Estate planning

Question 1

EPoA

If you lose mental capacity, without an enduring power of attorney in place, there may be no one with the legal authority to manage your financial affairs. Your family or advisers would then need to apply to the relevant authority in your State or Territory (VCAT) to have someone appointed.

Answer 1

a POA only operates while the principal is alive and ceases upon the death of the principal

Question 2

EPoA Myth - an assumption that married couples have the legal power to act for each other, should one of them lose capacity.

Not for financial decisions

Answer 2

EPoA

• financial
• medical
• enduring power of guardianship

useful in SMSF - failing residency test or loses capacity

Question 3

Consequences of inadequate power of attorney arrangements

• There can be unnecessary distress to their family and/or friends, as they would be powerless to help the client quickly with financial matters.
• There will be a period in which nobody has the authority to act on the client’s behalf. This creates the risk that important financial matters will not be managed promptly.
• The client’s financial affairs will come under the control of a state government body, at least for the short term.
• The person who ultimately obtains the authority to act on the client’s behalf may not necessarily be the person who the client preferred.

Question 4

Wills

Events and circumstances after which a will should be reviewed include:

• marriage (a will is invalidated by marriage), separation or divorce
• commencement of a relationship
• birth of a child
• death of an executor
• death of a proposed beneficiary
• lifetime gifts or loans made to beneficiaries
• disposal of personal items or property specifically given to a beneficiary under the will
• change in a beneficiary’s circumstances
• potential disputes between beneficiaries.

Answer 4

Revoking a will

An existing will can be revoked by:
• making another will, or
• automatically by marriage.

Question 5

Avoiding a claim against an estate:

• An asset owned as a joint tenant does not pass through the estate of the first joint tenant to die.
• Superannuation death benefits can be paid directly to a dependant. (valid binding nom)
• A life insurance policy on a person’s life can be owned by another person.
• Assets held in a discretionary trust do not form part of an estate.
• Making an outright gift of property to a beneficiary before death will circumvent assets passing through the estate.

Question 6

Testamentary trusts

A testamentary trust is one established by a person’s will and comes into existence following the will maker’s death. A testamentary trust can be established under a will for specific assets or for the residue of the estate (the funds or assets remaining in the estate after settling debts and making all other specific gifts).

Answer 6

Testamentary trusts generally maintain all the benefits of a regular discretionary trust, but with the advantage of potentially greater income tax benefits for minor beneficiaries.

Question 7

Purpose of testamentary trusts
Testamentary trusts can be used for a variety of purposes. Some of the more common include:
• tax effectiveness for income and capital (splitting income between the family)
• maintaining or maximising social security entitlements
• protection of assets if the beneficiary is involved in a family law property dispute
• financial provision for children who cannot care for themselves
• protection of assets if beneficiaries suffer addictions
• protection of the estate against overspending by beneficiaries
• protection from business creditors
• protection from legal actions brought against beneficiaries.

Answer 7

Any property that can be passed through an estate can be placed in a testamentary trust.

Question 8

Uses of trusts in estate planning

4 reasons why a business, assets or investments may be preferred to be held in a trust rather than in individual names:

1. tax minimisation
2. asset protection
3. succession
    4. provision for minor and/or disabled dependants.

Answer 8

Testamentary trusts - Tax minimisation
• degree of flexibility in the way that income is distributed to beneficiaries.
• one of the major benefits of a trust is the ability to divert income to beneficiaries, such as family members, on lower marginal tax rates.
• minors - ‘unearned income’ up to $416 is tax free. penalty tax rates over this.
testamentary trust - minors taxed at normal adult rates. (tax free up to $18,200)

Question 9

trusts -
Asset protection
• the separation of legal and beneficial ownership protects trust assets from claims
made on beneficiaries by third parties.
• e.g. many professionals prefer not to own assets in their own name because of
the possibility of negligence claims.
• protects assets from creditors (trust assets may not be accessible to creditors)
• in bankruptcy - protection - however, improved claw back laws within a certain
time frame.
- protects assets from addictive beneficiaries or spendthrifts

Answer 9

Succession
- protects assets from claimants for future generations.
- protection from divorce settlements - a testamentary trust can protect assets
inherited by one spouse from claims by the other in a divorce settlement -
although this is minimised by Family Court

Provision for minor and/or disabled dependants