Get a smart Will
Estate planning is a way to ensure your estate is passed onto your beneficiaries in the most financially efficient and tax-effective way possible.
Smarter than the average Will
Having a Will is a good first step but it may not be enough to ensure your assets are passed on in the most tax-effective manner. This is why including a trust as part of the Will is becoming an increasingly popular option.
Testamentary trusts are discretionary, which means the person you appoint as trustee can distribute the income and assets of the trust in the best interests of your beneficiaries.
If your trustee is financially savvy, they can maximise the family’s tax-free income each year. One way to do this is to split income from the trust to take advantage of beneficiaries’ tax-free thresholds. If a beneficiary has children or grandchildren under 18 years of age then distributions from testamentary trusts can be taxed very favourably.
Usually, minors under 18 may be entitled to $1,327 tax-free each year after the low income tax rebate of $600, after which they are taxed at the highest personal tax rate. However as beneficiaries of the trust they are treated as adults and can receive up to $10,000 tax-free each year.
A testamentary trust can also give your husband or wife control over how to distribute your assets effectively for stamp duty and capital gains tax (CGT) purposes.
For example, if you leave a block of land to your husband or wife directly in your Will and they want to pass it on to the children or grandchildren, CGT and stamp duty will be payable. However, if your make your husband or wife Trustee of a testamentary trust, they will have control over your assets without owning them. This means they may be able to pass the block of land onto any of your beneficiaries directly from the trust and obtain stamp duty and CGT advantages.
Whether a testamentary trust will be best for you will depend on your individual circumstances and how you want to leave your assets. A financial adviser can help you make the right choice.
Superannuation
Life insurance and super are generally not covered in a Will but are important to consider in your overall estate plan. Keep in mind super benefits are taxed differently depending on who they are paid to so you might want to allocate super to one beneficiary and non-super assets to another, to avoid unnecessary tax. For example children under eighteen are considered financially dependent on you and can receive a lump sum from your super tax-free up to the pension Reasonable Benefit Limits (RBL). Whereas children over eighteen will pay lump sum tax of up to 31.5% (including the Medicare levy) on any lump sum they receive from superannuation up to the pension RBL.
The laws are continually changing so it can be a good idea to leave your superannuation via a testamentary trust as well. A financial adviser can then advise your family on who is best to receive your superannuation after you die.
Don’t go it alone
Estate planning is a complicated issue and everyone’s situation is different. Seeking advice will help ensure your final wishes are met, and your beneficiaries end up with most of your money, not the tax man!