How to Build a Smart Estate Planning Strategy

Estate planning is easy to think of as paperwork. You make a will, sign a power of attorney, file it somewhere safe and go about your life.

The deeper question is what happens to the money? Which assets attract tax on the way through, who ends up paying it and whether the structures you have spent years building do what you assume they will. That is where a plan either holds up or quietly comes apart and it is the part most people never get advice on.

What is estate planning?

Estate planning is deciding how your assets and your decisions are handled if you lose capacity or die. It covers the legal documents and everything sitting underneath them: your superannuation, your trusts, your business interests, your insurance and the tax treatment attached to each.

To break it down simply into two categories, documents are legal work, and structuring is the financial work. When those two sides are not talking to each other, a plan can look perfectly tidy on paper and behave badly in practice.

Start with what your will can actually control

A surprising amount of what most people own never passes through their will at all. Superannuation does not, unless it is deliberately directed there. Jointly owned property usually passes straight to the surviving owner. Assets held in a family trust or a company are not personally yours to give away.

For a lot of Melbourne families, particularly those who own a business or an investment property, the assets sitting outside the will are worth more than the ones inside it. Sorting out which is which is the first real step.

An estate planning checklist

Before you look at structures, it helps to see the whole picture in one place. A working estate planning checklist looks something like this.

• A current will that reflects your circumstances now, not the ones you had when you signed it
• An enduring power of attorney covering financial and personal matters
• An appointed medical treatment decision maker
• An advance care directive setting out the treatment you would and would not want
• A valid binding death benefit nomination on every super account
• Beneficiary details confirmed on any insurance held outside super
• A list of every trust and company you are involved in and confirmation of who controls each one
• A documented succession plan if you own or part-own a business
• A clear view of the tax your beneficiaries will pay, and where the money to pay it comes from
• A date in the calendar to review all of it

Powers of attorney and a Victorian detail worth knowing

An ordinary power of attorney stops working the moment you lose capacity, which is when you are most likely to need it. An enduring power of attorney keeps operating. That is the practical difference in the power of attorney vs enduring power of attorney question and why the enduring version is the one that belongs in an estate plan.

In Victoria, a financial power of attorney is made under the Powers of Attorney Act 2014 and one enduring appointment can cover financial and personal matters together.

Medical decisions work differently here and this is where older plans often fall down. Victoria stopped using the enduring power of attorney medical treatment form in March 2018. Victorians now appoint a medical treatment decision maker instead. Appointments made before the change remain valid, but if yours predates it, it is worth a look.

Your super will not follow your will

Superannuation is held in trust, so the fund trustee decides where it goes unless you have told them otherwise. A binding death benefit nomination removes that discretion and many lapse after three years. An expired nomination is one of the more common problems we come across.

Then there is the tax and this is the part that catches families out. Superannuation death benefits paid to a spouse or a child under 18 are generally tax free. Paid to a financially independent adult child, they usually are not. According to the ATO, the taxable component is generally taxed at 15 per cent for the taxed element and 30 per cent for any untaxed element, with the Medicare levy usually applying on top where the benefit is paid directly to the beneficiary. On a large balance, that is a significant amount that nobody is expecting.

There are usually ways to reduce it through recontribution strategies, drawing down before death where capacity allows, and considering whether benefits are better paid through the estate; all of these can change the result. None of them suit every situation, since contribution caps, your total superannuation balance and your age all affect what is possible, and each needs planning well in advance, which is rather the point.

Testamentary trusts

So what is a testamentary trust? It is a trust created by your will and activated on your death, rather than one you establish while you are alive.

Families use them for two reasons. The first is asset protection, keeping an inheritance out of reach if a beneficiary faces a relationship breakdown or a claim. The second is tax. Income distributed to a minor from a testamentary trust is generally taxed at adult marginal rates with the tax free threshold available, rather than the penalty rates that normally apply to a child’s unearned income. For a family with young children, that compounds year after year.

The concession has limits as it only applies to income earned on assets that came from the deceased estate, or from the proceeds of those assets. Money or assets added to the trust later are taxed at the penalty rates, so what goes into the trust and when matters as much as having the trust in the first place.

As for how to set up a testamentary trust, it is drafted into the will by your lawyer. The work that comes first is financial: whether one is warranted at all, who should control it, which assets flow into it and what it will cost to run.

Business succession planning

If you own a business, business succession planning is not a separate exercise from your estate plan. It is usually the largest part of it.

The questions are who takes over, how ownership transfers, what the business is worth and where the money comes from. That last one is where family business succession planning usually stalls. A buy sell agreement with no funding behind it is a document, not a plan and insurance is often what makes the transfer possible at all.

Capital gains tax and deceased estates

Death itself does not usually trigger capital gains tax. Assets generally pass to the executor or beneficiary with the original cost base intact, so the liability travels with the asset and lands when the beneficiary sells.

It actually matters more than it sounds. If one child inherits a long held investment property and another inherits cash, the split looks even on paper. Once capital gains tax on the deceased estate is accounted for, it often is not. Knowing that in advance lets you even it up deliberately.

Where we fit

The documents themselves are drafted by a lawyer, the work that decides what should be in them is financial and that is where we come in. Our Wealth Advisory team models the tax, coordinates your super, trusts and business interests and briefs your lawyer, so the documents reflect a strategy rather than a set of assumptions.

Frequently Asked Questions

What is estate planning, in simple terms?

It is deciding in advance how your assets and your decisions are handled if you lose capacity or die. That means the legal documents and also the structures underneath them: super, trusts, business interests and the tax attached to each.

Do I need a lawyer or a financial adviser for estate planning?

Usually both. A lawyer drafts the will and the powers of attorney. An adviser works out the structure those documents should reflect, models the tax and coordinates your super and business interests. The two need to be working from the same plan.

Does my will cover my superannuation?

Generally not. Super is held in trust and sits outside your estate unless it is directed there. A valid binding death benefit nomination is what tells the fund trustee where it should go and many lapse after three years.

Will my children pay tax on my super?

It depends who they are. Super paid to a spouse or a child under 18 is generally tax free. Paid to a financially independent adult child, the taxable component is generally taxed at 15 per cent on the taxed element and 30 per cent on any untaxed element, with the Medicare levy usually applying on top. Planning ahead can often reduce this.

Is a testamentary trust worth setting up?

It depends on your circumstances. They are most useful where there are young children, a beneficiary who may face a relationship or financial risk, or a sizeable estate where the tax treatment of trust income makes a real difference. They also cost money to run, so they are not right for everyone.

Do powers of attorney work differently in Victoria?

In one important respect, yes. Victoria stopped using the enduring power of attorney for medical treatment in March 2018 and Victorians now appoint a medical treatment decision maker instead. Earlier appointments are still valid, but older plans are worth reviewing.

How often should I review my estate plan?

Every few years, as standard practice and always straight away after a marriage, separation, birth, death, business sale, or any significant change to what you own. Nominations expire and legislation changes, so a plan left alone for a decade rarely still does what it was meant to.

General Advice Warning

The information in this article is general advice only. It has been prepared without taking account of your objectives, financial situation or needs. Because of that, before acting on it you should consider whether it is appropriate for you having regard to your objectives, financial situation and needs. Where the information relates to a financial product, including superannuation or life insurance, you should obtain and consider the relevant Product Disclosure Statement before making any decision to acquire that product.

This article is not legal advice and is not taxation advice. Estate planning documents must be prepared by a qualified legal practitioner, and the tax treatment described will depend on your individual circumstances. You should obtain your own legal and taxation advice before acting on any of it.

The information is current as at the date of publication. Superannuation, taxation and estate planning laws change, and the treatment described may not apply at the time you read this.

The Practice Wealth Management Pty Ltd is the holder of Australian Financial Services Licence 315598.