Estate Planning is a term used to protect wealth and distribute it according to the owner's wishes upon their death.
Below are some of the main issues to examine along with terminology explanations:
Determine how you want your assets distributed upon your death. If you don't do it, the Government (State) legislation will determine it.
This means you die without a Will or an invalid Will. If you have assets in different States, the laws of each State will determine how the assets are dealt with.
Revoking a Will
If a new Will is created and does not include a revocation clause, then the new and old Will are joined to make up the last Will. Different States have different laws relating to this.
Revocation by marriage or divorce
In the majority of States the divorced spouse is treated as if he or she predeceased the deceased. In WA this has no effect. In TAS it revokes the Will.
Out of date Wills
Main things to consider: Are the beneficiaries still alive? Have the beneficiaries situations or needs changed? Do you still hold the assets mentioned in the Will? Are the executors or guardians still capable of acting in that role?
Assets governed by a Will
Generally all assets personally owned by the Will maker. Some assets not included: those held as joint tenant; held in a Trust; owned by a company; Superannuation death benefits paid directly to dependents, some Life Insurance proceeds from policies not owned by the life insured or that have a nominated beneficiary. Generally these assets are protected from a challenge to the Will as they do not form part of the estate.
In NSW Courts have the power to declare property held by a third party at the time of the deceased's death to be 'notional assets' of the deceased and therefore added to the deceased's estate. A number of elements must first be established by the courts to declare the property notional assets. For example if the ownership of the assets has changed under a non-arms length transaction within three years prior to death. See Family Provision Act - Section 23-25 for more information.
No assets to leave behind
Even if there are no assets it may still be prudent to have a will, particularly if there are children involved. The Will can be used to appoint a guardian if both parents die at the same time. There may be superannuation proceeds to direct.
Challenging a Will
Challenges can be time consuming and costly for all parties including the estate.
A 'seperate statement' can be made highlighting the Will-makers concern about any individual/s challenging the Will. It could help show the court why the individual was excluded as a beneficiary.
Increasing the level of life insurance could protect the assets. The life insurance proceeds could be used to pay the legal costs associated with a challenge.
Structure the assets so they do not pass through the estate. Examples:
- Joint Tenant ownership arrangements - be wary of NSW 'notional assets'.
- Superannuation death benefits paid via binding nominations
- Life insurance proceeds paid to a dependent
- Asset held in a Discretionary Trust
- Making an outright gift before dying
The grant of probate is proof that the Will is valid and final and is granted when the executor of the estate makes an application to the court. Probate is not required for:
- assets owned as joint tenants
- assets held in a discretionary trust
- superannuation benefits
- life insurance proceeds where the policy is not self-owned
Power of Attorney - POA
This is important to ensure your business and or personal needs are properly managed if you become incapable of doing it yourself.
There are three types - general, limited and enduring.
General and limited are revoked once the person is unable to manage their own affairs.
Enduring continues even after the person is considered of unsound mind.
Limited POA's are generally used for short term cases eg. someone may be going away for a short period and they need someone else to manage their affairs in their absence.
Power of Guardianship
A guardian is a person legally appointed to care for another person. A guardian can be appointed in a Will.
Estate administration period
The administration period for an estate generally cannot exceed three years. The length of time will be determined by the number of assets in the estate and whether or not they need to be sold etc. The executor is also responsible for submitting outstanding tax returns and pay any tax due from the estate proceeds.
Transferring assets - TAX issues
Death does not usually constitute a disposal of assets for CGT purposes. Any capital gain or loss is disregarded if a post CGT asset owned by the Will-maker passes:
- to their legal representative
- to a beneficiary
- from the legal representative to a beneficiary
- as an approved asset to a public library, museum or art gallery.
If the asset was pre-CGT then the beneficiary inherits a cost base of the market value of that asset at the date of death. If post-CGT then the deceased's cost base flows to the beneficiary.
If a CGT asset is left to a tax-exempt body such as a charity then the estate may be liable for CGT on that asset.
There are two types - death benefit nominations, which the Trustee is not bound by and Binding Nominations which the Trustee is bound by. Binding nominations become invalid after three years and need to be renewed. Binding nominations protect against challenges and expedite access to monies - the funds bypass the estate and are paid direct to the beneficiaries. It is important not to let the binding nominations lapse.