Good question! We won't bore you with the 200 word definition. In simple terms - it's a way of ensuring that a person's estate is passed onto their beneficiaries in the most financially efficient and tax effective way possible.
Estate planning has two main aims:
- to try and avoid the likelihood of any next of kin suffering financially; and
- to minimise the risk of family squabbles about who gets what.
Most people who work in this area include tax planning as a part of estate planing. They will also look at how you can get most use and enjoyment of your assets while you are alive, as well as providing for your beneficiaries.
Estate planning was initially used when there were death and estate duties. These don't exist anymore, but there are other taxes, such as capital gains tax, that make estate planning just as worthwhile now.
An estate plan should:
- be administratively simple to operate;
- not be too expensive to maintain;
- balance life-time enjoyment of assets/income with preserving assets for family after death; and
- be regularly reviewed.
Steps in estate planning
There are five steps to develop a comprehensive estate plan:
- Organise your finances and assets during your lifetime.
- Do it at a time when you have the capacity to make strategic decisions for yourself.
- Ensure that your assets are distributed to those for whom you are you are responsible.
- Minimise the taxes payable on your estate.
- At the end of the day, guarantee that your assets are distributed in the way that you – not the government or a court – want them to be.
Values based estate planning
To save yourself time, trouble and money, it is a good idea to determine what values you want to bring to the estate planning process. Ask yourself, “when my life is over – or when I can no longer make decisions for myself because of illness or disability, what are the values that I want to pass on to those for whom I am accountable”.
The last thing you want to do is inflict chaos on your loved ones, most especially at a time when they need to be able to deal with tragedy and their own anxieties about the future.
Some threshold questions
Here are some threshold questions that assist in establishing a framework to manage the succession of your values and not just your estate capital:
- To whom am I accountable?
- Who do I trust to represent me, during my life (whether incapacitated or not) and upon my death?
- How will my beneficiaries cope with their inheritance?
- What people apart from myself have rights that attach to property that I possess?
- What promises have I made that will survive my death or incapacity?
- How do I expect my family to operate in the event of my incapacity, disability or death?
- Are there disabled or disadvantaged people in the group of people to whom I consider myself accountable in the management of my estate? If so, do I know how best to deal with their interests?
- How do I plan to extract the value of equity I have invested in my business interests?
- What life and financial risks am I under and how do I intend to minimise those risks?
- Am I concerned about my spouse and/or other inheritors taking risks with family assets, or being unable to deal with them?
Using a trust
Leaving assets directly to another person is only one way of distributing assets through a will. Another, increasingly popular strategy is using a trust. Trusts are prepared by lawyers and accountants for many reasons - probably the most common is a discretionary family trust which allows a person to transfer assets out of their name while still keeping control of the assets.
One of options often considered in estate planning is to include a trust as part of the will - this is called a testamentary trust. The advantages include:
- maintaining social security entitlements;
- ensuring that assets pass to children even if a surviving husband/wife remarries;
- capital gains tax and income tax advantages;
- providing for children with an intellectual disability or mental illness; and
- protecting assets where a beneficiary becomes bankrupt or divorced.
There are few general rules about whether a testamentary trust will be best for you. It will depend on your individual circumstances and how you want to leave your assets. You will need expert advice about this.
Do I need it?
This depends on your financial situation. For many people who have money in superannuation and a reasonable level of assets, it is certainly worth considering. Most lawyers who work in this area should be able to explain to you how they can maximise the amount of your assets that are passed on after your death. They should be able to provide you with the costs and benefits of a particular estate plan.
Examples of how estate planning could be useful are:
- where you want to pass on a family business;
- where you have a superannuation payout;
- where you want to make a gift to a charity;
- where you've got capital losses;
- where you have property which may be caught by capital gains tax, i.e. it was purchased before 19 September 1985;
- where you have life insurance;
- where there are family debts; and
- where you want flexibility in distributing your assets, for example, there are more kids on the horizon or for tax purposes.
Who does it?
Many lawyers work in this area. Some financial advisers and trustee companies also give advice, and many work closely with lawyers to make sure they can provide a comprehensive service.
Lawyers who work in this area, often give advice about pension planning and taxation planning as well. So again, depending on your circumstances, it may be well worth while approaching a lawyer for advice.
Last Updated – April 2010