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The new Aged Care Act will soon be law
Australia’s population is ageing, with the number of people aged 85 and over projected to triple in the next four decade...
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In the next 10-20 years, it’s estimated that more than $3 trillion will be transferred as part of the largest intergenerational wealth transfer in history. With such a remarkable figure, it’s a stark reminder of the importance of structuring your estate to ensure that your wealth transfer intentions are honoured.
Leaving a legacy for future generations is a core motivator for many of our clients. Ensuring that your wealth is protected and passed to your loved ones requires careful estate planning. This is more than just having a will—how you structure your finances both in and outside your estate has a significant impact on a smooth wealth transfer.
It’s important to note that not all your assets or interests are automatically included in your will.
Only assets you own yourself can be included—jointly held assets, private company assets and assets held in family trusts can’t be included.
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Included in your will |
Excluded from your will |
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Assets owned solely by you |
Jointly-held assets |
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Life insurance—when owned by you, with no nominated beneficiary |
Life insurance—owned by another person or with a nominated beneficiary |
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Shares in a private company owned by you |
Private company assets |
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Appointor role in a Family Trust |
Family Trust assets |
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Superannuation—where it’s been forced into the Will by your Binding Death Benefit Nomination |
Superannuation—if you have nominated another beneficiary or not completed your Binding Death Benefit Nomination |
A commonly held assumption is that superannuation automatically forms part of your estate—it doesn’t. If you haven’t completed your Binding Death Benefit Nomination, either identifying a beneficiary or forcing it into your estate, your super fund will identify potential beneficiaries and contact them directly, with no consideration for the allocation of assets in your will. This can often cause confusion and complications for your intended beneficiaries.
I witnessed the distress an overlooked Binding Death Benefit Nomination can cause families early in my career. A wealthy client in another division passed away, leaving behind his widow and adult children. The client owned significant farming assets, a self managed super fund and an additional super fund with MLC holding a balance of $150,000.
Their simple ‘I love you’ will directed that everything was to be transferred to their wife. Unfortunately, it came to light that they hadn’t completed a binding death benefit nomination for their MLC super account. As it wasn’t part of the estate, the fund identified the potential beneficiaries, writing to their widow and adult children, asking if they had a claim to the superannuation account. Two of the children indicated they did, triggering a lengthy challenge that, while ultimately resolved, caused untold angst and the rupture of the family. A single form would have prevented a great deal of unnecessary heartache.
Often the process of estate planning triggers the restructuring of assets. In the early phases of life, personal finances are typically structured with a goal of tax minimisation and asset protection, in a structure that doesn’t necessarily facilitate smooth wealth transfer. Assets held in a trust or owned by a company can’t be transferred via your will—control of the trust or company shares are transferred instead.
Transfers involving ownership of company shares in particular can be quite complex, and need to be very diligently managed to avoid unintended outcomes. A common cause of these complications come from inter-entity loans and personal loans to family businesses. If you intend on transferring ownership of your company in your estate, it’s critical that any loans are clearly documented and communicated to stakeholders, with wills being updated as loans are issued and repaid. Any loans that aren’t accounted for in your estate planning can greatly impact the value of assets divided amongst your beneficiaries. Here’s an example of how this can have unintended consequences in your estate.
Mum and Dad have two children, Ben and Sally, and run their business via Smallbus Pty Ltd. Ben works in the business, while Sally has a successful career away from the family business. Mum and Dad pass away only a few months apart from each other. In their estate, they leave the full shares in Smallbus Pty Ltd to Ben, handing him ownership of the successful business he’s been working in his whole life. Sally receives the family home, superannuation and any residual.
On face value, the estate looks fair and equal, with each child receiving a 50% share of value. However—Mum and Dad had loaned Smallbus Pty Ltd $1,000,000, which is now owed to Sally. Instead of leaving their children an equal inheritance as they’d planned, Ben and Sally are instead left with an uneven, messy division, with Sally receiving the lion’s share of the family wealth.
As there’s no estate tax as such in Australia, during our estate planning sessions we instead look to the most tax-effective vehicle to transfer wealth. This often changes depending on the intended beneficiary. For example, superannuation be transferred to your spouse tax-free, however if it’s transferred to an adult non-dependent child, they’ll pay 15% tax and 2% Medicare levy on the taxable component. For some families, this influences how they choose to divide assets. If you wish to leave your superannuation to your children or beneficiaries other than your spouse, there are strategies that we can implement throughout your life to reduce the taxable component.
If you intend to give a gift to your children or grandchildren, investment bonds can be a very effective mechanism to bypass the will and reduce taxes paid on your gift. A bond is established in your name, with your child or grandchild named as the beneficiary. You nominate the date that the bond vests to the child, which can be any age between 10 and 25. The earnings on the investment bond are taxed within the bond at 30%. Capital gains on the bond can be received tax free if it's held for more than 10 years. This is a strategy we often recommend to clients, as investment bonds are a very effective tool to ensure your children and grandchildren receive their share of your estate without complication or risk.
If you hold assets within a family trust, it’s important to recognise that you can only transfer control of the trust within your will, and not the assets it owns. The role of appointor can be transferred, allowing you to manage trustees, but the assets can’t be left to any one beneficiary. It’s also vital to understand if the trust owes money elsewhere as this can significantly shift the value of what you allocate within the will.
As our clients progress through to their later years, we often have conversations about simplifying financial structures to make estate planning more straightforward. This is where the trusted relationship between advisor and client is particularly important, as these conversations have our clients sharing the highly sensitive and private details of their family challenges. The difficulties and flows of human life—health, disability, addiction and relationship breakdowns—can weigh heavily during estate planning conversations. Our clients are often keen to ensure they can continue to protect and provide support to children in complex situations even after they’ve passed. This is where testamentary trusts are effective.
Family testamentary trusts can provide a degree of protection and comfort that you can support your loved ones for the long term, regardless of what challenges they face. While they can be expensive and complex to implement, assets left to a testamentary trust offer enhanced security for your estate, giving you a sense of control that is not available if you directly transfer assets in the will. Assets are instead left to a testamentary trust, which is established upon your death. The structure provides asset protection from bankruptcy creditors and divorce settlements, as well as adding the influence of trustees who are able to ensure wise investment decisions are made.
Your will can specify which assets are to be held in the trust, who the beneficiaries and trustees are, and the terms of the trust in regards to access to income and capital. While it may not be ideal in all circumstances, and does require a degree of planning and commitment from nominated trustees, they’re an effective tool to ensure your gift provides the long-term stability you intend, particularly in challenging circumstances.
Consider Don and Helen’s scenario.
Don and Helen share three children, Joy, Jasmine, James—as well as Chloe, from Don’s previous marriage. Chloe has suffered from years of drug addiction, and has been in and out of recovery. Joy is a self-employed neurologist, Jasmine’s marriage is unstable, and James has had ongoing financial difficulties. Don and Helen want to ensure that their spouse is looked after first, and that each of the children are provided for equally.
The estate is worth around $4million. Don and Helen pass away within a few months of each other, with a simple ‘I Love You’ will.
This is what happens to their estate, with each child receiving $1million:
In an alternative scenario, here’s what could have happened if Don and Helen had provisioned for testamentary trusts in their will:
For Don and Helen, a testamentary trust would give them some peace of mind that their children will be financially supported and protected, regardless of life’s challenges.
The final and arguably most critical step in successful estate planning and wealth transfer is communication and documentation. Ensuring your entire team—financial and legal advisors—are on the same page is important to ensure the numerous legal and financial mechanisms involved work in synchronicity to achieve your goals.
When we work with clients on estate planning, we’re often presented with unsigned documentation, including wills, shareholders agreements and inter entity loans. The intention behind a document or a verbal agreement is not enough to protect your assets on your death—signatures are essential, even if everyone involved understands your wishes. Beneficiaries should also be reviewed whenever circumstances change.
Ensuring your family are aware of your intentions and the division of assets in your will is also helpful in minimising disputes and misunderstandings during an emotionally fraught time. Unfortunately, there are circumstances where challenges are made. This involves a family provision application, which goes before the courts. As part of this process, a lot of private and very personal family information enters the public domain which can cause a huge amount of distress to families. A frank and honest conversation about your intentions can often reduce the risk of this happening.
The other important conversation to have is around capacity planning and the nomination of an Enduring Power of Attorney to act on your behalf. Frequently we focus on the event of our death and the writing of the will, while overlooking the importance of identifying who we trust to make decisions on our behalf. An Enduring Power of Attorney is essential to ensure you have someone able to act in your best interests, making decisions about your health and financial matters, including accessing trauma, income protection or TPD insurance if you’re incapacitated, whether due to illness, injury or cognitive decline.
It’s important that both your solicitor and financial advisor have a clear understanding of your estate and intentions, to avoid making any decisions that have an unintended impact on your plans. At Ulton, we work hand in hand with you and your solicitor to ensure your preferred outcomes are achieved. If you’d like advice on how to achieve this for your financial situation, please get in touch.
Disclaimer
The information provided in this article is general only and is not considered advice. It has been prepared by Ulton without taking into account your personal financial situation or needs and should, therefore, not be relied upon. Information in this document provides a broad overview of current services and capabilities. Before making any decisions based on this information, please seek detailed professional advice. To the extent allowed by law, neither Ulton nor any of its employees will be liable for any errors or omissions in the contents of this document, including errors or omissions due to negligence.
Liability is limited by a scheme approved under Professional Standards Legislation. This limitation of liability does not apply in respect of the provision of financial services provided as an authorised representative of Ulton Wealth Services Pty Ltd (AFSL 497721). Sub Authorised Representative No. 245052 of Ulton Wealth Management Pty Ltd Corporate Authorised Representative No 460875 of Ulton Wealth Services Pty Ltd AFSL 497721 ABN 86 614 308 628. All wealth management services are provided by Ulton Wealth Management Pty Ltd Corporate Authorised Representative No 460875 of Ulton Wealth Services Pty Ltd AFSL NO.: 497721 | ABN: 86 614 308 628 | www.ulton.net | Ulton Wealth Management Pty Ltd ABN 73 168 815 450 | Kylie Wright (245052) and Jessica Wilkinson (378670) are Sub Authorised Representatives of Ulton Wealth Management Pty Ltd. Our liability is limited by a scheme approved under Professional Standards Legislation, except where we provide financial services as an authorised representative of Ulton Wealth Services Pty Ltd (holder of Australian Financial Services License No. 497721).
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