Over the past 6 months we have had quite a few clients, friends & trustees of self-managed super funds ask us about their estate planning. It’s an important issue: what do you want to happen to your assets when you die? For many it’s a simple topic of ‘each to the other and then the kids’ where we have a nuclear family. It’s not as simple as that now, blended families in particular add a complexity that needs to be addressed.
Ask yourself this question now: do you know exactly what happens when you die? If you don’t know, aren’t sure, think you have it covered via a Will, it’ll be worth spending 5 minutes to read on.
How do we help? Firstly we have a chat about your personal situation, and what you would like to happen with your estate. It starts with a simple question: who is going to look after your estate if you die? We discuss the assets in your life and what you would like to do with them, identify how these could be dealt with. Do you know how your super and life insurance is dealt with if you die? Will your spouse or dependant children receive a pension or a lump sum in their bank account?
A Common Scenario
Here’s an issue to think about: you are the sole surviving spouse, and you have a home, some money in super that you’re receiving a pension from, some savings, maybe a few shares or an investment property. Or maybe you are a younger couple with kids under age 18. Whilst you may have different wishes, you have the same goals … to look after your family and loved ones when you die, and not see your hard-earned estate squandered or lost. I would argue it’s probably critically important if you have children that are minors … who will be their carer if both parents are no longer with us? How will they be provided for? What happens regarding your assets, insurance and super proceeds … how is it managed? Who looks after it until the kids are 18, 21, or 25?
Many clients simply say “our parents will look after the kids if we die”. But what if the grandparents are in advancing years? Maybe one of your siblings? No problem, but how do your assets help them provide for your children, and what happens when your kids grow up: what about the estate you’ve left, where there’s money or property left over when they turn 18?
I’m Worth More Dead Than Alive!
The majority of us have some form of life insurance and we joke “I’m worth more dead”. Whilst it might be factually true, this brings it’s own issues. If you die and at a point down the line your spouse remarries, does that pose a threat to your estate wealth that you’ve left, that I’m sure you want to see go to and support your biological children? Of course it does.
Another comment I hear is “we love our kids equally and immensely, but Johnny isn’t very good with money” or “Jenny doesn’t gave great taste in partners”. What can you therefore do to help ensure your wealth is passed to your adult children that ensures it then passes to their children down the track and not end up part of a divorce settlement, a deposit on a Ferrari, or fall victim to an unscrupulous spouse?
It’s not meant to be fun
It’s not a great topic to think about, but it’s reality. The good news (now that I’ve painted a grim picture of orphan children, fast cars and thieving spouses) is there’s a few simple measures you can put in place that will mean your beneficiaries can still benefit from your estate, but protect it from the things we don’t plan on happening, but invariably do. Our mantra: plan for the worst, protect yourself from it, and then expect the best.
Bhavesh Mistry, senior partner with Mistry Fallahi Lawyers who are expert estate planning specialists, provided some clarity around the different types of options that are oft spoke of when estate planning is scrutinised.
What is a Testamentary Trust?
A common question, usually framed in the context of “I’ve heard of it but have no idea what they are”. No problem, Trusts come in many shapes and forms. One point to make is that they are not purely the domain of the wealthy, the property developers, tax dodgers and the Reinhart family. In fact, almost all of us will have exposure to a Trust. If you have a superannuation fund, you are a member of a superannuation trust.
A testamentary trust however is one that only starts upon death.
Having a testamentary trust in your estate plan allows you to set up a method of managing the assets of your estate. This can be for the benefit of minors (i.e. kids under 18) and other beneficiaries (i.e. spouse, adult children). This can ensure that your assets and wealth are protected in the future. A testamentary trust will come into operation after the Will maker’s death, generally when the executor of your estate first transfers assets into the name of the trust (i.e. property, cash, shares).
Why do I need a Testamentary Trust?
Depending on your circumstances, there are many reasons why you would use a testamentary trust in your estate plan. Some of the main benefits for the implementation of a testamentary trust are that:
- Allows executors and trustee to make decisions for beneficiaries particularly those under the age of 18 years. This can be to provide for education, care, general needs. It can also split the income earned from investments in the trust between nominated beneficiaries (i.e. multiple children). Why? To achieve a reduction in the total amount of tax paid from the distribution of income earned from the estate.
- Protects assets from possible family breakdown. Or insolvency of a beneficiary. Or other matters where a creditor may make a claim against the beneficiary’s assets (i.e. being in business which may fail).
- Allows for multiple trusts to be created for separate control over individual inheritances (i.e. where there are multiple children).
- Provides protection to vulnerable beneficiaries with a severe disability or special needs. Trustees may use income to provide for a beneficiary’s maintenance, benefit, advancement in life and general wellbeing.
Which Testamentary Trust should I implement?
It depends on your circumstances and the situation of your intended beneficiaries. There are different types of testamentary trusts which may be considered for your estate plan. We do not expect you to know the exact use for each, and these Trusts may not apply to all people. For example:
- Principal Property Trust. Consider protecting your main residence for the benefit of your spouse and children. Through a right of occupancy or life interest, it ensures that your spouse and children have a place to reside and to protect the family home from future marriage and divorce.
- Investment Portfolio Trust. Your investment portfolio is held and maintained in trust to secure and protect your wealth. It assists managing the taxation on the income for your beneficiaries. For example; each beneficiary has a tax-free threshold of $18,200 … you could use each person’s threshold to the fullest if they are not working or have minimal income.
- Educational Trust. Funds are set aside for minor children’s care and maintenance. Includes payment of educational, medical, dental and living expenses to ensure their guardians are not financially burdened. Ensures your child is financially protected in the future.
- Special Disability Trusts. provide for the current and future care of a family member with a severe disability. It ensures that the inheritance will not affect their entitlement to receive social security (Centrelink) support payments.
- Superannuation and Life Insurance Proceeds Trusts. Allows you to direct your superannuation into your estate. Then, your executors and trustees have the flexibility to make distributions to dependents, and non-dependents, in line with your wishes.
- Protective Trusts. Place your assets into trust and outline provisions to ensure that beneficiaries who you believe need to be protected, are. They may need guidance and professional advice, or have gambling, spending or drug issues.
Speak to us
If you found yourself scratching your head at the types of trusts above, don’t worry. You must obtain the right advice to ensure that the correct trusts are used. They must be specifically drafted and tailored considering your personal situation and your intended beneficiaries. Standard provisions in your Will may result in your estate being subject to considerable tax. There is risk and potential loss to factors outside your control.
We do not expect anyone to pick up the phone and know exactly what they want or need. Do you have any questions about your estate planning situation? What about your Will, are you worried about what might happen in your family situation? Then let’s discuss it. If you have a blended family, a beneficiary that may have a potentially difficult situation (i.e. you’re worried about a possible divorce, spending habits, business risk), please contact us for a confidential chat.