Whilst the preparation of wills and estate planning advice is the responsibility of lawyers suitably qualified in those areas, it is important for lawyers and accountants to work together to ensure that the estate planning is in line with taxation and other business plans.
Often considerable effort is put into determining the best structure for a family group for both tax planning and asset protection purposes. However, if the reasons behind that structure are not taken into consideration, individuals may undo all of that effort by leaving their estate to the “wrong” person.
Even where investments and other assets are held in a trust, poor estate planning can undo the effectiveness of a structure, particularly where there are large unpaid present entitlements owed to beneficiaries.
One option that may be considered is the creation of a testamentary trust within the will. A testamentary trust is simply a trust which comes into existence upon the death of an individual. A provision is made within an individual’s will that following their death, certain assets will be held on trust for one or more beneficiaries.
Testamentary trusts are most commonly used when providing for minors, such as the deceased’s children or grandchildren, or for others that are subject to a legal disadvantage. However, they can be used for tax planning and asset protection purposes.
The greatest tax advantage of using a testamentary trust is that income distributed to minors will be taxed at normal marginal tax rates rather than the penalty rates which apply to unearned income of minors. There is no requirement that the beneficiary be related to the deceased to obtain this tax concession, provided that they are included in the provisions of the will. Depending on the number and age of minor beneficiaries, this concession can result in a significant reduction in tax payable during the life of the testamentary trust.
Another alternative is to consider the creation of a life interest. A life interest is created when the ownership of an asset is left to one or more beneficiaries (the remainder beneficiaries), but another beneficiary is granted the use and enjoyment of the asset during their lifetime (the lifetime beneficiary).
A life interest is often used in blended families where the owner of the family home wishes to leave the house to their children from a previous marriage, but allow their current spouse to live there for the remainder of their life. It can also be used to provide an income stream for a particular beneficiary, by leaving income producing assets to one beneficiary, but providing that the income be used for the benefit of another.
The principles which apply to pass ownership of an asset to one beneficiary, but the usage to another can also be used for asset protection purposes.
From a capital gains tax perspective, the asset will be deemed to be owned by the remainder interest holders during the entire period which the life interest exists, with the normal inheritance rules applying to deem the purchase date and cost base, depending on when the deceased purchased the asset. If the asset is sold at some point in the future, the capital gain will be realised in the hands of the remainder interest holders.
It is worth noting that a life interest is an asset of the life beneficiary, and if they choose to give it up, or deal with it in some other way during their lifetime it will be necessary to consider the capital gains tax issues which may arise. Depending on the nature of the asset in which the life interest is held, and the state in which it is located, transfer duties may also apply on this dealing with the life interest during the holder’s lifetime.
Estate planning should not occur independently to any other planning exercise, whether that is taxation planning, or structuring planning for asset protection purposes, but should form part of the holistic planning process. By considering the intentions behind the other plans, an individual’s will should not leave any nasty surprises for their beneficiaries.
This is an area where accountants, lawyers and other advisors should work together to ensure that the best outcome is achieved for their clients.
This article has been provided by Annette Bonnett, Partner, HLB Mann Judd SA and is a Family Business Australia Accredited Adviser. The advice in this article is designed to be general in nature.