Friday, 9 December 2011

5 serious mistakes most people make with their estate planning affairs

5 serious mistakes most people make with their estate planning affairs

Mistake No: 1

Most people think that signing a simple Will is all that they need to do to effectively arrange their estate planning affairs.  They wrongly assume that their Will automatically controls the distribution of all their wealth on their death –


    • Jointly held property.
    • When you buy real estate, shares and managed funds or open a bank account with another person or persons then your decision on how to hold the asset at the time of acquisition will govern whether you can leave it in your Will. When you acquire any asset with another person you can nominate that you hold either as ‘joint tenants’ or as ‘tenants in common’.  It is easy to confuse the two, and it is important to be sure what type of tenancy you have in the asset. If you hold the asset as ‘joint tenants‘ then on your death your interest in the asset automatically goes to the survivor, irrespective of what you have said in your Will. If you hold the asset as ‘tenants in common‘ then you can leave your share in the property any way you want to in your Will. Where no nomination is clearly made the law will decide.  In some states the law assumes that you hold as joint tenants in others the law assumes tenancy in common. When you buy shares or managed funds or operate a bank account with another person on the basis that either of you can sign for withdrawals then a joint tenancy is assumed and on the death of one the asset will automatically pass to the survivor. If you don’t want an automatic transfer on death to occur then you need to alter the terms of your ownership on the title documents applying to the particular asset. Just to add to the potential for confusion the tax office treats all jointly held assets as if they were owned as tenants in common for capital gains tax purposes.
    • Property Held in Trust .
      Whoever controls the Trust will have the say as to what happens to the assets in the Trust. If you have set up a Family Trust or a Self Managed Superannuation Fund (SMSF) to hold investment assets then these assets can’t be ‘left in you Will’ because under the law although you may be the controller and/or trustee of the Trust during your lifetime, you are not regarded by the law as the legal owner of the assets held in the Trust You can’t leave assets in your Will which are not legally owned by you. What happens to the assets in Family and Super Trusts on the death of the controller/trustee? – it depends on the terms of the Trust Deed. Most Trust Deeds allow the controller to nominate his or her successor on death.  Sometimes this nomination can be set out in the controller’s Will.  The Trust Deed needs to be checked to make sure that its provisions actually ‘dove-tail’ with the controller’s estate plans. A common problem can arise where control of a Trust passes to ‘the children’. Unless the Will or Trust Deed contains special provisions to ensure that all children share control by ‘unanimous consent’ it is possible that a simple majority of children will exercise control in their own interests by excluding some of their siblings.
    • Shares in Private Companies.
      Certain shares in private companies cannot effectively be given by Will.  The Constitution of many Family Companies contains provisions which can restrict the right of a shareholder either to participate in control or to have a share transfer registered.  Once again the terms of the Constitution of the Company needs to be examined to ensure that a gift shares in a Will is capable of achieving the Willmaker’s intentions.
    • Business Partnership property .
      If you are in a business partnership you can’t leave assets belonging to the partnership in your Will.  You can however leave your interest in the partnership in your Will but once you need to examine what the Partnership Deed says happens on the death of a partner.  Many partnership deeds allow for the surviving partners to take years to pay out the interest of a deceased partner.
    • Your Superannuation .
      For many people their Superannuation account balance and any insurance proceeds attached to their super represents their largest or second largest asset (including your own home).  Most people are shocked to learn that their Will does not necessarily direct what happens to their Superannuation on death.  Unless you have made a binding death benefit nomination, the Trustee of the relevant Superannuation fund has the initial power to direct where your Superannuation goes.  The Trustee’s decision can be challenged so delays and disputes occur frequently. Any nomination given to your fund trustee should be reviewed and consideration given to making a definitive instruction to the trustees.  This can only be achieved using a ‘binding nomination’ or an ‘SMSF Will’.
    • The Proceeds of Life Insurance Policies:
      If the owner of the policy has nominated a beneficiary of the policy, the nomination takes precedence over the terms of the will.  It follows that where a nomination is made, the proceeds of the policy do not form part of the estate.  If you wish the proceeds of the policy to go to someone other than the nominee, the nomination must be changed.  Each policy should be checked to determine who has been nominated.

    Mistake No: 2

    People think that since Death Duties no longer apply, their estate will not be subject to tax. The fact is that significant levels of tax can apply to deceased estates.
    • The New Death Taxes
      Federal and State Death Duties were abolished in 1981.  Taxes on lump sum super payouts (including death payments) were significantly increased in 1983. Capital Gains Tax was introduced in 1985.
    • Capital Gains Tax – the back door death duty.
      Today Capital Gains Tax raised on the disposal of assets in deceased estates raises many times the amount that was ever collected under the previous death duty regime. The reason for this is quite simple – while under Capital Gains Tax laws death is not a ‘deemed disposal’, the assets of most deceased estates are sold so that the estate can be conveniently distributed usually to 2 or more beneficiaries. The sale of estate assets almost invariably attracts Capital Gains Tax (up to 48.5% of the gain) whereas death duties were capped at 15%. The standard simple Will provides no assistance for beneficiaries in helping them minimise the incidence of taxation and quite frankly puts most beneficiaries in the ‘worst case scenario’ tax position . The use of ‘Testamentary Trusts’ in Wills can achieve significant savings in Capital Gains and Income Tax as a trust structure allows beneficiaries to reduce the level of tax by distributing tax gains to family members on lower tax rates.
    • Lump Sum Superannuation Tax .
      If your Superannuation is being directed to someone other than a spouse or dependant then prepare yourself for a tax shock – up to 31.5% of your Superannuation death benefits could be lost to tax.  The reason for this is that taxation of superannuation death benefits differs subject to the type of benefit components and also who the benefit is to be paid.  Any benefit payment made to adult child that contains taxable component would have a 16.5% tax rate applied before receiving the benefits (i.e. $16,500 tax in every $100,000). The average rate of tax applicable to Superannuation money left to non-dependant children can vary. However all is not lost – with proper planning your affairs can be structured during your lifetime it is possible to eliminate or reduce this estate tax.  A simple Will is not what is needed – a qualified SMSF specialist in combination with a specialist estate planner can advise on strategies that need to be considered in the context of your overall estate and financial plan to help you deal with Death Benefit Super taxes.

    Mistake No: 3

    People think that all lawyers are experts in estate planning. While most lawyers could put together a simple Will, few have the training and additional skills to advise on sophisticated estate planning strategies.


    Getting your estate planning affairs in order is so much more than just getting Will signed. Before you begin the process of documenting your Will the following actions should be undertaken:

    • Your asset position needs to be carefully researched (to work out who owns what and what will be the Capital Gains Tax implications).
    • Your Superannuation fund trust deed needs to be examined and consideration given to the most appropriate form of death nomination,
    • Your insurance arrangements need to be looked at to ensure that insurance is held in the most appropriate way,
    • Your income tax position and that of any tax structures holding your wealth needs to be examined and the terms of trust deeds scrutinized and perhaps amended to ensure that all of these documents are in harmony with your requirements
    • The taxation circumstances and asset protection needs of your beneficiaries needs to be professionally considered
    Only after all of the above steps have been completed can it be assured that your Will and other estate documentation will do what you want them to do effectively.
    The process requires a collaboration expertise including your legal, financial and taxation advisers. Generally the potential savings in tax for the estate far exceed to cost of having the job done by experts.
    Your financial advisers are probably in the best position to help you orchestrate the collaboration which will be necessary to achieve the right result.
    The involvement of solicitors who possess a special skill set is necessary. The fees charged by these firms generally reflect the special knowledge and skill they possess. The legal fee component can vary depending on what is required.

    Mistake No: 4

    People think that once their Will is done that they can forget about it. Keeping your estate planning affairs up to date is vital if the right result is to be secured. Records need to be kept, reviews need to be carried out and your estate planning strategies revisited regularly.


    It has been said that the only certainties in life are Death and taxes. Our experience suggests that a third certainty exists for us all and that is - change.
    It is important that your estate planning affairs be reviewed professionally on a regular basis. Every purchase or sale of an asset will have ‘estate planning’ ramifications, every change in tax laws could have an effect on your estate planning taxation strategies and so on.
    For these and many other reasons change can undermine your estate plan unless a review process is put in place.
    In our view a review should take place at least once every 2 -3 years.

    Mistake No: 5

    The worst mistake that people make in relation to bringing order and structure to their estate planning affairs is to put it off to think that it can wait.
    The Peace of Mind that comes from having everything in proper order.
    The knowledge that all their estate planning affairs are in complete order is a great comfort for most people. Proper planning, regular review, access to good ongoing advice and the exercise of care in keeping records relieves most people of the burden or worry and provides great peace of mind for the whole family.
    This article was provided by Ian Glenister, Principal of Glenister & Co, which is a specialist estate planning and SMSF legal practice.