Introduction To Estate and Succession Planning

Estate planning

Current and future retirees in Australia hold a growing proportion of wealth, including personal and business assets. It is estimated that over the next 20 years, up to $3.5 trillion dollars will be transferred from Australians over the age of 60 to a variety of beneficiaries. It is therefore evident that a significant number of Australians will need assistance to develop and implement effective strategies and solutions for intergenerational wealth transfer.

The importance of estate planning

Estate planning is an essential component of financial planning and must be addressed in every plan. All too often, estate planning is seen as simply having a will or considering the consequences of death;

Often, a person will suffer a period of incapacity before death. Some clients may also be impacted by divorce or insolvency. Estate planning includes planning for these situations.

Estate planning is the process of working out the best way to structure your personal and financial affairs while you are alive so that you are looked after during your lifetime, and your personal possessions and financial assets are distributed the way you want when you die.

(Australian Executor Trustees Limited n.d.)

Complexity arises because estate planning involves people, family structures and beneficiaries; as well as trusts, taxation and, potentially, business succession. Decisions must be made about how assets are to be distributed on death in the most tax-effective way possible and using the correct financial structures and arrangements to protect the interests of the testator (i.e. the will maker) and their beneficiaries.

A thoughtfully structured estate may result in substantial tax savings on distribution of the assets of an estate — for example, by taking into consideration the unique requirements of a dependant with special needs or by allowing for tax implications on bequests.

What forms part of an estate?

The starting point for an estate plan is distinguishing between those assets that are owned in the personal name of the testator and those that are controlled, but not owned, or wholly owned by the testator. This separate consideration of estate and non-estate assets has become more important in recent decades with the growth of wealth in family trusts and superannuation funds.

Distinguishing between estate and non-estate assets and treating them accordingly is critical.

Estate assets

Estate assets are typically those assets owned in the name of the testator and which automatically fall into a deceased’s estate. They may include:

real property
shares personally owned in any company
cash
personal possessions
any share of any asset owned as tenants in common with anyone else
any superannuation death benefits paid by a trustee to an estate
the proceeds of a self-owned life insurance policy (i.e. where the policy owner is also the person insured and they have not nominated a beneficiary)
loans by the testator; including loans to relatives, the trustee of a trust or to a company
income or capital allocated to the testator from a trust.

Sometimes people control assets but do not actually own them. These will not be considered estate assets.

These non-estate assets may include:

superannuation, account-based pensions and/or annuities (unless a nomination has been made in favour of the estate)
assets owned as joint tenants with another party (for example, the family home)
assets owned by a company
assets held in trust (for example, discretionary (family) trusts)
life insurance benefits (paid to someone other than the life insured).

Non-estate assets cannot be disposed of in a will and other steps may need to be taken to transfer them. The documents that govern such assets may assume much greater importance than a person’s will.

Superannuation

Similarly, there is often confusion about the status of superannuation. Superannuation funds are trust funds, so the trustees are the legal owners of the fund’s assets. Benefits are not estate assets and proceeds will be distributed according to the terms of the trust deed for the particular superannuation fund, the governing superannuation rules and common-law entitlements.

Traditionally, superannuation trust deeds gave absolute discretion to the trustee as to how any fund balance and life policy proceeds were distributed. Trustees would identify the deceased’s dependants and pay the benefit to those who were deemed the most appropriate person(s) in accordance with the rules of the fund and superannuation legislation.

Many funds allow a member to nominate a ‘preferred’ beneficiary, but this is not usually binding on the trustees. The nomination can serve as a guide, but trustees retain complete discretion as to the payment of death benefits to dependants. The trustees always have discretion to pay the benefit to the deceased’s estate for distribution according to the will.

To remove any uncertainty, it is now common for trustees to offer members the opportunity to make a ‘binding nomination’ to a beneficiary(ies) of their superannuation benefit upon death. This is an important area of estate planning, and this is where financial planners should be involved: to provide guidance and advice.