meaning that the fund is obliged to act in accordance with it, or non-binding, meaning that the fund may exercise discretion if they see the need. Cases in which a fund may exercise such discretion could include where a nomination is in favour of an ex-spouse or deceased person.
Lapsing/Non-lapsing – some super funds require that you update your nominations regularly to ensure they remain appropriate; this is called a lapsing nomination. A non-lapsing nomination will remain in place until revoked.
Reversionary nominations – if you have a super income stream, you may be able to make a reversionary nomination; this is a nomination in favour of a financial dependent (eg. your surviving spouse) and allows for the income stream to continue to be paid after you pass away. Such a nomination can be beneficial in avoiding cashflow issues for beneficiaries who rely on this income. By contrast, if a regular beneficiary nomination is made, this income stream will stop once the fund is informed, and funds will be distributed accordingly.
Estate taxes
Superannuation monies that are included in your estate may attract tax upon distribution, depending on who the beneficiary is and the tax status of the funds themselves. Money that you put into super is generally taxable if it received concessional tax treatment when contributed, and tax-free if it did not. For many people this means that a majority of their super funds are taxable – this can attract tax of 17% when distributed to your estate, which could be a fair chunk of change. However it’s possible you can reduce this tax by implementing a re-contribution strategy; this essentially entails withdrawing funds from super and re-contributing them, to convert them to tax-free element. Because of the many rules and limits regarding withdrawing from and contributing to super, we recommend you speak to an adviser if you’re interested in implementing this strategy.
References
[1] Wealth transfers and their economic effects (page 62): www.pc.gov.au/research/completed/wealth-transfers/wealth-transfers.pdf
Thomas Kidd in an authorised representative of Alliance Wealth Pty Ltd. (AR: 001292328)