Week 10 Estate Planning Flashcards
Why Estate Planning is important
Providing for those who remain after the client’s death and for the distribution of the clients assets in accordance with their wishes.
- It needs to be simple and flexible
- It should seek to minimise tax where possible
- It should be fair to all beneficiaries
- It should be simple to operate not an undue burden to maintain
- It needs to be reviewed regularly.
Obligations of the Financial Adviser
- Identify objectives and wishes of the client
- Identify assets available to the estate for distribution, and non-estate assets
- Identify tax implications on the estate plan
- Ensure a valid and up to date will is executed
- Establish an enduring power of attorney
Estate Assets
Estate assets are those assets that will pass in accordance with your Will. They are those assets held in your personal name or as tenants in common with another person. Examples of estate assets are property, shares or motor vehicles owned solely by you or as a tenant in common with another person.
Non-Estate Assets
Non-estate assets are those assets that you might exercise a degree of control over during your lifetime but will not (or may not) pass in accordance with your Will. These include:
Assets held as joint tenants, Superannuation and Assets in a family trust.
Will
A will is a legal document that specifies how property is to be dealt with after the will maker’s death. A will provides directions about who the will-maker wants to receive assets. A will can be made by anyone over 18 years old providing they have testamentary capacity (generally, being of sound mind). The executor manages the estate (sum of a person’s asset) until its final distribution.
Drawing up a valid will
A will nominate the executor who will be the person responsible for finalizing affairs and ensuring assets are distributed in accordance with the will. The executor must be willing to take on the role and be told where the will and other important documents are kept.
Executor role: Organise the funeral, manage the legal and financial affairs of the estate, obtaining the grant of probate, paying outstanding debts from the estate, distributing the remaining assets in accordance with the will, defending the will if there is any challenge
Grant of Probate
- On death, the deceased’s will must be proved in a court
- The supreme court assesses the validity of the will
- If valid, the court will grant probate (proof of the will)
- The court confirms the appointment of the executor or appoints an administrator if there is no executor (using a letter of administration
Defining the estate:
A person’s assets may be viewed in 2 classes of assets
- Estate assets: These are assets that are solely owned by the will marker and are the only assets which can be left in will e.g. property (Including property owned as tenants in common. The percentage owned is the will makers own estate, personal goods, share portfolio in own name, cash investments, units in a trust)
- Non-estate assets: Assets that are either jointly owned or owned and controlled through an independent business structure (Assets held as joint tenants compared with tenants in common, property with nominated beneficiaries e.g. superannuation and life insurance, goes straight to the nominated beneficiaries not the estate, assets held in a discretionary trust because trustee owns and look after the trust)
Rights of beneficiaries
Beneficiaries have the right to have the estate administered property, they have no claim while the estate is in the hands of the executor but can bring the executor to court to apply for probate is the executor does not do so within a time frame.
dying intestate
A person is said to have died intestate if they die without a valid will. Approximately 45% of Australians die intestate. Estate will be distributed in accordance with state intestacy laws, the fundamental principle is that estate will pass to the deceased next of kin. State laws prescribe order and extent for distribution.
Example under Victorian Law:
- Entire estate goes to the spouse if no children
- If there are both spouse and children: if $100,000, the surviving spouse receives 100,000 plus 1/3 estate
- Remaining spilt to children equally
- If no spouse, spilt to children equally
- If no surviving spouse or children to next of kin
- If none of above to the government
Estate planning and Taxes
The 3-year rule: income tax assessment act allows up to three years to finalize an estate, the estate will be taxed at normal adult marginal tax rates during this time. Usually no stamp duty on transfer of assets.
Capital gains tax: the application of CGT on when the assets were purchased. CGT is only payable if assets are sold.
Superannuation death benefits:
For many people, superannuation will be the largest or second-largest asset they pass on to their beneficiaries. Superannuation fund members can give binding death nominations regarding the distribution of their superannuation after their death.
- Tax on superannuation death benefits depends on whether the money is distributed to a dependent as defined under the Tax Act. Any person who at the time of death was dependent.
Who owns the payout of a life insurance policy?
Important in determining whether the payout is an estate or non-estate asset.
- If owned by a spouse, not an estate asset
- If owned by deceased: if the policy has a nominated beneficiary, then non-estate asset otherwise, an estate asset
Estate Planning and Trusts
Two of the most important objectives in effective estate planning lie in:
- Establishing a tax effective structure by which estate assets and income can be distributed to intended beneficiaries and
- Providing the will maker with control over their estate asset will be distributed and managed after their death.
