Planning for your beneficiaries

19 Mar 2015

By Shadforth Financial Group

Have you nominated your children as beneficiaries to your super fund account? If so, you may have inadvertently exposed their super inheritance to future legal proceedings.

Consider this scenario. Jane passes away at the age of 68 leaving a remaining super balance of $1,200,000. Her two sons, Alistair and James, are listed as beneficiaries and are both in their mid-30s. In accordance with the Jane's nomination, the super fund pays a net amount (after deducting taxes) of approximately $500,000 into each son's respective bank account. Alistair invests his portion in a managed fund.

A year later Alistair marries and his wife gives birth to their first child soon after. Several years later however the marriage breaks down. During legal proceedings, the Family Court specifically orders 40% of Alistair's super inheritance be split with his former wife.

Alistair understandably questions, "that was an inheritance from my mother. How can my wife receive 40% of it?"

This example highlights the importance of thinking ahead when making super fund beneficiary nominations. Here, the super fund paid Jane's death benefit directly to Alistair, who in turn invested the proceeds into a managed fund in his own name. However, when his marriage broke down, the managed fund was placed into a pool of assets that the Family Court was able to divide and allocate between him and his former wife. This was despite the managed fund being invested solely in his name using the proceeds of his late mother's inheritance.

What Jane could have done was to nominate her super be paid directly into her estate rather than nominating her children as beneficiaries. The $1,000,000 could have been held in a trust and invested for the benefit of her children.

Establishing a trust of this type typically affords beneficiaries a degree of protection from future legal proceedings, particularly if there is a marriage breakdown or bankruptcy later in life. These trusts can also be tax friendly as income generated by the inheritance, for example share dividends, investment property rental income, can in theory be spread out and distributed to a range of beneficiaries and diverted to family members who are in a lower tax bracket. This may be appealing from the child's perspective, particularly if their employment income already has them in a high marginal tax bracket. The trust can also be designed to restrict the ability to withdraw and sell the assets, thereby protecting the inheritance against spendthrift or vulnerable beneficiaries.

It is important to remember however that a trust of this type comes at a cost. For starters, expert legal advice needs to be obtained upfront to design and embed the terms of the trust into the person's will. Then, once the trust comes to life (following death), annual tax returns will need to be prepared and beneficiaries may require legal advice from time to time about the trust's ongoing operations. However many would say that these costs are a small price to pay for protecting and managing the tax position of a child's inheritance.

Trusts designed to manage inheritances are not necessarily limited to super fund proceeds and may comprise of other assets that the deceased owned at the time of passing. Term deposits, real estate, shares and cash from insurance policies may in theory find their way into the trust and be set aside for the benefit of the children.

Trusts, however, are not for everyone. With the right expert legal advice you need to evaluate how it might fit with your own estate plan.

To review or set up an estate plan simply contact your team at Shadforth.

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