Attwood Marshall Lawyers Wills and Estates Lawyer, Xara Coassin, joins Robyn Hyland on Law Talks on Radio 4CRB to discuss how different entities are dealt with in estate planning and mechanisms you can put in place to pass wealth from one generation to the next.
Introduction
Estate planning is often more complex than writing a simple Will. Many people own assets in different structures and entities, and it is important to understand how to deal with these structures and entities when completing your estate plan.
A person may hold their assets through a family trust or other trust structures, in their superannuation, or as a company or partnership for example.
At Attwood Marshall Lawyers, as part of the estate planning process, our lawyers sit down and complete a fact-finding exercise with our clients so that they can get a clear picture of what someone’s family structure looks like, what their assets and liabilities are, and what are the estate planning goals they want to achieve.
These initial discussions are important because determining how an asset is held by the Will-maker will determine how it can be passed on to a beneficiary and what strategies and tools are required to achieve the client’s estate planning goals.
For business owners, additional succession planning will be required, for example, to determine if the business will continue to operate, how it will run, what will that look like and who will be in control of the business after they pass away.
Family trusts – what are they and what happens to a family trust if you die
The term family trust refers to a discretionary trust set up to hold a family’s assets or to conduct a family’s business.
It is an attractive vehicle for holding assets due to its ability to:
- effectively manage tax between family members
- provide asset protection against creditors and family law proceedings
- easily pass assets to the next generation.
Assets held in a Family Trust do not belong to you, they are ‘held on trust’ by the trustee for the benefit of the beneficiaries. Whoever ‘controls’ the trust has access to the assets and income of the trust and has discretion over their control and distribution (within the terms of the trust deed).
If you are a beneficiary of a discretionary trust you merely have a right to be considered by the trustees, who control the trust.
Every Trust Deed is different and should be tailored to the individual’s circumstances. This is one of the reasons why it is imperative that the Trust Deed, and any Deeds of Variation be reviewed as part of the estate planning process.
A Trust Deed should set out:
- how the trust is to be managed;
- who the controllers (trustees / appointors) are;
- who the beneficiaries of the trust are; and
- how the control of the trust can be passed on and in what circumstances.
Assets in a family trust do not form part of your estate, which means they are not delt with by including them in your Will. Instead, the succession of a trust and control of its assets are dealt with by passing the control of the trust to another person either upon death via the Will or a deed depending on the terms of the Trust Deed. Succession in a trust should also deal with the situation where the controllers, especially a sole trustee and appointor, loses capacity or becomes insolvent (bankrupt).
Failure to review the trust deed or to put in place the correct documentation to ensure control goes to the correct person if you die or lose capacity can result in the wrong person gaining control of the trust, and the assets of the trust. The court does not have jurisdiction to intervene if the wrong person gains control of the trust if the appointments were made in accordance with the procedures set out in the trust deed.
Whoever you choose to take control of the trust needs to be someone that understands your intentions for the assets and will carry them out on your behalf. Certain mechanisms can be put in place to ensure that there are checks and balances and no one person can gain control of the trust.
Careful consideration must be given as to who the new controllers of the trust will be and how they will make their decisions.
Benefits of having a family trust
- Asset protection
Assets held in a family trust may be protected from creditors in the event of bankruptcy, or even protected in the event a relationship breaks down. A family trust can also facilitate the transfer of assets from generation to generation.
Help protect and manage investments for children without having the investment legally owned by the child for them to access this at their will.
- Tax planning
Subject to the trust deed and the power this document provides the trustee, it may be possible for trust income to be distributed effectively to the beneficiaries on lower marginal tax rates. This can allow for more flexibility when distributing income or capital to each beneficiary.
- Simple compliance
Compared with companies, family trusts have fewer regulatory requirements to follow. This means in terms of tax, beneficiaries report trust distribution on their individual tax return and pay tax at their individual tax rate, making compliance simple.
Risks associated with family trusts
- Tax disadvantages
If trust income is not distributed, tax will be payable on the undistributed income at the top marginal rate. This may be a much higher rate than if the income was distributed to the beneficiaries. It is always important that distributions are made in accordance with the Trust Deed and that proper records are kept regarding distributions.
It is also important to consider any social security implications. Being involved in a trust in any capacity, including trustee or as a beneficiary, may have social security implications.
- Complexity
A family trust needs to satisfy certain requirements such as completing annual tax returns. The trustee may need to seek professional advice from legal professionals, accountants, and financial planners in order to maintain the trust.
- Personal liability
When an individual is used, rather than a corporate trustee, the trustee can be held personally liable for some trust debts.
There are many ways you can structure or operate trusts depending on your unique circumstances. It is important to discuss your specific circumstances with an experienced estate planning lawyer so that they can help you understand all the benefits as well as the implications that may be applicable when setting up a trust. An estate planning lawyer will ensure your trust meets your succession planning goals.
Don’t forget to plan for your superannuation
Superannuation, whether it be a self-managed super fund or an industry or retail superannuation fund, are held in trust. Therefore, you do not own your superannuation. Because you do not own your superannuation it does not automatically form part of your estate. This means that you cannot leave your superannuation to someone in your Will. You must put extra strategies in place to ensure who you want to benefit from your superannuation and any insurance polices linked to your superannuation fund, will.
Under superannuation legislation, your super death benefits can only be paid out to certain classes of beneficiaries. That can include your spouse, your children, a dependant, or your legal personal representative. The best way to ensure that your superannuation death benefits go to your intended beneficiaries is to put in place a Binding Death Benefit Nomination. This tool allows you to give a binding direction to the trustee of the super fund to pay your death benefits either to your nominated beneficiary directly, or alternatively to your legal personal representative if you want your death benefits to form part of your estate and be dealt with in your Will.
A binding death benefit nomination usually lapses every three years therefore it is important to remember to resign and renew your binding death benefit nominations for it to be valid.
If you have a self-managed superannuation fund, a review of the trust deed is required to determine if the self-managed super fund allows for a binding death benefit nomination to be put in place and prescribed form if required.
Some older trust deeds do not allow for this and it might be required that the trust deed be updated before a valid binding death benefit nomination can be put in place.
If the binding death benefit nomination is invalid or lapses, it will not be binding on the trustee of the super fund. The trustee of the super fund will retain its discretion as to who to give your superannuation death benefits to in the absence of any valid nominations. This can be a lengthy process as eligible beneficiaries will need to make an application to be considered and there is no certainty that the trustee will follow your last nomination, risking your benefits going to the wrong person. This can be particularly risky where blended families are concerned.
A binding death benefit nomination is the easiest and most certain way to protect your superannuation death benefits.
Attwood Marshall Lawyers – helping you achieve your estate planning goals
With one of the largest and most experienced Wills and Estates departments, our estate planning lawyers will help you plan for the future and preserve your testamentary wishes. We take a holistic approach to estate planning to ensure that your plan aligns with your specific family circumstances, the types of assets you hold, and how you wish to distribute your assets after you pass away.
Whether you need assistance with setting up family trusts, drafting a Will, completing an Enduring Power of Attorney, or making a binding death benefit nomination, we can discuss your needs and ensure you have all the legal documents in place.
To discuss our estate planning services or book an appointment, contact our Wills and Estates Department Manager, Donna Tolley, on direct line 07 5506 8241, email dtolley@attwoodmarshall.com.au or free call 1800 621 071 at any time.
You can visit our estate planning lawyers at any of our conveniently located offices at Robina Town Centre, Coolangatta, Kingscliff, Brisbane, Sydney or Melbourne.
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