The aim of proper succession and estate planning is to preserve the value of an individual’s wealth (whether owned personally or via other means such as super funds, companies or family trusts) and ensure it continues to benefit intended beneficiaries into the future. In doing so, the individual seeks to avoid adverse consequences for either themselves or their intended beneficiaries in the event that circumstances change, for example, change of occupation, employment, domestic relationship and moving into retirement. This article outlines the benefits of succession planning, while focusing on points such as achieving tax savings on distributions after your death, protecting your beneficiaries’ inheritance and guarding against mental health, age and sudden accidents.

The pitfalls of improper or incomplete structuring, succession and estate planning

The dawn of a new financial year should serve as a reminder for people to review their personal and business objectives, and plan for how those objectives will be met into the future.

Failure to give attention to, or to document succession and estate planning objectives can lead to:

  • the reduction in value of an asset to an individual (for example, exposure to unnecessary income tax, capital gains tax, or land tax)
  • loss of an asset (for example, in the event of a domestic relationship breakdown or personal bankruptcy)
  • the payment of greater income tax in retirement (for example, because of contribution limits on last minute wealth transfers to superannuation).

Testamentary Trusts – Achieving tax savings on distributions after your death

A testamentary trust is a mechanism which can save a beneficiary significant amounts of tax (as well as offer asset protection from loss through divorce, waste or other disasters). Quite simply, a testamentary trust is a trust created pursuant to a will.

A testamentary trust is the preferred vehicle if a will maker wishes to:

  • protect their estate from their beneficiaries’ creditors (typically from a beneficiary’s trustee in bankruptcy or a beneficiary involved in a relationship breakdown)
  • benefit from tax advantages
  • exercise a level of control over how their assets will be managed by the next generation.

There are different types of testamentary trusts, such as:

  • full discretionary
  • rights of occupation
  • education and other term trusts (for example, for minors)
  • protective (for example, special disability trusts)
  • capital reserved testamentary trusts
  • accommodation funds and fixed lift interests.

A testamentary trust has the significant advantage of enabling the trustee to stream or split income amongst the trust’s discretionary beneficiaries in a way that minimises overall tax paid on the trust’s income. The beneficiaries that receive the trust income then include this income in their own assessable income which is taxed at that individual’s marginal tax rates. By streaming income to beneficiaries with low marginal tax rates, a trustee is able to minimise overall tax paid by beneficiaries.

There are also capital gains tax benefits of using a testamentary trust. Any capital gain made by a trustee of a testamentary trust from a capital gains tax asset passing to a beneficiary of the trust will be disregarded by the Commissioner for Taxation.

Protecting your beneficiaries’ inheritance

You can assist in protecting the inheritance of beneficiaries by avoiding giving direct personal gifts to beneficiaries and by building into the testamentary trust mechanisms to allow for flexibility or to shore up protection, including:

  • giving the executor the discretion to pay the inheritance direct to the primary beneficiary if requested
  • a mechanism whereby the primary beneficiary is removed from control of the trust in the event of a relationship breakdown
  • giving the executor the discretion (with the consent of the primary beneficiary) to vary the terms of the trust prior to control being given to the primary beneficiary. This could include splitting the trust into a number of trusts and fixing the entitlement of certain beneficiaries.

Estate planning clients often express concern as to what will happen to an inheritance that they may wish to leave to a child if the child’s relationship dissolves.

In that case, control of that testamentary trust is key:

  • If the child is trustee of their own trust (a common estate planning device for tax purposes) then the Family Court is likely to see that child’s interest in the trust property as something called on in the property division.
  • A capital reserve trust can also be adopted. In this case, the capital is reserved for the ultimate benefit of the residuary beneficiaries (for example, the children of the primary beneficiary), and will guard against spouses taking any of the inheritance. The income is distributed to the primary beneficiary and the capital to the beneficiaries’ children. The beneficiary is then able to borrow capital from his or her children. This type of trust ensures a spouse does not obtain any funds, as the capital is controlled. This is recommended in the event that a beneficiary is concerned about assets being dissipated and mismanaged by the spouse.

Guarding against mental health, age and sudden accidents

Powers of Attorney and Appointment of Medical Treatment Decision Maker

When executing a will, an individual should also consider giving effect to an Enduring Power of Attorney (EPOA) and an Appointment of Medical Treatment Decision Maker.

When guarding against the implications of mental health, age and sudden accidents, an individual should ensure they have these documents in place, as each of these will assist in facing the changing needs and changing capacity requirements, which may arise as a result of increasing age and in the event of a sudden accident.

Appropriately drafted will

An appropriately drafted will, reflecting the testator’s wishes, can also guard against the consequences of sudden accidents and age occurring in relation to beneficiaries.

If a testator’s will includes provision for beneficiaries suffering from a disability, a special disability trust or other trust which offers Centrelink relief may be suitable.