With over 20 years of experience as a certified financial advisor, I have witnessed how much estate planning can positively impact families in Australia and their loved ones. It’s not just about numbers and legalities it’s about providing a sense of security for your loved ones, especially when life takes unexpected turns.
What is Estate Planning?
Estate planning aims to make sure your wishes are honoured whilst minimising taxes and avoiding legal headaches. It’s about peace of mind, knowing that your loved ones will be taken care of according to your intentions, no matter what life throws your way.
There are plenty of reasons why you’d want to plan your estate: securing your family’s wealth, making sure your spouse and kids are taken care of, setting aside funds for your children’s or grandkids’ education or leaving a lasting impact through charitable contributions. So, estate planning is all about deciding what happens to everything you’ve built and cherished once you’re no longer around.
Key Components of Estate Planning
- Will and Testamentary Trust
A will is a legal document that outlines how you want your assets distributed after your passing, providing clarity and legal standing for the distribution of your estate. Through a will, you designate someone as your “personal representative” to manage bills and distribute assets, providing guidance on carrying out these responsibilities. Further, when creating a will, you have the option to nominate an executor responsible for administrative tasks such as identifying debts, managing tax filings, claiming life insurance, and executing the estate distribution as per your wishes. In the absence of a will, the state may be required to take charge of both appointing an executor and determining how assets will be allocated.
Testamentary Trust is established within your Will and becomes active upon your passing. Within a testamentary trust you can appoint a Trustee who will be responsible to look after the assets. For example, you can appoint your spouse as the Trustee of the trust to oversee and distribute assets to beneficiaries according to your wishes outlined in the Will. Deciding if a Testamentary Trust suits your needs isn’t a straightforward call and it depends on your specific situation.
- Beneficiary Designations
You have the flexibility to name multiple beneficiaries and specify how you want each asset or benefit distributed to them. This designation can be applied to various accounts and assets, such as retirement accounts, life insurance policies, bank accounts, investment accounts, and more. Reviewing and keeping these designations at least once a year is vital, ensuring they always reflect your current wishes.
- Tax implications
Understanding about taxes is important as it changes over time and it will assist in creating a smart estate plan, ensuring your beneficiaries benefit the most from it. While Australia does not impose a specific inheritance tax, other tax implications around Capital gain tax, Super Death Benefit, Testamentary trust come into play. These taxes may not all apply to you, and how each tax affects you differs based on your circumstances, and these considerations evolve over time.
Let’s see how tax works within a Testamentary Trust: You decide to leave $500,000 worth of assets in a testamentary trust to provide for your two children as beneficiaries. Now, the trust earns $40,000 in a year from investments. The trustee decides to distribute $20,000 to each beneficiary.
For tax purposes:
- The Testamentary Trust files a tax return declaring the $40,000 income it earned.
- However, because it distributed all its earnings ($40,000 to the children), it doesn’t pay tax on that $40,000 income at trust tax rates.
- The $20,000 received by each child is included in their individual tax returns.
- If the child is a minor (under age 18) and the income from the testamentary trust is classified as excepted income, the adult income tax rates will apply, with a tax-free threshold of $18,200.
This is just a simple scenario. Understanding taxes can be challenging, but don’t let it hold you back. Seeking personalised advice from experts is key to ensuring you’re on the right track for your family and keeping up with any changes.
- Advance Care Directive (ACD)
An ACD is also referred to as a Living Will or Advance Health Directive, serves as your voice in healthcare decisions when you’re unable to speak for yourself. It outlines your preferences for medical treatment and end-of-life care. An ACD is legally valid only if you’re above 18 years old and possess the capacity to make decisions. Remember, as long as you’re able to express your preferences, you retain the ability to communicate and uphold your wishes, even if they differ from what’s outlined in your ACD.
- Power of Attorney and Enduring Guardianship
Through a power of attorney, you can grant the authority to someone you trust such as your spouse, child (over age 18) to make financial decisions on your behalf if you become incapacitated or unable to make decisions for yourself. These decisions can include operating your bank account, paying bills, buying, or selling a property, collecting rent or managing your investments.
Enduring Guardianship is a legal document where you can appoint someone you trust to make decisions when you’re unable to do so. How this works differs across states in Australia. In Victoria, Enduring Guardianship can make decisions relating to your residential and lifestyle mattes. For example, to which Age Care Facility you should reside in or who you live with.
- Medical Treatment Decision Maker (MTDM)
In Victoria, you can appoint a MTDM, this person will be responsible for making medical decisions in the event that you’re unable to make those decisions yourself. This person can be a family member, friend or anyone else over 18 years that you trust to make medical treatment decisions on your behalf.
- Regular reviews and updates
Regularly reviewing and updating your estate plan is crucial to ensure it stays aligned with your current situation and desires. As your life changes like getting married, having kids, experiencing tough times like a divorce, or loss of a loved one, starting a business, changes in your finances or laws that can impact the effectiveness of your plan. So, by revisiting your estate plan, ideally every few years or after significant life events, you can make necessary adjustments, ensuring it accurately reflects your desires and continues to protect your assets for your beneficiaries. This practice not only keeps your plan up to date but also provides peace of mind that your wishes will be carried out as intended.
- How professional advisors can help you?
Just like life keeps evolving, your estate plan should keep pace. So, it’s not just simple as assigning beneficiaries or drafting a will—it’s about staying attentive to the ongoing changes and ensuring your estate plan remains resilient and adaptable. The professional advisors at Yield are dedicated in offering personalised estate planning advice, drawing from vast experience and expertise. We’re here to help you navigate these changes, aligning your estate plan with your unique needs and seamlessly integrating it with your overall financial plan.