I have often been asked the question. Is a will necessary? What happens to unspent super? Does Australia have a death tax? Do we need a trust?
The answer to these questions is
A legal will, can ensure that your intentions in the event of your death are clear. It is necessary and should be prepared by a solicitor
Unspent super in the event of your death, is taxed in the hands of the beneficiaries of the will, (up to 32%) unless they are classed as a tax dependant or the trustee of a fund that has a binding nomination to pay the beneficiary
Australia abolished death taxes in 1979 (Fraser government) and all states followed by 1981
A trust can be an effective tax structure while we live and in the event of our death. Whether you need one or not, is a question of circumstances, wealth and choice.
Lets unpack some of the answers by looking at the tax structures that surround estate planning.
A trust remains a popular vehicle in which to protect capital assets and to facilitate tax savings through distribution of trust income to family members. A trust can also serve as a protector of assets should members become deceased. Trusts are declining in popularity as a tax saving measure. The principal use is in the protection of assets for transitional wealth. i.e. to ensure that the beneficaries of your assets are those intended and not others.
The two trust types that are commonly used for families are Family Discretionary Trusts and Testamentary Trusts. I will discuss these in this post. However they are also possible tax saving structures in the broader issue of estate planning. In this post, I will talk about estate planning and why we should think about this earlier in our lives.
Estate planning is a multi-facted assessment of assets to ensure their protection while we live, when we retire and when we say goodbye to the world. When an estate becomes a deceased estate, effective planning comes into its own and ensures that our beneficiaries receive the maximum benefit of our intention in a will.
The inheritance landscape in Australia, is a moving target as regulators seek to withhold for government coffers by modifying legislation to tax all that they can. Meanwhile, planners utilise legal means to optmise inheritance retention.
Tax structuring and ongoing vigilence of chosen structures has never been more complex as we navigate the common options of trust income splitting/vesting, testamentary trusts to protect a deceased estate, and the ever changing laws around superannuation.
It is fascinating to see the increased generational wealth that comes with time. My grandparents lived through poverty and war. They relied on social security and government hand-outs. They had very little in financial assets when they died in the 1970’s. My parents lived through the second world war, and married in the 1940’s. They were farmers who gave us an education and left an estate of around $1million in 2016.
We were born, ‘baby boomers’ at a time where the world began to expand with new technology and post war hope. We had opportunity and fortune that has lead to a wonderful life of family, personal growth and travel. Thanks to the property boom, our generation’s legacy will be counted in the millions.
The current generational wealth has entered a new cycle in which superannuation will play a significant role. For those who have a permanent and steady full time job, their wealth will be defined by their inheritance and their accumulated superannuation. For most, it will be substantial and it needs to be protected. The most popular agreements in place are Family Discretionary Trusts and Testamentary Trusts. So what are they?
Family Discretionary Trusts
A family trust is an agreement between a settlor or benefactor (someone who gifts money or assets to the trust), and a trustee (a person or a company who aquires and deals with investments on behalf of the beneficiaries of the trust).
This means that money and assets can be moved into a trust for the benefit of family members. Income from assets or capital gains on sale of assets is managed by the trustee and distributed each year to the beneficiaries.
Why?…
The tax benefit is typically where beneficiaries have lower marginal tax rates. e.g. for additional income, someone on $30,000 pays less tax (16 cents in the dollar) than someone on $200,000 (45 cents in the dollar).
How?…
Include family members as beneficiaries in the trust and distribute trust income, at your discretion to minimise tax paid. Even franking credits can be passed to beneficiaries selectively. Capital gains, including CGT discounts, can be distribited selectively. There are rules, but essentially this is how it works.
The Cost?
The state government gets their cut. Stamp Duty of $500 is paid to register the trust deed. You can do it yourself but $70 is all you need to pay to an authorised deed stamper and the state government will issue a Duties Notice of Assessment. This number must be written on all copies of the trust deed.
I recently established a trust to hold investments for the benefit of my grandchildren. My objective is to have funds released when they turn 18 years of age. I know that they will need all the financial help that they can get to avoid paying HECS HELP when the leave university or other tertiary study.
Testamentary Trusts
Similar to Family Trusts but structured to, in the event of your death, to have your estate pass directly to a trust, that can only be dealt with by a trustee. This includes all assets including superannuation.
Why?…
To avoid the unncertainty of a will and any challenges that may be launched by money grabbers such as former partners of family members and regulatory authorities like government departments and family law courts. Management of generational wealth is a growing professional service in medium to high income families as estates move into the millions of dollars.
How?..
Change your Will so that immediately on your death, a trust is formed to manage your estate.
The Cost?..
About $3,000-$5,000 depending on the complexity of assets involved.
I have this structure in place and I advise all clients to speak with their solicitor where they feel that they need to protect generational wealth.
If you would like to discuss this with me then please feel free to contact me at Harbour Accounting Pty Ltd on www.harbouraccounting.com.au.
All the best
Peter Cox