We spend our life planning for what lies ahead, but it’s also important to think about what we leave behind. This article examines why it’s important to involve your loved ones in the discussion.
A number of our advisers have noticed that their clients are bringing their adult children or grandchildren along to their annual review meetings. Often this is to discuss family succession and the need to develop an estate plan for their family should the unexpected happen.
Some people worry that their loved ones will be left without adequate means to survive, while others may be concerned that their family members lack the necessary skills to manage their inheritance.
SKIs and KIPPERs
Did you know, Bernard Salt, the well-known social demographer who coined the acronym SKI or ‘spending the kids’ inheritance’, has identified a new social group known as ‘kids in parents’ pockets eroding retirement savings’ or KIPPERS?
There’s no one-size-fits-all approach to estate planning, but having a well-integrated and appropriate structure in place can help minimise the pain and stress for your loved ones after your death and also in the long run. Your adviser can help facilitate these discussions with an estate planning lawyer, who will work with you to develop a clear plan and talk it through with everyone concerned.
"Estimates suggest that Australia will see more than $3.5 trillion change hands over the next 20 years1, and a recent study by Forbes found that 70% of intergenerational wealth transfers fail because the successors weren’t prepared."
What are the estate planning considerations when transferring wealth or distributing assets among the family?
Making an effective Will is certainly a good place to start. Without a valid Will, the Government or the courts may end up determining how your assets are distributed and even how your children (if they are under 18) are looked after.
A well-structured Will can ensure that your desired beneficiaries inherit your assets, that their tax positions are optimised and that contingencies are documented should circumstances differ at the time of your death.
In the case of children under 18, it allows you to nominate their guardians and also, via a trust structure, how their assets will be managed. Even if your children are over the age of 18 there may be good reason to use trust structures, for example if you wish to protect family assets from a divorce or bankruptcy situation or to protect a vulnerable beneficiary who may not have the skills or be financially responsible enough to manage their inheritance.
A discussion around assets that may have sentimental meaning is also a good idea - such as selling or keeping the family home or, if you own a business, how it will be managed after you die.
Depending on your situation, it can be beneficial to have your family involved in these discussions so that, when the time comes, family arguments or legal challenges are minimised.
You can also put a plan in place that allows others to make decisions on your behalf – both lifestyle and financial, either for a period of time or indefinitely in the event of sickness and ill health.
A power of attorney or enduring power of attorney enables you to appoint an individual (or trustee) to deal with your financial affairs for a certain period of time. Unlike a power of attorney, an enduring power of attorney will continue if you lose capacity. An enduring power of guardianship2 allows others to make lifestyle decisions on your behalf, for example about your health or treatment options, if you become incapable of making your own decisions.
It’s important that your family understands who your power of attorney is and the decisions they may need to make on your behalf so there is a mutual understanding of your wishes.
If you have superannuation, you need to nominate either a beneficiary who meets the definition of a ‘SIS dependant’3 or your legal personal representative (LPR), who may then distribute the proceeds in accordance with your Will. The LPR will either be the executor of your estate with a valid Will, or the administrator of your estate where there is no Will. Unfortunately, many people are not aware of this limitation – or opportunity.
If you don’t make a valid nomination, your super death benefits are subject to the super trustee’s discretion - which may lead to a different outcome than you intended. You can direct or influence a super fund trustee as to how you want your super death benefits to be distributed by completing a non-binding, binding or non-lapsing binding nomination of beneficiary form. If you have a self-managed super fund (SMSF) you need to execute a trust deed amendment. Not all funds will provide all these options. When completing these forms you should seek the advice of your financial adviser and an estate planning lawyer as it’s important to consider the tax implications, amongst other things, when deciding who to pass your super death benefits to.
Understanding the various tax implications and structuring your affairs accordingly should also be part of the intergenerational conversation. For example, an asset you leave to one child may be subject to a high rate of tax, whereas another asset (or the same asset) left to another child may be exempt, resulting in each child receiving different final amounts. This situation could be avoided by using, for example, an equalisation clause in your Will, whereby each beneficiary inherits in the most tax-effective manner depending on their situation.
A testamentary trust can be set up with the appropriate provisions within your Will and is activated after you die. A testamentary trust can be an effective estate planning tool not only providing for the tax-effective distribution of your wealth but also greater asset protection and flexibility depending on your circumstances.
The decisions you make about the transfer of your wealth are complex, however involving your family in the discussion can ensure they understand the mechanics in place and why particular decisions and provisions have been made.
At the end of the day, estate planning is all about peace of mind. Please contact us to start the discussion.
1 “How to get the great wealth transfer right” AFR Dec 2019
2 An Enduring Power of Guardianship is also known as an Enduring Guardian, Advanced Care Directive or Medical Power of Attorney depending on which state you live in.
3 A SIS dependant is defined under the Superannuation Industry (Supervision) Act 1993 and includes your spouse, (including de facto and same sex partners), child (of any age), financial dependant and any person with whom you have an interdependency relationship.