James Tng, Partner and Director at Moore Stephens, discusses the essential areas which clients commonly neglect as their assets grow and they become older. Companies, trusts and super funds are more commonplace now, and clients should be aware these generally continue to run beyond death, he writes.
They say there are two things that are certain in life, death and taxes. As morbid as it sounds, these are realities we must prepare for.
In our discussions with clients areas that are commonly neglected are:
- Enduring Power of Attorney (EPA)
- Binding nominations in superannuation
- Adequacy of insurance
As much as we would like to think we are immortal, the truth is the opposite and if you pass away without a will, the complications you leave behind are significant. If you do not have a will, the time it takes for the administrator of your estate to gain control of the assets is also much longer.
Contrary to popular belief, there is also no guarantee dying without a will results in your spouse and/or children receiving everything. Parents and siblings can also have an entitlement.
Finally, you want to avoid a challenge to the will when you are gone; try not to exclude children from receiving assets under your will without good reason, as a reasonable expectancy they should receive something can give them grounds to challenge the will.
Testamentary trusts are something to consider where the assets of your estate justify the additional complexity, and you perhaps have concerns over a child’s ability to manage money, or you worry a child’s marriage could end in a messy divorce. The testamentary trust can have both tax savings (children can be taxed as adults), and provide asset protection.
If you have gone to great lengths to own no assets (for asset protection reasons), and your spouse owns all your assets, you need to also carefully consider their will and ensure on their death all the assets don’t revert back to you (and undo all the asset protection you have created). Testamentary trusts are something to consider in this instance as well.
EPAs to some degree are even more important than wills, as you may not pass away, but could be incapacitated. Someone you trust and is accessible should have an EPA (either individually or jointly), so that decisions regarding any of your assets can be made even if you are unable to sign. Imagine being incapacitated and no one being able to, for example, sell one of your assets to pay for medical bills or essential care.
Companies, trusts and superfunds are more commonplace now, and you should be aware these generally continue to run beyond your death. They will only form part of your estate if:
1. In the case of a company, the value of the shares and any loans your have made to the company;
2. In the case of a trust, any monies you have lent to the trust, including trust distributions that have been made to you, but have not been paid to you yet; and
3. In the case of superfunds, only where you make it clear to the trustee this forms part of your estate.
Superannuation in particular can be complex and you should ensure binding nominations are renewed every 3 years. Also be aware that, whilst a spouse and dependent children can receive death benefits from superannuation tax-free, adult children who are not dependant can be taxed on death benefits from superannuation.
In the case of self-managed superannuation funds, we also recommend serious consideration of having a corporate trustee, as this makes succession much easier and the chances of one beneficiary of your estate taking control of everything in superannuation to the exclusion of other beneficiaries, are much lower. For example, if one of your children and spouse are the remaining trustees of a self-managed superannuation fund and your spouse dies, the remaining child could appoint their own spouse as the other trustee and take everything in superannuation, even if your will states all your children are to share your assets equally.
Insurance adequacy is something to consider as well. You should ensure your family is adequately provided for in the event of your death to payout debt, and provide cash for your family to get on their feet again. Very importantly, consider what insurance you have over your business partners so that an unexpected departure doesn’t leave you in a position where you need to payout their family for their share of the business, but can’t afford to, or worse still, have your business partner’s family stepping into the business (not ideal for either party). On the flip side, over the age of 50 insurance becomes much more expensive and if your children are no longer dependant and your asset base sufficient, you may re-assess the amount of or necessity for life insurance.
Finally, a change of circumstances (children becoming adults, new entities, marriage, divorce, etc), should also trigger a review of your wills and other issues mentioned above.
So, what should you consider?
1. Do we have current wills and have we excluded anyone we shouldn’t have?
2. Have we compromised asset protection in our wills?
3. Does our letter of wishes give medical directives, etc?
4. Do we have Enduring Powers of Attorney in place?
5. Have we properly protected our superannuation?
6. Do we have adequate insurance or should we still have insurance in place?
James Tng has been a Partner since 2006. He has decades of experience in tax and business advice to businesses, migrants, overseas and Australian businesses and government agencies. James generally looks after the ongoing tax affairs for clients with complex tax issues and has extensive knowledge and experience in assisting clients with business advisory, development and planning issues. James also assists businesses and individuals from overseas in setting up in Australia, providing strategic financial know-how and applying his extensive knowledge of tax systems. James regularly presents for the Institute of Chartered Accountants and is a Chartered Tax Advisor. His areas of expertise include: Business Advisory, Taxation, International Tax, Superannuation.