How to Avoid Inheritance Hiccups
As Australians prepare to transfer an estimated $3.5 trillion in wealth by 2050, proper estate planning has never been more important. Without it, even the best intentions can be derailed by taxes, complexity or family disputes. The planning process is often associated with the distribution of assets, but its true value lies in preserving wealth for the future and ensuring assets are passed onto the intended beneficiaries. When done correctly, an estate plan ensures your wishes are honoured and your wealth is passed on efficiently and effectively.
Protecting Wealth
A testamentary trust is a legal structure established upon passing to manage the assets in a Will. The testator maintains full control over their assets during their lifetime and appoints a trustee to manage the assets after their passing. Assets are ring-fenced within the trust and therefore protected against unintended beneficiaries, such as a son or daughter-in-law, claiming the assets. Moreover, should a beneficiary run into financial trouble, the assets held within the trust are protected from creditors. Having a trustee also provides a level of oversight not available when assets are transferred directly to beneficiaries.
In addition to asset protection, testamentary trusts provide tax advantages. The trustee can distribute proceeds of the estate to beneficiaries depending on their personal tax circumstances. One strategy available to retirees is to manage the testamentary trust in line with the investment time horizon and risk profile of the beneficiaries. Concurrently, superannuation and other investments can be governed more conservatively to fund retirement and avoid drawdowns.
When One Asset Dominates
A common obstacle faced when passing on wealth is providing equal inheritances. Often most of the wealth in an estate is held in a single asset (such as a farm, business or family home) and therefore not easily divisible among beneficiaries. Matters are further complicated when one beneficiary continues to operate the business or intends to move into the home. In these events, you can consider building “off-balance sheet” assets to diversify your wealth. If the primary asset can support debt, this can be used to support and grow an investment portfolio. Life insurance policies can also be used to provide a lump sum upon death to provide a liquid asset that can be easily passed down.
Minimising Tax for Beneficiaries
Because Australia does not have an explicit inheritance tax, families incorrectly assume there are no taxes after they pass. However, superannuation inherited by independent adult children can incur up to 17 per cent tax. Assuming a $1.5 million superannuation balance, a non-dependent adult beneficiary could receive a tax bill of up to $255,000. Put another way, non-taxable superannuation can be taxed up to $17,000 for every $100,000 inherited. To minimise tax paid, a re-contribution strategy can be implemented, whereby funds are withdrawn from your superannuation and then deposited back into the fund. This reduces the taxable component of the superannuation balance and increases the proportion of tax-free. While cumbersome, this can result in significant tax benefits, particularly for beneficiaries who inherit superannuation upon your passing.
With expert guidance and proactive planning, many of these potential inheritance hiccups can be avoided – helping ensure your wealth is preserved for future generations and your wishes are honoured.