9 Benefits of Having an Estate Plan

A disorganised estate can leave a major burden on your loved ones. Without a valid Estate Plan, assets may fall into the wrong hands or get tied up in the court system, and you may end up significantly reducing the value of the estate by paying far more than you need to in taxes and legal fees.

While no one likes to think about dying, it is important to plan ahead to protect your family when they need it most. If you do not yet have Estate Plan in place, this article will outline the benefits of establishing one and how a professional accountant can help reduce tax obligations for your beneficiaries.

The Benefits of Having an Estate Plan

1. Provide for your family

Having an Estate Plan allows you to support your loved ones even after you have passed, especially as they navigate what can be both an emotionally and financially exhausting time. You can use your Estate Plan to allocate certain assets to cover your funeral expenses, or to ensure that adequate education is ensured for a member of your family. You know the needs of your family and an Estate Plan gives you the chance to meet those needs even after you are gone.

2. Choose how your assets will be allocated

An Estate Plan allows you to decide how your assets will be distributed among your beneficiaries. These assets may include property or land, business assets, an investment portfolio, and, in some cases, even your Superannuation.

In the absence of an Estate Plan, your assets may instead be allocated by the court according to State Government protocols. For example, if you have a young child with a partner and you do not have an Estate Plan, government regulation dictates that in the event of your death, the child would receive your assets when they turned 18 years old and your partner would receive nothing. Situations like this can lead to long and drawn-out legal disputes between family members and, in turn, additional court costs.

You know your loved ones, their situations, and what they need, far more than any court. By establishing an Estate Plan, you can ensure that the right assets are given to the right beneficiaries.

3. Elect a guardian for your children

In addition to protecting your assets, Estate Planning also allows you to protect any minor children you may have from being caught up in the court system. Again, you know your loved ones better than any court and you know who is best suited to assume parental responsibility for your children in the event of your death.

Without a proper Estate Plan, guardianship of your minor children does not automatically fall to your parents or siblings, as many people assume. If there is no testamentary guardian designated in your Estate Plan, parental responsibility is decided by the Family Court of Australia. Family members, or those with sufficient interest in the well-being of your children, must apply for a guardianship order — a process that can take an emotional and financial toll on your loved ones.

If you have young children under the age of 18 years, Estate Planning is essential for making sure that they are taken care of after you are gone. Avoid the court system by making your intentions for testamentary guardianship clear in your Estate Plan.

4. Appoint an enduring power of attorney

Appointing an enduring power of attorney is an important consideration when it comes to Estate Planning. An enduring power of attorney has the authority to make financial or legal decisions on your behalf, even if you lose the ability to make these decisions for yourself, therefore it is important to appoint someone that you trust.

If you pass away without having an enduring power of attorney in your Estate Plan, the Court may grant administration of the estate to the person with the greatest entitlement in the estate. Alternatively, a family member or close friend may apply to become your financial manager through either the NSW Civil & Administrative Tribunal (NCAT) or the Supreme Court, which, again, can take a considerable amount of time and will incur additional legal fees for your loved ones. In either case, your estate may eventually fall to someone who you do to want as your enduring power of attorney, highlighting the need to appoint someone in an Estate Plan.

While your enduring power of attorney does not need to be a professional lawyer or accountant, they need to be someone you trust. Having an Estate Plan is the only way to guarantee that the authority to make decisions regarding your estate is given to the right person.

5. Reduce the burden of tax for your loved ones

You may not need to worry about taxes once you are gone, but the way that assets are handled in your estate can impact the tax that will be payable by your loved ones. An Estate Plan allows you to improve the 'after-tax' value of assets you pass on by structuring them in a way that minimises tax obligations for your beneficiaries. The main tax obligations to be wary of are Capital Gains Tax (CGT), implications for Income Tax, and taxes regarding Superannuation.

Capital Gains Tax (CGT)
Individuals are usually required to pay CGT on any profit gained from the sale of an asset. If a beneficiary wishes to sell assets received from your deceased estate, they may also be liable to pay CGT.  A common solution to minimise tax obligations for your beneficiaries is to instead place your assets in a testamentary trust before they are sold and appoint a trustee to distribute the proceeds to your beneficiaries in order to minimise individual CGT obligations.

Income Tax
While beneficiaries are not required to pay tax when they receive assets from a deceased estate, some assets may still impact their tax obligations. For example, if an asset continues to earn income after you have passed, such as a property that generates rental income or an investment portfolio that produces dividend payments, your beneficiary must report the earnings and pay tax at the appropriate income tax rate. In the case of a rental property, you may wish to establish a particular ownership structure in your estate to minimise tax obligations, such as holding the property in a trust. Any rental income generated could then be distributed by a trustee to your beneficiaries at a lower marginal tax rate.

Superannuation
If you have adult, non-dependent children, your Superannuation will be passed on to them in the form of a super death benefit upon your death, if you are the last surviving parent. Non-dependants can only receive a super death benefit as a lump sum, and the taxable component of your super will usually be taxed at 17%. If your balance is large enough, this can amount to thousands or even tens of thousands of dollars in tax upon withdrawal. One solution is to withdraw funds from your super fund before your death, as assets received as part of a deceased estate are not subject to tax. In addition, if you are over the age of 65, you are able to make withdrawals without being taxed, maximising the amount your beneficiaries' inherit by minimising the tax they are required to pay to receive it.

In certain circumstances, your beneficiary may instead elect to transfer your balance into their own Superannuation fund, if your Superannuation policy allows. This will be treated as a non-concessional contribution, which is usually not subject to tax. There is, however, a cap on non-concessional contributions and your beneficiary will be required to pay tax on the excess at a rate of 47% if they choose not to release the excess contributions.

The purpose of your Estate Plan isn't just to decide how your assets are distributed, it also allows you to decide how your assets are distributed. By carefully planning for these taxes and establishing structures that minimise tax liabilities, you can maximise the value of your estate for your loved ones.

6. Reduce legal, probate and executor fees

Without an Estate Plan, the court will be responsible for electing an executor to manage the administration of your estate, including the distribution of your assets, the payment of your debts, and even guardianship of your children. There are a number of costs associated with obtaining probate and estate administration. These are deducted directly from your estate, reducing the value of the assets eventually received by your loved ones. They can range from a one-off executor fee based on the value of your assets to an annual estate management fee for ongoing administration duties.

By appointing a power of attorney or naming an executor in your Estate Plan, you can ensure that the responsibility of managing your estate does not fall to the courts in the event of your death, avoiding additional legal costs and maximising the value of your estate.

7. Avoid potential problems with settling your estate

Even the most well-intended wills can be subject to dispute, usually as a result of disagreements regarding how an estate has been distributed or whether particular beneficiaries are entitled to more than they received. Effective Estate Planning can help to address some of the common issues that arise when settling an estate. An Estate Plan be used to ensure that all of your assets are correctly valued and accounted for, allowing for fair and equitable distribution, and to streamline the probate process so that beneficiaries receive their entitlements as quickly as possible.

Having an Estate Plan ensures that your wishes are respected and made clear, avoiding any misunderstandings by your executor or between your beneficiaries.

8. Establish a succession plan for your business

If you have a controlling interest in a company, a business succession plan is an essential inclusion in your Estate Plan. A common mistake is having one without the other, or even having one contradict the other. For example, your business succession plan may clearly outline conditions for a successor, such as an adult child, but your Estate Plan may allocate all of your assets, including your controlling interest, to a different beneficiary, such as a spouse. Aligning both documents ensures that your intent for succession is clear.

In addition to appointing a successor, a business succession plan should also be used to distribute business assets. People often make the mistake of thinking that they personally own assets when, in fact, are actually held by their company or a trust. In this case, the transfer of the asset to your intended beneficiary would not be legally enforceable by your executor. To avoid this, it is important to review your company and trust structures to understand what assets you personally own and to use your business succession plan to allocate assets owned by your business.

9. Give to a charity of your choice

An Estate Plan can also help you achieve your philanthropic goals once you have passed on that a will alone cannot, allowing for much more comprehensive planning and far greater flexibility when it comes to making charitable donations. In your Estate Plan, you have the ability to establish trusts and foundations to distribute donations in order to minimise your tax liability and include provisions that protect any assets intended for charity from being challenged by other beneficiaries.

If you would like to leave a gift for charity, an Estate Plan will ensure that your donation is fulfilled as intended, and in such a way that minimises your tax obligations and probate expenses.

What role does a professional Accountant play?

Whilst an Estate Plan is a legal document that requires the expertise of an experienced Estate Planning lawyer, the key to achieving the most advantageous outcome is collaboration between both legal advisors and professional accountants. Throughout the Estate Planning process, a lawyer can offer expert advice to help you make more informed decisions about the future of your estate. In addition, they can ensure that any required documents are prepared and processed correctly to uphold the validity of your will. A professional account, on the other hand, can help you understand your tax implications and matters pertaining to trusts, structures, and asset pools, for more effective distribution of your estate.

Our trusted partner: McLachlan Thorpe Partners - Commercial & Family Law Firm

McLachlan Thorpe Partners, one of our trusted partners, has a dedicated Estates Team that specialises in probate, administration and disputed estates. They understand that Estate Planning is more than merely creating a valid will; it is about understanding your unique circumstances and devising the best plan to provide peace of mind and ongoing support for you and your loved ones.

Azure Group and McLachlan Thorpe Partners work together with our clients to deliver the best Estate Planning solutions from both a legal and financial perspective. Get in touch.

Have you noticed our #FridayExpertTips... here's one that relates to Superannuation 

"Make sure any contributions you make before the end of financial year are within the contribution caps, so you don’t pay a penalty tax."

This article is intended to provide general information only, and is not to be regarded as legal or financial advice. Our conclusions may not be valid if there is any change in those facts, circumstances and assumptions.  Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused.