Topic 9 - Estate planning Flashcards
The following are major considerations for financial planners in estate planning.
- Identify objectives and wishes. Identifying a client’s objectives and wishes is the first step in the estate planning process.
- Identify assets available to the estate for distribution and non-estate assets.
- Identify any tax implications on the estate plan.
- Ensure a valid and up-to-date will is executed.
- Establish an enduring power of attorney.
will
specifies how property is to be dealt with upon the willmaker’s death. It provides directions about who the willmaker wants to distribute their assets to, how much each beneficiary is to receive and nominates the person responsible for finalising the affairs of the deceased in accordance with the directions of the will.
Who can make a will?
Anyone over the age of 18 years can make a will, providing they have testamentary capacity.
. Testamentary capacity can be difficult to define, but a useful guide is that the willmaker should:
understand the nature of making a will
understand the extent and character of the property left in the will
understand the claims of potential beneficiaries such as family
have no mental disorders which may influence the decision.
Some of the tasks usually undertaken by the executor are:
organising the funeral
managing the legal and financial affairs of the estate
obtaining grant of probate
locating, protecting (such as changing the locks) and insuring estate assets
paying outstanding debts from the estate
distributing the remaining assets in accordance with the will
defending the will if there is a challenge.
Grant of probate
Probate simply means ‘proof of the will’
For estate planning purposes, it is useful to classify a person’s assets into two categories.
1 -Estate assets. These are assets owned solely and independently by the willmaker. These assets form part of the willmaker’s estate and their distribution to beneficiaries is determined in accordance with their will.
2 -Non-estate assets. These are assets that are either owned jointly or are owned and controlled through another entity or tax structure, such as a family company or trust, or a superannuation fund. The distribution of non-estate assets is not determined by the will of the deceased and will require other forms of estate planning over and above the preparation of the will document.
Jointly owned property can be divided into two categories
joint tenancy and tenancy-in-common.
joint tenancy
both parties own the entire asset. Upon the death of one of the owners, ownership automatically passes to the surviving owner and does not form part of the deceased’s estate
tenants-in-common
each party owns a separate, defined portion of the asset, typically with respect to property. In this case, the willmaker is able to leave his or her share of the property to a chosen beneficiary in their will and hence these are estate assets.
There are two main situations where an estate could be contested:
- if the validity of a will is challenged
- if inadequate provision has been made in the will for a beneficiary.
The validity of a will can be challenged on any of the following grounds:
lack of testamentary capacity
undue influence
incorrect execution.
Dying intestate
If a person dies without a valid will they are said to have died intestate. In such cases, the estate will be distributed in accordance with the individual state’s intestacy laws.
. For example, under Victorian intestacy rules:
- the entire estate goes to the surviving spouse if there are no children
if there are both a surviving spouse and children:
– if the total estate is less than $100 000, the entire estate goes to the spouse
– if the total estate is more than $100 000, the spouse receives the first $100 000 and the remaining estate is split one-third to the spouse and two-thirds equally between the children - if there are children but no spouse, the children share the estate equally
if there are no children and no spouse, then any surviving parents receive the estate - if there are no children, no spouse and no surviving parents then any surviving siblings receive the estate
- if there is no family or next of kin, the property of that person is passed to the Crown.
The main areas of tax consideration in relation to estate planning are:
capital gains tax
the ‘3-year rule’
testamentary trusts.
CGT position on the inheritance of home
CGT-free if sold within 2 years of date of death or the home continues to be used as the principal residence of the beneficiary.
CGT position on the inheritance of investments
Purchased by deceased before 20 September 1985
The cost base to the beneficiary is the market value at date of death of the deceased and CGT will be payable at the time of sale by the beneficiary on any gain since date of death. The 50% CGT discount will apply only where the disposal takes place more than 12 months after the deceased acquired the asset.
Purchased by deceased after 19 September 1985
The beneficiary takes on the original cost base of the deceased at the date of death. CGT is payable at the time of disposal by the beneficiary on any gain made from date of acquisition by the deceased to the date of sale, either by the estate or the beneficiary. The asset must be held for a total of 12 months (by the deceased and/or the beneficiary) to attract the 50% discount.
CGT position on the inheritance of personal assets
CGT-free (unless they are collectables, e.g. antiques, art work, expensive jewellery).
The 3-year rule
The Income Tax Assessment Act 1936 allows executors up to 3 years to finalise an estate. During this period, the estate itself is taxed as if it were an individual.
