Planning your estate

Benjamin Franklin once said that the two certainties in life are death and taxes, but fortunately for wealth creators the effects of both can be minimised with careful planning and preparation.

According to McCullough Robertson Lawyers partner Scott Whitla, estate planning is all about “appropriateness”.

“[Estate planning] is about making sure the appropriate assets end up with the appropriate people at the appropriate time,” he explained.

“It’s making sure that the kids aren’t receiving bucketloads of money when they are 18 to go and blow it at the Ferrari dealership. It’s important to preserve the estate and help your family to grow it further. Some people would call it ‘ruling from the grave’, but I prefer to think that it is giving the descendants tools to guard against creditors and predators. It’s making sure that kids have the means to protect themselves from that and at the same time ensuring that people are protected from unnecessary tax.”

The key consideration in estate planning is to ensure that the appropriate structures and controls are in place.

“The process of estate planning differs in terms of how your assets are already structured,” Whitla explained.

“If you are in business and the wealth is primarily in a company or a family trust then the issue is about passing control of those entities to the next generation, rather than setting up structures within the will.”

Another option is to establish a testamentary trust through your will.

“If my parents leave me a million dollars in my own name as an individual then I am free to deal with that – which is fine,” Whitla said. “But if my marriage breaks down or I am sued or I invest badly – there are risks that can dissipate that money pretty quickly. Also I am going to pay a lot of tax on the income I generate from that inheritance because I own it in my own name.

“If the assets are passed through a testamentary trust, however, the assets are protected in many ways for the beneficiary’s benefit.

“You can then allocate the income among all the beneficiaries of the trust in the most tax effective way. In this example I can split the income between my wife and kids and a testamentary trust has a wonderful advantage that infants are treated as ordinary adult taxpayers – it is a concession the tax office gives – so it is very attractive in terms of income splitting.”

So where do people go wrong when they are planning their estate?

“The first mistake is that people try and do it themselves with home made kits or they don’t update their will for several years, which doesn’t allow for changes in circumstances or the needs that are currently there,” he said.

“The other mistake is that they generally don’t think it through properly in accounting for all potential family members, so then they end up with people claiming against the estate for inadequate provisions having been made.

There is a little attitude that ‘it’ll be right, it will sort itself out’ and quite often they might put a will in place but it is far too basic and doesn’t account for the actual issues the descendants will face.”

Given that death is one of the few guarantees that entrepreneurs and wealth creators can depend on, it is surprising how few people are adequately prepared, Whitla continued.

A study showed that 86% of Australians had a will, but only 55% had a will that was effective or valid, he added.

How to do it

1. Work out what you own and how you own it. The first thing you need is a summary of assets and liabilities and the structure and which it is owned. For example, do you own the block of land in your own name, or jointly with your spouse or through a family trust?

2. Work out who you want to benefit from your estate.

3. Establish the true value of each asset, taking into consideration issues such as taxation implications. For example you might want to give one child $300,000 in cash and another child a property worth $300,000. The children might think they have been treated equally, but the child with the property could have a $200,000 capital gain attached to it so it is not the same.

4. Identify any potential risks. There may be a child who is engaged in a risky profession – like a surgeon or financial adviser – where there is a potential challenge to the estate in some way (for example, if the child is being sued). Or there may be a child who is in a rocky marriage.

5. Identify the priorities for your estate. The priority may be asset protection, or tax planning, or making sure there is plenty of flexibility. All these factors will determine the best way to set up the will.