Estate planning essentials

In the event of your death or disability, it is essential that you have the correct estate planning tools in place to provide for yourself, your family and your beneficiaries.

Estate planning is the planning and documentation of your wishes for the distribution of your wealth following death, including assets you own personally as well as assets you control.

Estate planning is a specialist area and it is therefore important you obtain professional legal advice in relation to all areas of your estate plan. However, we outline below some of the issues you should consider in designing your estate plan.

Will

A Will is the first step in ensuring the distribution of your estate is actioned in accordance with your wishes. Without a Will, upon your death, a court controls the distribution of your estate and the persons to whom your estate is distributed to, which may result in delays in asset distribution.

It is important to ensure that your Will:

• nominates executors (and successor executors) for your estate, who are likely to survive you and who clearly understand your wishes,
• nominates beneficiaries in relation to the whole or part of your estate and nominates second choice beneficiaries, should your first choice predecease you,
• bequeaths monetary value or a percentage of your estate rather than a specific asset, as there is the risk that an asset may not be in existence at the time of distribution of the estate,
• nominates assets to be held in trust for beneficiaries under 18 years of age. For example, you can provide funds for your children’s or grandchildren’s education,
• can also include provision for establishing a testamentary trust, which can be a tax-effective tool for distributing your estate.

Power of Attorney

This element of your estate plan is designed to be implemented prior to your death in the event of disability or incapacity, so that your affairs can be conducted appropriately.

General Power of Attorney

A general power of attorney appoints another party to act on your behalf to make decisions in respect of your legal and financial affairs. Subject to its terms, such a document remains in force until you cancel it. However, a general power of attorney is automatically terminated when you die, become bankrupt, or become incapable of making reasonable judgments due to disability.

Enduring Power of Attorney

In contrast, an enduring power of attorney is not terminated if you become legally incapable of making your own decisions due to disability. Therefore, this type of document is particularly important if you were to lose mental capacity and required someone else to manage your affairs.

Without an attorney, your family would have to apply to a state authority to have an administrator appointed to manage your affairs. This may mean that your assets are frozen for a lengthy period of time and that the subsequent decisions about them may not accord with your family’s overall best interests and wishes.

In granting an enduring power of attorney, you are giving wide powers to another person to act unfettered on your behalf. In essence, your attorney can conduct any legal and financial affairs that you can. It is essential, therefore, that you take great care in choosing your attorney and that you choose someone you implicitly trust to act in your best interests.

Enduring Power of Guardianship

An enduring power of guardianship allows someone to make personal and lifestyle decisions for you, which is also not terminated if you become legally incapable of making your own decisions due to disability. You can nominate the types of personal and lifestyle ‘functions’ in respect of which your guardian will have the power to make decisions on your behalf, e.g. determining your place of residence.

A power of attorney may only be granted by someone who is over the age of 18 and who is of sound mind at the time of the grant and capable of fully understanding the nature and purpose of the document they are signing. The attorney is not able to do anything illegal while operating under a power of attorney, nor are they able to prepare a Will on behalf of the donor or transfer the power of attorney to someone else unless specified.

Enduring Medical Power of Attorney

An enduring medical power of attorney provides the attorney with authority over the medical needs of the donor if the donor is unable to make these decisions themselves (whether temporarily or permanently).

Appointment of guardian

A Will-maker who has young children should appoint a guardian to take care of such children should the Will-maker die before the children are adults.

The appointment of a guardian is usually included in a Will as a safeguard in the event that both parents die before the children are 18 years old.

The appointment of a guardian also serves to avoid the possibility of disputes between members of the family. The Court has an overriding discretion to appoint or remove a guardian.

It is the guardian’s responsibility to make the important “life decisions” on behalf of the children. The guardian must ensure that the children are adequately housed, clothed and educated. The guardianship of minor children is a responsible task. The Will-maker should think carefully about the appointment of a guardian and attempt to appoint one or more persons who:

• are prepared to take on the responsibility
• are of a similar age to the Will-maker, and
• hold similar social and cultural views to the Will-maker.

Conflicts may arise between an executor and a guardian as to how a minor beneficiary’s entitlements are to be used for a beneficiary’s ongoing maintenance, education advancement or benefit. To avoid such conflicts, a Will-maker may consider appointing the same person as executor and guardian. This may, however, give rise to conflict of interest between the duties of an executor and the duties of a guardian.

Superannuation death benefit nominations

Death benefits are funds paid upon death by the trustee of your superannuation fund to your estate, or to the beneficiary you have nominated.  When nominating a beneficiary it is important you understand that there are implications for each choice you make, including the type of nominations that you make.

There are two types of nominations for beneficiaries: binding and non-binding.

• Non-Binding Nominations: Many death benefit nominations made by members of superannuation funds are not binding on the superannuation fund trustee. This means that the trustee of the super fund may exercise a discretionary power to determine how the benefit is distributed and to whom.
• Binding Nominations: Nominations may also be binding subject to the rules of the trust deed. A death benefit will be binding on the trustees if:
  • the nomination form includes the name of each person(s), or class(es) of person (e.g. spouse), and the allocation of the death benefit amongst nominees is clear,
  • each death benefit nominee is a legal personal representative or dependant of the member,
  • the nomination form is dated and signed by the member in the presence of two adult witnesses, neither of whom is a nominee named in the notice,
  • the nomination form contains a declaration by the witnesses, stating that the member has signed and dated the nomination form in their presence, and
  • the nomination is valid.

Testamentary Trust

A testamentary trust is an estate planning structure which arises upon the death of the testator, usually under his or her Will. Testamentary trusts are distinguished from other unit / family trusts which are created during the trustee’s lifetime. A testamentary trust is only triggered upon death.

For a testamentary trust, as the settler is deceased, they will generally not have any influence over the executor’s exercise of discretion. At its simplest, a trust exists in circumstances where the executors hold the assets of the estate for the benefit of the beneficiaries. Normally a beneficiary only becomes absolutely entitled to their share of the estate under a Will (providing there are no other conditions attaching to the entitlement) if the beneficiary survives the deceased for 30 days.

More specifically, the term might be used to refer to a trust explicitly created by the terms of a Will, as opposed to a contingent or conditional gift. The trust might be fixed or discretionary, depending on the testator’s wishes.

Trusts under Wills

More recently, the term testamentary trust has been used to refer to a discretionary trust created under a Will. The range of possible beneficiaries and the powers given by the trust are virtually infinite. The usual provision is for the spouse and infant children of the deceased to be named as beneficiaries, although, depending on the circumstances, this may be extended to the grandchildren of the deceased as well as other classes of beneficiaries.

As with any other discretionary trust, the trustee of the testamentary trust (usually the executor of the estate) has the power to distribute the income and capital of the trust amongst the beneficiaries in whatever proportions and at such times as they think appropriate.

The testamentary trust ends like other trusts. If there is a life interest, it ends when the person whose life is to be counted, dies or when the person with the life interest assigns or surrenders it.  If the trust is a discretionary trust it will end according to the terms of the trust deed.  For example, the trust vests by one of the actions provided for in the Will, such as distribution of the property to the various beneficiaries or by declaration by the trustee that the trust has vested. Testamentary trusts can also end if the courts make an order vesting the trust, or it can end by accident if there is no trust property.

The primary advantage of a testamentary trust lies in the treatment of its income. Income from testamentary trusts is ‘excepted trust income’ and is dealt with separately to regular taxable income. Consequently, income received by a minor under a testamentary trust is taxed at the same rates as normal individual taxpayers. Therefore beneficiaries (whether adults or minors) under a testamentary trust, who do not have any other income, can receive $18,200 income (2019/2020 financial year) tax free in each year and normal tax rates apply to any excess income. The opportunity to split income between minors is obviously a significant benefit of a testamentary trust. Of course, the trust only comes into existence on the death of the testator.

The other advantage of a testamentary trust is its flexibility. Rather than deciding before death how an estate is to be distributed, a person can effectively delegate that task to their executor to carry out after death. The executor is normally in a much better position to assess the consequences for a particular beneficiary of a distribution, and can maximise the benefit both to the estate and for the beneficiary. Obviously, it is important that the person chosen to carry out this task is someone the testator can trust, and who is capable of making the appropriate decisions at the appropriate time.

The specific terms of a testamentary trust will depend upon the wishes of the testator. In many cases it may be appropriate to have multiple testamentary trusts. For example, a testator with three adult children, each of whom has children of their own, might establish three separate trusts under their Will. Each trust would have, say, one third of the estate, or, if appropriate, specific assets could be designated to each trust. The Will could appoint each child as trustee of their trust, and each trust would be administered separately. Each family could decide how their trust was administered, whether it would continue, or whether it would be wound up. Even if one child did not have children at the time of the Will, separate trusts could be used. If that child subsequently had children before the testator’s death, it may be appropriate to continue with the testamentary trust. If they were childless, the trust could be immediately wound up.

Trusts within three years of death

A testamentary trust can be established up to three years after the death of the deceased. Section 102AG(2)(d)(ii) of the Income Tax Assessment Act 1936 permits a party who was a beneficiary of a deceased estate to transfer their benefit from the estate to a trustee.

The opportunities that are available through a testamentary trust should be considered by people at any time they review their personal and financial affairs.

When establishing a testamentary trust, consideration will need to be given to:

• the nature of the trust that is to be created,
• the present and future taxation position of the testator and potential beneficiaries, and
• whether any benefits are best achieved by distributing specific assets to a testamentary trust or to the beneficiaries.