How to Use Estate Planning for Wealth Protection

One thing people will say about money and death is that “You can’t take it with you”. There is no way around the truth of this matter: no amount of earthly riches can transfer to the beyond. What you can do, however, is to make sure that you leave a legacy for your family and loved ones on your terms. That’s essentially what Estate Planning is about.

Many people think Estate Planning is just about having a Will, and that is true, but it is more than that. Estate Planning is about taking control of your affairs and having a say in how you leave your legacy. If you have a business, for example, you are well advised to tidy up business structures and succession plans to make sure that any adverse events impacting on the business do not affect your family’s financial future. It involves thinking about how you will provide for and protect your family, how you will build and protect your wealth, and how you will share your wealth with the people you care about.


Thinking Ahead

If you can at all imagine what might happen to your family when you are no longer around, you will more than likely pose the following questions:

  1. How can I continue to look after my family or business if something happened to me or my spouse?
  2. How do I best prepare my children for responsible independence?

Here are some facts that will astound you:

  • Approximately 60% of Australian’s die without a Will in place.
  • The average age of people with a Will is 82.
  • The average age of people who die without a Will is 62.
  • Most Australian families earn less than $75,000 per annum and will be lucky to have sufficient capital to survive what is now for most workers a 15-25 year retirement.

Your life and that of your family members can be turned upside down in an instant, and generally people don’t know when that moment will come. That’s why it is so important to be prepared.

More and more people are increasingly considering transferring wealth to the next generation during their lifetime. They also want to make sure that they leave a legacy for their family in a way that they want to. Estate Planning is one of the best strategies to achieve this. It provides a comprehensive process to examine the degree of complexity of your affairs, taking into consideration laws associated with investment, family, superannuation, and taxation.

Once you have determined the best strategy for your circumstances, it is most important to document your wealth distribution in your Will. You should ensure that it is up to date, drawn up in a legally binding fashion, and has been drafted with proper regard to your personal, family, business and investment structures.

Invalid, no Will, or is out of date. The right time to update your will is now. Not tomorrow, not after the weekend, not ‘when things quieten down’. You should review your Will every 12 months, and probably update every 4 years.


Structures to Manage Assets

Depending on your financial or business situation different complexities and questions might apply to you. For example, if you have a “family trust”, “investment trust”, “farm trust” or “business trust” you cannot include trust assets in your Will as they do not form part of your personal “estate”.

There are plenty of good reasons for people to set up a trust, however, you need to bear in mind that passing control of assets held in a trust is not a simple matter, either when you are alive or when you die.

If you carry on a business, either in your own name, or through a trust, partnership or company, there are more questions you need to consider to protect your family and business assets, including:

  • protection from claims
  • planned or unplanned “exit”, which could result in unintended consequences
  • appropriate insurances
  • tax issues arising from the sale of your business, eg. capital gains tax?


Modern Families

These days there is a very high percentage of “blended families” with step-siblings living together under the one roof after Mum and Dad have both divorced and married again. Determining how you can leave the legacy that you want can be difficult under such circumstances. You may need to think about various scenarios before determining your strategy.

If you have divorced children, or children at risk of divorce, you may want to consider how to safeguard any gifts to such children to ensure that the assets stay within the family. If you have dependent children, either under 18 or with some form of disability, who will look after the children if you die or become incapacitated?

If you have children from more than one marriage, are all your children adequately provided for, and will any gifts be administered by someone who will act in the best interests of each child?


Assets and Liabilities

If you own shares in a company, you want to consider who will control these shares, who will be appointed a director of the company and how they should act. Further points to consider are director/shareholder guarantees, Shareholders’ Agreements and “succession” clauses.

If you have a Self Managed Super Fund (SMSF), you need to decide who will control the assets if you die or become incapacitated – who will be the trustee? Your pensions need to be structured properly, with appropriate reversionary clauses and the Deed needs to be up to date, providing for the full range of possible pension benefits, binding death nominations, and the proceeds of any life policies held in the fund.

If you own one or more investment properties, it is important to consider who holds the title and in what capacity. Examine the extent of cross-security, whether you have you forgone “asset protection” to get access to “negative gearing”, or whether you are paying too much land tax.

If you have significant loans, both with related entities and banks, you need to think about how these loans will be paid out if you die or become incapacitated. Examine if your solution will impact a specific gift to a beneficiary and if the loan and any associated life or disability insurance are held in the same entity.


Giving Back to the Community

If you wish to make a contribution to society in the form of a charitable gift either while you are alive or on your death, then it is worthwhile to consider a “charitable trust” or “charitable foundation” and the tax consequences of charitable giving through your Will.


Common Mistakes

Estate Planning can raise so many questions to be answered and a small amount of time invested now can help you to work through all of these issues. An Estate Planning expert can make sure that you don’t make the common mistakes that people make when arranging their affairs and making a Will.

Failing to minimise death taxes: You are taxed long after you die. Your estate is reduced by three de-facto taxes – income tax, capital gains tax and stamp duty. Failure to plan allows these taxes to eat into your estate’s value.

Appointing an unsuitable executor: You need to appoint an executor in you Will. They handle your affairs after you die. Know the costs when appointing professional trustees and lawyers as your executors as they work hard on the issues and high fees could be racked up.

Failing to include both intended and unintended beneficiaries: Carefully consider who you want to be a beneficiary in your Will. Ensure that any witnesses to your Will do not receive anything under it. Failing to dispose of all assets Carefully consider your assets. You should provide for all assets that you wish to distribute. You should also include a provision to cover any beneficiaries that cannot inherit as you intended. Include a residuary clause in your Will. This allows you to keep control over any leftover assets. If there is no residuary clause, the State can decide where your residuary assets go.

Will Challenges. Only certain people are potential challengers and they include:

  • Your parents
  • Your spouse – the person you are married to but could also be your de facto
  • Your children (adopted children but not children born from sperm or egg donation)
  • Your grandchildren
  • Anyone that you are ‘maintaining’ (not in all States).

There is nothing you can do about the rights of people listed above to challenge your Will, and you can’t use your Will to force someone to do or not do something. Nonetheless, just because someone can challenge your Will doesn’t mean that they will be successful. Your Will is one of the most important documents you will ever sign and forms the foundation of your Estate Plan.

Estate Planning is a must to protect the assets you have and keep them in the family. Make sure you have the final word on where they go. Don’t leave it to chance. If this article raised more questions for you that you need answered, click here to contact the Team at Straight Money Talk Pty Ltd for a FREE “Money Health Check” or call us on 1300 416 590. We can help you to get started and work through your financial and business structures and assist you with complete Estate Planning services, including working with your solicitor and any other third parties.

Copyright © 2011 Robert Bauman

Disclaimer: This information (including taxation) is general in nature and is for Australian residents only. It does not consider your individual circumstances or needs. Do not act until you seek professional advice and consider a Product Disclosure Statement. To find out more about services provided by Straight Money Talk Pty Ltd please visit my website.