Estate Planning is planning for what we don’t want to think about. However given the certainty of death it is important that attention is paid to this most important aspect of financial planning. It comes back to one of the main drivers of Ethos Financial Advisers to provide you with greater structure and control.
There are a lot of misconceptions about estate planning and one in particular relates to the will and what it does and does not control.
It is important to remember that estate planning does not just involve the preparation of a will but consideration of assets that are not controlled by a will. Nonetheless the will is an integral component of estate planning and the following issues should be given careful consideration in the preparation of a will:
- What person or organisation will be responsible for the administration of the estate?
- Who will ultimately benefit from the assets held by the estate?
- What are the abilities of any potential beneficiary to manage their finances?
- What will the taxation status of the assets following the will-maker's death be?
- What is the potential for family conflict, particularly with blended or second families?
- Has ample provision been made for surviving dependants and spouse?
- Can any charitable intentions be met?
The following assets are not controlled by a will;
- Assets owned jointly.
- Superannuation assets unless the estate is nominated as the beneficiary.
- The proceeds of life insurance policies (depending on ownership).
Most family homes are owned jointly. Jointly owned assets automatically revert to the surviving owner on death.
Superannuation assets are distributed by the trustee of the superannuation fund who will take into account the nomination form lodged by the superannuation fund member. From a legal point of view a superannuation fund is a trust. Hence the trustee of the trust has the power to distribute superannuation assets on death.
However only if a binding nomination is made is the trustee of the superannuation fund obliged to follow the nomination form made by the member of the fund.
A binding nomination must be updated every three years and witnessed by two unrelated parties. You can nominate any of your dependants as defined under superannuation legislation – i.e. your current spouse (including your defacto) or your child of any age (including adopted children), or a person financially dependant on you at the time of your death (your Mother-in-Law that is living with you).
A non binding nomination is much more common and does not need to be updated. In most cases a binding nomination is not required however if your personal situation is complex you may want to consider a binding nomination.
Please note that superannuation assets paid to a dependant are tax free in the hands of a dependant. Non dependants include parents, adult children, uncles, cousins etc non dependants may be taxed at 16.5% on the superannuation benefits that they receive.
Hence care needs to be taken when non dependants will receive superannuation benefits.
Testamentary trusts are established within a will. A testamentary trust is enforced after death based on the instructions left in the will.
A well-drafted testamentary trust document will provide the trustee of a testamentary trust with discretion to allocate income providing the will maker with far greater structure and control over their estate planning.
We recommend that clients with younger children and/or dependants requiring additional care considering establishing testamentary trusts within their will.
Because the trustee of a trust is the legal owner of the assets for the underlying beneficial owners of the assets, testamentary trusts, like other trusts, are useful for structuring ownership arrangements in order to maximise benefits such as taxation and social security entitlements.
Ordinarily children are taxed at penal rates of tax to avoid income splitting to children. A key benefit of a testamentary trust is that children will not be taxed as minors on receipt of distributions from a testamentary trust ,and will have the benefit of the tax-free threshold and low-income earners rebate.
We recommend that your will is prepared by a registered legal practioner. Ethos Financial Advisers is happy to provide a referral for you or please contact your current solicitor.
Power of Attorney
A Power of Attorney provides another person with the power to legally act on your behalf.
It is therefore a very powerful document that should be considered very carefully prior to establishment as it provides someone else with control over you.
There are generally three types of Powers of Attorney:
Enduring Power of Attorney
An Enduring Power of Attorney is a legal document legally authorising another person to make financial decisions on your behalf.
An Enduring Power of Attorney is valid even if you become mentally incompetent. It can also be revoked at any time.
The risks, the advantages and disadvantages of granting an Enduring Power of Attorney should be discussed with a legal adviser before granting an Enduring Power of Attorney.
Medical Power of Attorney
A Medical Power of Attorney gives your nominated Attorney the ability to make decisions relating to your medical treatment if you are not capable of doing this yourself. Typically, this would relate to life threatening operations or the decision relating to life support systems.
This power of attorney will remain valid until you sign a new medical power of attorney or is cancelled. (you must be mentally competent to do this). It does not give the Attorney the authority to withhold basic needs such as food or water or give authority to allow euthanasia.
A Medical Power of Attorney may also be cancelled or suspended by the Victorian Civil and Administrative Tribunal if it is not being used in your best interests.
General Power of Attorney
Most people use this type of attorney for short-term needs such as when you go on holidays or need someone to buy property on your behalf. You can limit the decisions that the attorney can make by writing this on the document. This allows you to limit what the attorney can do. You can also nominate a time frame for the Power of Attorney to last. This type of Power of Attorney will last until you cancel it, die or are unable to make your own decisions, i.e. you become mentally incompetent.
The law in relation to Powers of Attorney is complex and varies depending on the State or Territory. Ethos Financial Advisers recommends that you seek legal advice. We are happy to recommend a legal practitioner to you if required.