Smarter estate planning isn’t just for the wealthy. Even if all you own is your home, there are many good reasons to update from a ‘simple’ will to a more sophisticated will that properly protects your assets and reduces unnecessary tax.
Basic, simplistic wills can expose your hard earned assets to risk and leave gaping holes for tax leakage and exposure to creditors. Spend a few hundred dollars more now to protect your assets and your beneficiaries from tens of thousands of dollars in unnecessary tax and increased exposure to risk.
Here is how…
Protect your income and assets with a smarter will.
When a recipient in your will earns income from a gift, such as rent on an investment property, that income will be taxable. If your recipient is a minor (under the age of 18 years), a smarter will can mean the difference between them paying 19% in tax or 47% in tax (as at FY18).
If your recipient has children under 18 years old, that income can be streamed to the kids in order to take advantage of preferential tax rates.
Income can also be streamed to low-income-earning adults, such as full-time or part-time students, which similarly provides a valuable mechanism for reducing tax.
Your beneficiaries may currently live in Australia, but what if they move overseas in the future? With a simple will, applicable assets passing to a foreign beneficiary can trigger capital gains tax (CGT). With a smarter will that can be overcome by using a testamentary discretionary trust.
By placing your assets in a testamentary discretionary trust, you can protect your assets by claims to the beneficiary’s creditors, bankruptcy and any family law claims your beneficiary might be involved with. In a testamentary discretionary trust, a trustee owns the assets and the beneficiary does not have a fixed entitlement to the assets.
Smarter wills give more flexibility.
Smarter wills allow the beneficiaries to receive the assets in the way that best suits their personal situation at the relevant time, whether that be directly or via a testamentary discretionary. The tax advantages of a testamentary discretionary trust are relevant where the beneficiary chooses to retain the assets to earn income from them. If the beneficiary chooses to immediately sell the property (e.g. to help pay off their own mortgage) then the beneficiary may prefer to receive the property directly. Smarter wills give the beneficiary that choice.
Smarter wills give the executor a general power to make necessary adjustments.
The executor of your will may need flexibility to make adjustments to deal with unintended scenarios. For example, if two beneficiaries are intended to receive equal shares but the gift to one of them turns out to be subject to an unexpected tax, the executor needs the flexibility to increase the gift to that beneficiary to achieve a more equitable distribution on an after-tax basis.
A smarter will allows you to exclude certain people.
When you pass away, any ‘eligible person’ may make an application to the court for a family provision order if they believe that there has been inadequate provision for them under your will. If an order is made, interests under your will may be adjusted and the applicant may be able to obtain part of your estate, contrary to your will.
The likelihood of a family provision order being successful might be reduced by expressly excluding people who may be eligible persons in the will, outlining the reasons why they have been excluded. This is not usually a feature of a ‘simple’ will but can be included in a smarter will.