Legally Speaking — Estate Planning

Estate planning is an important personal financial issue that is especially relevant to ageing baby boomers.

The aim of estate planning is to ensure that wealth passes to beneficiaries in exactly the way intended by the testator, while legitimately minimising or eliminating tax for beneficiaries and without leaving behind a bitter legacy of family disputes.  Careful estate planning should aim also to ensure that a substantial inheritance does not end up in the hands of a beneficiary who will either squander it or be targeted by creditors.

A smart way to begin planning for the transfer of wealth is to make a distinction between drafting a simple will and undertaking comprehensive estate planning.  You need to consider beneficiaries for such things as business risk, family law risk, and whether there are tax-planning benefits for beneficiaries receiving income through testamentary trusts rather than directly in their own names.

Children may be young and not able to deal with assets suddenly landing in their laps some might have gambling or drug problems, or have intellectual disabilities; others may be facing a marriage breakdown or could be at risk of being sued following the failure of a business venture.

Testamentary trusts are a valuable method to protect your beneficiaries.

Testamentary trusts are provided for in wills and are brought into existence by the death of the testator.  Selected assets or cash are held in these trusts instead of being immediately distributed to beneficiaries.  In this way, the trusts can be used for purposes such as providing asset protection from creditors of beneficiaries, ensuring that assets from the estate are withheld from children until they reach specified ages, and distributing income to children or grandchildren in a tax effective way.

A testamentary trust is one of the most flexible and tax effective ways to distribute income to young children and teenagers.  Trust beneficiaries under 18 are subject to the standard adult marginal tax rates – including the $6,000 tax free threshold instead of the higher tax that applies to the unearned income of minors.

There is no limit to the number of discretionary trusts that can be included in a will.  If appropriate, each child of the benefactor could be the beneficiary of a different testamentary trust.

Beneficiaries are sometimes unevenly treated when a benefactor overlooks the capital gains tax (CGT) implications of inheriting different assets.  One child, for example, might inherit an investment property, the value of which had risen sharply during the deceased’s ownership, while a second child might inherit the main residence of a deceased parent.  Although the properties might have similar market values, their treatment under the CGT provisions will be vastly different.

The child inheriting the investment property might also effectively inherit a big CGT liability.  For CGT purposes, this beneficiary is taken to have acquired the investment property at its original cost to the deceased, with any CGT payable when it is eventually sold. 

The child inheriting the parent’s home will inherit no CGT liability, but for CGT purposes is taken to have acquired property for its market value at the time of death.

A change to marriage circumstances will influence estate planning.  There are a lot of blended families.

It can take extremely careful estate planning to ensure that, say, the children of a first marriage are adequately cared for in a Will even though the testator may have been married at least twice.  Any likely marital disputes involving intended beneficiaries should be taken into account.

Uncoordinated estate planning can destroy a family’s carefully prepared asset-protection plans, which have been put in place as security against a possible financial setback in the future.  The example of a businessman who had painstakingly structured his affairs so that no assets were in his own name.  Many of his assets, including the family home, were in his wife’s name.  But then his wife predeceases him and leaves him everything.

This undoes much of the husband’s asset-protection planning.  One solution in this case is for the wife to have a clause in her will granting her husband a life estate for the use of the house and income but then for the property to go to the couples children.

Estate planning is exactly that …planning.

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