Where there's a will...?
06 Feb 2013
There is a fundamental shift happening as baby boomers leave the paid workforce and consider how they will manage their assets in retirement and set up their estates.
Although many had long assumed they would be leaving a tidy nest egg for their kids and grandkids, post-financial crisis-ravaged share markets mean this is not necessarily going to be the case.
People are living longer and need their savings to fund their retirement, sometimes for decades after they stop working. According to Australian Bureau of Statistics figures, the average life expectancy from birth for a female in 2007-2009 was 83.9 years, while for men this figure is 79.3. This compares with the average life expectancy from birth of a female in 1975-1977 of 76.6 years and 69.6 years for a man.
Now consider that the average retirement age in 2010-11 for people over 45 was 57.9 years for men and 49.6 years for women. What this means is that many of us will spend a considerable period of our life not working.
Longer life spans, coupled with increasingly complex family structures involving numerous partners and children, are making estate planning a top priority for those nearing and in retirement.
Step-by-Step
The first step when it comes to estate planning is to review and record all of your assets, including your investments, retirement accounts, insurance policies, real estate, business interests and valuable items such as jewellery, cars, valuable collections or assets of general value.
Next, decide what you want to achieve with those assets and who you want to inherit them. “After you decide what kinds of bequests you wish to make, discuss your plans with your heirs. The sooner you outline your intentions to your family and friends, the less chance there will be for disagreements after you're gone,” says Diane Terzian, a partner with accounting firm JI Moore & Partners.
The start of the estate planning process should also include an assessment of how long you are likely to live, how much money you have and therefore how much you can spend each year. But don’t plan too far ahead – you can always re-visit your will at a later date.
It’s a good idea to refresh your will every time your circumstances change, for example if you retire, re-marry or divorce, and when laws related to estate planning change. Attaching a statement of wishes to a will is a good way to express your emotional state. “A lot of things can be done softly,” says Noel Yeates, a private wealth adviser with Macquarie Bank.
At the start of the estate planning process it’s essential to consider whether your beneficiaries will receive an income stream or a lump sum, as well as whether and how you will clear your debts. “You also need to consider whether you will need to put in place special arrangements, for example to care for a disabled child,” says Lisa Duggan, an adviser with Epona Financial Guidance.
Superannuation and trusts
Another key initial consideration is that superannuation does not automatically form part of the estate. When assessing how your super will be treated after your death you need to consider whether it will be paid directly from the fund to nominated beneficiaries, or to your estate and then to your beneficiaries.
“It’s usually most tax effective if it is paid to a spouse rather than to adult children. You also need to consider whether you want to leave your assets directly to people or have them held in a trust. A testamentary trust can set the parameters about when assets can be accessed. For instance, if you have adult children it’s a good idea to give them the flexibility to leave the funds in the trust,” says Michael Hutton, wealth management partner at HLB Mann Judd.
Family and testamentary trusts can have tax benefits, but these do have ongoing costs attached apart from the initial set-up costs.
Taxes and inheritance
Part of the estate planning process should be transferring as many assets as possible into your super fund. You can make a $150,000 non-concessional contribution to your super fund each year. If you have a self-managed super fund (SMSF), appoint a corporate trustee.
If you are using a SMSF, capital gains tax implications can be a little more complicated than with a traditional super fund. “When the last member of the fund dies it will revert to accumulation mode,” Randle explains. “If a large amount of capital gains have built up there could be a hefty tax bill.”
Consider the tax ramifications of passing on pre-1985 and post-1985 assets, as well as stamp duty. There is no capital gains tax payable on disposal of assets acquired before 1985, but capital gains tax may be payable on assets acquired after 1985 when they are sold.
Stamp duty laws vary from state to state. For instance if you transfer an investment such as a managed fund in your own name where the manager is based in NSW into a SMSF in specie, also in NSW, stamp duty is payable. But in Victoria under the same circumstances no stamp duty would be payable.
It is essential to seek proper advice in complicated situations such as that above. “Effective estate planning will help you to plan and prepare better outcomes for you and your heirs through an enhanced understanding of the impact of tax laws on all assets controlled by an individual at death,” says Terzian.
An estate plan should include a review of the laws that relate to the taxation of trusts as they apply to deceased estates and testamentary trusts.
“The laws that relate to business succession and superannuation income streams need specialist review.” Terzian explains. “The tax office has recently stopped providing guidance to executors about potential tax liabilities related to a deceased estate, which means close attention needs to be paid to tax during the estate planning process.”
There are still circumstances where the cost may not be justified. “If you’re just updating your will and there is no complexity involved you shouldn’t need to deal with a specialist,” says Randle.
As with most financial questions, there is no one-size-fits-all answer – everyone’s circumstances vary and so should their approaches to estate planning.
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