The Importance of Estate Planning
The Importance of Estate Planning

Estate Planning is broadly concerned with making arrangements to most effectively and efficiently deal with your personal assets after you have passed away. Sometimes people are hesitant to consider this sombre subject. However, some of the very basic Estate Planning strategies are not only related to the eventual distribution of your wealth but ought to be viewed as a worthwhile part of the ongoing administration and management of your financial affairs during your working life and retirement.

There are significant additional costs involved where people have not considered and attended their Estate Planning needs. So in this article we outline the importance of three simple Estate Planning strategies.

1. Record Keeping

Investors who hold shares most commonly hold those shares either in their own name as legal and beneficial owner of them, or as Trustee of a Trust or a Self-Managed Superannuation Fund. The accumulation of a share portfolio usually occurs over a considerable period of time. We have many clients who have built up a share portfolio through us over 10, 20 or 30 years or more. During that time there have usually been numerous changes to the composition of the portfolio.

When you buy or sell shares, the records that you will most likely be familiar with are; a) the Confirmation of the BUY or SELL transaction, and b) the periodic Portfolio Holdings Statement that you request from us – typically at the end of the Financial Year. The Confirmation of transaction is an important document as this records the date on which you bought the shares and the price of those shares (plus transaction costs) which is known as the ‘cost base’. Over an extended period of building and adjusting your portfolio you may well have a very substantial number of these Confirmations as individual records of your share transactions.

In relation to the sale of shares, your Accountant (Tax Agent) is required to account for the cost base of the shares you sell, if any in any given year if, like most tax payers, you trade on Capital Account.

In the absence of a consolidated share transactions record for your portfolio, which brings together all of your share transactions over time, if you are selling a share purchased some years ago you will need to supply the details from the individual Confirmation to your Tax Agent. There are two issues with this approach;

  • The ATO requires that you, as a Tax Payer or Trustee keep all the appropriate records, being ALL of the Confirmations of your share trades over the many years you have made them so that the proper tax treatment is applied when parcels of shares as sold, and
  • You may not be able to simply and easily review the CGT position of your WHOLE portfolio, and so you may not be able to manage your portfolio tax efficiently.

Furthermore, some Investors have participated in company dividend reinvestment schemes, or you may have participated in company off-market share buy-back schemes, your original shares may have changed in nature because of a company takeover or spin-off, or more simply (especially if you own REITs or other trusts) you may have depreciation or capital returns and the like to account for. In such cases there is no Confirmation of a transaction from your Stockbroker and you will need to have a proper record of the date and cost base of shares acquired under these arrangements and any changes to the original cost base.

Also, some Investors will have bought shares directly or through other firms over time.

On a number of occasions, it has been necessary for us to assist clients, their families and/or their advisers with the building of proper and adequate records for share portfolios. This can be a lengthy and expensive exercise where extensive research is required to determine the cost base of securities purchased on various historical dates. The ASX public website only has limited historic share price information so other resources are required.

This is an unnecessary expense that can be avoided by having us build and maintain a consolidated share transactions record for your portfolio through our Portfolio Service. This is not only worthwhile for the purposes of administering your Estate but also for the tax efficiency of any adjustments in your portfolio from time to time.

Estate Planning strategies are not only related to the eventual distribution of your wealth, but ought to be viewed as a worthwhile part of the ongoing administration and management of your financial affairs during your working life and retirement.

2. Testamentary Trusts

A Testamentary Trust can be another important part of your Estate Planning. This is a Trust that is created through your Will. Other than the advantage of asset protection, one of the biggest advantages of a Testamentary Trust for minor children or grandchildren, is they will pay tax on earnings at adult rates – that is they will have the advantage of the tax free threshold which is currently $18,200. Under other arrangements, minors pay tax on earnings after the first $416 of passive income.

Why might this be important for you to consider?

You may have thought that your assets will comfortably provide for your family, minor children or grandchildren. However, the effect of CGT on the sale of any shares or other assets, and tax on income under different arrangements, needs to be considered.

You may or may not be aware that when shares are inherited by any of your beneficiaries there is no tax payable at that time, as under tax law ‘death does not constitute a disposal’ which would trigger a CGT event. In general, the beneficiary inherits the shares or other assets with the same cost base as the person whose Estate is being administered. However, this is not the case with pre-CGT shares (those purchased prior to 20 September 1985) where the cost base is the value of the shares at the date of death of the person whose Estate is being administered.

3. Superannuation death benefit nominations

Your superannuation will generally not be an asset of your Estate, this is because superannuation funds are trusts and you only have a beneficial interest in your superannuation, until such time as you retire and your superannuation fund is paid to you.

You can however make Estate Planning arrangements around your superannuation, through making various nominations on how your superannuation should be distributed upon your passing.

  • You can make a non-binding Death Benefit Nomination.

This is a nomination which notifies the trustee of your superannuation fund of your wishes on how your superannuation should be distributed on your death, but the trustee is not bound to follow your instructions, especially if (under Superannuation Law) there are higher ranking beneficiaries. For example, if you marry, the trustee would treat your spouse as having priority to your superannuation death benefits, over nominated beneficiaries.

  • You can make a Binding Death Benefit Nomination

This is a nomination (that if valid) is binding and must be followed by the trustee of your superannuation fund on your death. In fact, a Binding Death Benefit nomination is the only way you can ensure (with any certainty) that your benefit is paid according to your instructions.

Binding Death Benefit Nominations; can lapse and then needed to be refreshed after a certain period (usually 3 years); or can be non-lapsing (usually available through an SMSF); and providing they are valid at the time they are made and remain valid on your death, must be followed by the trustee of your superannuation fund without the exercise of any trustee discretion.

  • You can make a Reversionary Beneficiary Nomination

This type of arrangement is most common with people who are currently in receipt of a pension from their superannuation fund. In the case of a Reversionary Beneficiary Nomination, the deceased’s pension simply reverts to their beneficiary (usually their spouse) and continues on without any disruption to the superannuation fund. This is generally the most tax-effective way to pass on a pension on death, especially if either member of a couple are 60 or over.

  • You could neglect to make any Death Benefit Nomination on your superannuation.

In that case the trustee would then need to distribute your superannuation in accordance with Superannuation Law – generally to your spouse first, then any children and then to your estate or next of kin.

*Under Superannuation Law you can only nominate certain people and/or your estate as beneficiaries of your superannuation – beneficiaries are usually limited to: your spouse (including de facto spouses and members of same sex couples); children of any age (including adopted children and step-children); anyone who is financially dependent upon you at the time of your death; and anyone with whom you are in an Interdependency Relationship with.

Estate Planning and Superannuation Death Benefit Nominations can be complicated areas of Law, and you should always obtain advice from suitably qualified legal professionals before effecting any Will or Superannuation Death Benefit Nomination.