1. MAF765 Financial Planning and Analysis Presented by: Dr Tze Chuan Ang (Chewie) Consultation: Time: 3.00 – 5.00pm (Mondays) Room LB 4.112 c.ang@deakin.edu.au

2. Topic 7 Chapter 14 - Estate Planning ©2014 John Wiley & Sons Australia, Ltd Updated by the MAF765 Unit Team, 2014

3. Introduction In the past, the will has been the major focus of estate planning Now, estate planning can be viewed more broadly to include protecting and maximising net assets available for distribution to beneficiaries There is a need to consider assets not included in the will Estate planning is a dynamic area of increasing complexity and importance

6. What is an estate plan? Providing for those who remain after the client’s death and for the distribution of the client’s assets in accordance with their wishes. It needs to be simple and flexible It should seek to minimise tax where possible. It should be fair to all beneficiaries It should be simple to operate and not an undue burden to maintain. It needs to be reviewed regularly 6

7. Estate planning Control your wealth when you are alive and well Plan for your loved ones and yourself in case you become disabled Avoid family disputes Give what you want, when you want, to whom you want, in the way you want Protect your wealth from: – the taxman – creditors; third parties; and predators

8. Obligations of the financial planner 1.Identify objectives and wishes of the client 2.Identify assets available to the estate for distribution, and non-estate assets 3.Identify tax implications on the estate plan 4.Ensure a valid and up-to-date will is executed 5.Establish an enduring power of attorney Buy CANNOT prepare the will for the client.

9. Drawing up a valid will A will: is a legal document that specifies how property is to be dealt with after the willmaker’s death. provides directions about who the willmaker wants to receive assets. can be made by anyone >18 years providing they have testamentary capacity.

10. Drawing up a valid will A will nominates the executor who will be the person responsible: – for finalising affairs – for ensuring assets are distributed in accordance with the will. Executor must be willing to take on the role and be told where the will and other important documents are kept.

11. Will: Important Requirements 1.Writing 2.Signed 3.Witnessed: two or more (not beneficiaries) 4.Alterations: must be witnessed and signed 5.Minors: cannot make a valid will unless under special cases 6.Divorce and marriage

12. Role of the executor Organising the funeral Managing the legal and financial affairs of the estate Obtaining grant of probate Locating, protecting (such as changing the locks) and insuring estate assets Paying outstanding debts from the estate Distributing the remaining assets in accordance with the will Defending the will if there is a challenge

13. Grant of probate On death, the deceased’s will must be proved in a court Grant of probate gives executor power to – Deal in the estate – Make distributions in accordance with will The Supreme Court assesses the validity of the will If valid, the court grants probate (i.e. ‘proof of the will’) The court confirms the appointment of executor or appoints an administrator if there is no executor (using a letter of administration)

14. Grant of probate continued Grant of probate often confused with payment of probate duties At present, no Australian state requires payment of probate duty Grant of probate may not be required for estates with relatively low value (e.g. $25 000)

15. Defining the estate A person’s assets may be viewed in 2 classes of assets: Estate assets These are assets that are solely owned by the willmaker and are the only assets which can be left in will Non-estate assets Assets that are either jointly owned or owned and controlled through an independent business structure

16. Example: estate assets Estate Assets (distributed according to the will/intestate laws) Property (including property owned as tenants in common) Personal goods Share portfolio in own name Cash investments Units in a trust

17. Example: non estate assets Non estate assets Assets held as ‘joint tenants’ (compared with tenants in common) Property with Nominated Beneficiaries – Superannuation – Life Insurance Assets held in a discretionary trust Principal Residence in Spouse’s Name

18. Identify ALL Beneficiaries Primary Beneficiaries – husband, wife and children General Beneficiaries – range of individuals and entities related to primary beneficiaries Unrelated Beneficiaries – friends (contestable), charities Excluded as Beneficiaries – Settlor and Trustee Unwanted beneficiaries – parties whom you do NOT want to get a claim against your assets whilst you are alive or dead

19. Rights of beneficiaries Beneficiaries have the right to have the estate administered properly. They have no claim while the estate is in the hands of the executor, but can bring the executor to court to apply for probate if the executor does not do so within statutory time frame. They are not entitled to borrow against the assets of the estate until it is settled and title has passed to them.

20. Contesting a will The validity of a will can be challenged on the grounds of: – lack of testamentary capacity – undue influence – incorrect execution. Family provision legislation – Inadequate provision – Where transactions were undertaken in order to deny a benefit to a claimant these can be undone by the court – Costs paid out of estate – not contestant

21. Who can contest a will? De facto partner Former spouse(s) Children from wedlock Stepchildren Grandchildren Other people who were members of the deceased's household and dependent or partially dependent on the deceased – e.g. live-in housekeepers and carers

22. Dying intestate A person is said to have died intestate if they die without a valid will. Approximately 45% of Australians die intestate Estate will be distributed in accordance with state intestacy laws. Fundamental principle is that estate will pass to the deceased’s next of kin. State laws prescribe precise order and extent for distribution.

23. Dying intestate continued For example, under Victorian Law: Entire estate goes to spouse if no children If there are both spouse and children: If < $100,000, all to spouse If > $100,000, surviving spouse receives $100,000 + 1/3 estate Remaining split to children equally If no spouse, split to children equally If no surviving spouse or children to next of kin If none of the above to the government

24. Intestacy Law Victoria

25. Source: The Law Handbook

26. Dying intestate continued The basic formulae may produce unintended consequences, for example: Fred and Wilma married 25 years then separate Not formally divorced Fred finds a new partner in Betty, but Fred dies without a will Wilma will receive estate Is this what Fred intended? Important to discuss estate issues with client

27. Estate planning and taxes Capital gains tax – The application of CGT depends on when the assets were purchased. – CGT is only payable if assets are sold. 3-year rule – Income Tax Assessment Act allows up to 3 years to finalise an estate. – Estate will be taxed at normal adult marginal tax rates during this time. Stamp duty on transfer of assets

28. Estate planning and taxes continued

29. Estate planning and trusts Two of the more important objectives in effective estate planning lie in: (1) establishing a tax-effective structure by which estate assets and income are able to be distributed to intended beneficiaries and (2) providing the willmaker with control over how their estate assets will be distributed and managed after their death. Testamentary trusts are often established through a will to achieve these objectives.

30. Estate planning and trusts continued There are two main types of trusts in the context of estate planning: 1.a living trust or inter vivos trust (established during a person’s lifetime) 2.testamentary trust (established by will after the death of the person) which only comes into effect upon the death of the willmaker. It is the use of trusts — both testamentary and living (inter vivos) — that provides for more effective estate planning.

31. Estate planning and trusts continued Essential elements of a trust: – Settlor: settles the money to establish the trust – Appointer: nominated by the settlor to appoint or change the trustee for the trust – Trustee: holds the trust property on behalf of beneficiaries according to the conditions set out in the trust deed. Has personal obligation and fiduciary duty to deal with trust property for the benefit of the beneficiaries – Beneficiary: the person(s) nominated to receive the beneficial interest in the trust property – Trust property: the property held in the trust

32. Estate planning and trusts continued Types of trusts based on the entitlements of the beneficiaries A fixed trust (or unit trust) gives beneficiaries a fixed entitlement to distributions and capital in proportion to number of units held. A discretionary trust gives beneficiaries an entitlement to be considered for distributions from the trust but not the right to receive distributions.

33. Estate planning and trusts continued Trusts are used in estate planning for: – tax minimisation – asset protection – succession – provision for minor and/or disabled dependants.

34. Tax minimisation Taxation of minors – Gifts left under a will are exempt from the penalty tax rate applied on a minor’s unearned income – Such gifts are often held in a testamentary trust. – Trust income from proceeds of the will distributed to minor beneficiaries is taxed at normal adult tax rates.

35. Tax minimisation continued Example: Upon the death of Maria a testamentary trust was established for her son Michael who has two minor children During the current year the trust derives the following income: – fully franked dividend of $8 000 – rental income of $15 000 – interest income of $7 000.

36. Tax minimisation continued The trustee distributes the income to the beneficiaries in the most tax-effective way as follows: – investment income can be distributed equally between his two minor children who will be taxed on income from a testamentary trust at the normal adult resident marginal tax rate – once the low income tax offset is taken into account, the two children will not be subject to any tax on the income received. Had the income been received by Michael directly, he would have been subject to a marginal tax rate of 37%.

37. Tax minimisation continued

38. Asset protection The separation of legal and beneficial ownership protects trust assets from claims made on the beneficiaries by third parties. A discretionary trust can be used to protect assets from creditors. A testamentary trust can also be used to protect assets from beneficiaries who have problems such as drug or gambling addictions or who are spendthrifts.

39. Example: Special Testamentary Trust

40. Succession The ownership of assets within a trust structure helps to protect assets from claimants, ensuring the assets are available to future generations. Discretionary trusts, both inter vivos and testamentary, can also offer protection from any potential divorce settlement although the Family Court can award a larger settlement to compensate an individual adversely affected.

41. Superannuation death benefits For many people, superannuation will be the largest or second largest asset they pass on to their beneficiaries. Superannuation fund members can give binding death nominations regarding the distribution of their superannuation after their death. Superannuation can only be paid to dependants (as defined under the Superannuation Industry Supervision (SIS) Act) or the estate.

42. Superannuation – who is a dependant? Spouse De facto spouse Former spouse Child under the age of 18 Any person who at the time of death was dependant – Financial dependant – Interdependency relationship

43. Superannuation death benefits continued

44. Life insurance Who owns the payout of a life insurance policy? If owned by spouse, not an estate asset. If owned by deceased, then: – If the policy has a nominated beneficiary, then non estate asset – Otherwise, an estate asset.

45. Power of attorney A power of attorney is a legal document that authorises someone else to act on your behalf. Need to have sufficient mental power to appoint attorney Types of power of attorney – Limited power of attorney – General power of attorney – Enduring power of attorney

46. Enduring power of attorney Most states have enacted laws to create three types of enduring power of attorney (EPOA). They are: – Financial EPOA – Medical EPOA – Guardianship EPOA

47. Power of attorney continued Laws relating to powers of attorney differ between states and do not transcend state boundaries. A power of attorney is valid as soon as it is signed and witnessed. It continues to be valid until it is revoked. It is only valid while the donor is alive and automatically ceases when the donor dies.

48. Power of attorney continued Powers of attorney should be used carefully and the attorney chosen carefully. It is normally beneficial for husbands and wives to hold an enduring power of attorney for each other. It may also be appropriate to consider appointment of another family member in case the couple become mentally incompetent at the same time.

49. When does an estate plan need to be reviewed? Divorce Marriage or remarriage Further children in the family: this could be children, grandchildren, stepchildren or adopted children. Changed business circumstances Significant wealth increase Death of a nominated executor or party undertaking a similar role. Change in circumstance of a nominated beneficiary. 49

50. Consider a 'Living Trust' A Trust that substitutes for a Will Trust holds all assets and becomes the beneficiary of all insurance and superannuation proceeds. Existing assets need to be retitled. Grantor manages and controls all assets in the Trust Can be revocable or irrevocable

51. Advantages of a ‘Living Trust’ AVOIDS PROBATE: A living trust avoids probate and therefore gets assets distributed significantly more quickly than a will does. CONFIDENTIAL: It offers a higher level of confidentiality, as probate proceedings are a matter of public record. DIFFICULT TO CONTEST: Trusts are usually harder to contest than wills.

52. Disadvantages of a ‘Living Trust’ MORE TIME REQUIRED: Takes longer to put together than a will ONGOING MAINTENANCE: Requires more ongoing maintenance – reviews on change of circumstances e.g. divorce, re-marriage, births … TIME CONSUMING: Although both a will and a living trust can be modified or revoked at any time before death, such changes are slightly more time-consuming for a living trust. ALL ASSETS TRANSFER TITLE: Additionally, assets that a person wants to move to a living trust, such as real estate and bank or investment accounts, have to be re-titled.

53. Revocable Trusts A Revocable Trust (also referred to as a Revocable Living Trust) is a type of Trust in which the Grantor retains the right during his/her lifetime to amend, change, revoke or terminate the Trust within his/her sole discretion. A typical Revocable Trust becomes irrevocable when the Grantor dies, and can also be designed to break into separate Irrevocable Trusts for the benefit of a surviving spouse, or into multiple Irrevocable Lifetime Trusts.

54. Irrevocable Trusts An Irrevocable Trust cannot be altered, changed, modified or revoked after its creation Once a Grantor transfers property to an Irrevocable Trust, the Grantor can no longer take the property back from the Trust Though, by design, an Irrevocable Trust cannot be changed, there are certain exceptions that allow Beneficiaries or the Trustee to modify the Trust. If the assets in a Trust are sold, the Trust is terminated.

55. Plan Business Succession Who will takeover the business on retirement or death? Cross Buy/Sell Agreements funded with life insurance policies (“business prenuptial”) When owner dies, remaining owner(s) buy the deceased’s share of the business from the deceased estate using the proceeds from life insurance policies

56. Summary Estate planning is an important part of financial planning. A thorough estate plan looks beyond the need for a valid will to the protection of assets. There is also the need to consider tax implications and threats to estate assets. Enduring powers of attorney play an important role in estate planning.