A will is only part of Estate Planning. One wants to organise their affairs in a way to minimise cost, tax and stamp duties so as to maximise the Estate. As assets may be held in various entities, one must consider what will happen to these assets and entities when one dies.
Circumstances may also change, one must consider such things as divorce, if one remarries, mentally incapacitated, children. One must have contingencies for what may happen in the future.
The executor of a will should be a close personal relative who the deceased trusted and is also a beneficiary under the Will. If the desired executor does not have any legal and tax skills the taxpayer may consider appointing a solicitor or accountant as a joint executor with their close relative.
For the Will to be tax effective, it should give the executor as much flexibility and discretion as possible. It is also important to include a clause, which allows the executor to sell some of, or all of the assets and to distribute the proceeds, or distribute all or some of the assets in specie. This allows the executor to assess whether it is more tax effective to sell assets or distribute them in specie and decide at what time. By transferring an asset in specie there is no capital gains tax and the cost base of the asset will be the original price.
An effective Tax structure where assets from a deceased estate can be held is to create a Testamentary trust. A Testamentary trust is created by a taxpayer’s Will.
The main advantages are:
- Protection of assets against creditors and bankruptcy of beneficiaries
- Protection against spend thrift beneficiaries
- Protection against a relationship breakdown
- Flexibility of distribution
- Protection of pension entitlement of spouse and other beneficiaries
The main advantage is its taxation savings – that is, distributions to a minor beneficiary via a testamentary trust will not be assessed at the penal rates (Div. 6AA). Minors receiving distributions from a testamentary trust can enjoy the $6000.00 tax free threshold and lower adult marginal rates of tax. The trust is also exempt from Capital Gains tax under Division 128, where assets pass from the deceased to the trustee of the testamentary trust and eventually to a beneficiary of the testamentary trust.
The main disadvantage of a testamentary trust is that they require a trustee and may be costly to operate. A trust return will need to be lodged each year.
Where assets are held in a trust or company structure and the deceased is the trustee, upon death the trustee can effectively pass control or ownership of the assets to their intended beneficiaries. The deceased taxpayer can Will shares held in a company to the beneficiaries, and a replacement appointor or trustee of the Trust can be appointed.
Other things to look at when Estate Planning
- Superannuation and Estate planning, such things as ETP Death benefits
- Business succession planning – buy sell agreement
Issues to consider are:
- Capital Gains Tax – There are tax advantages when a deceased taxpayer’s assets pass to the deceased estate. The beneficiary is taken to have acquired the estate on the day the deceased died for an amount equal to the assets cost base.
It is important to review your plan regularly. Estate planning involves both tax & legal issues and therefore should be prepared in conjunction with an Accountant and a Lawyer.