For Baby Boomers with diverse asset bases in their family home, superannuation and other investments, the question of how best to transfer and preserve wealth for the benefit of successive generations is a complex issue that is increasingly becoming more important.
With the divorce rate amongst older Australians nearly doubling in the last 35 years (Australian Institute of Family Studies, Divorce in Australia), as well as the growing incidence of blended families in each generation (Australian Institute of Family Studies, ‘Two in five children live in a complex family’, 6 October 2016), it’s never been more critical to ensure the assets you’ve worked so hard to accumulate over your life are distributed in the way you wish, once you’re gone.
In this article, we look at a number of strategies you can put in place to protect your family and other beneficiaries after you pass away, and to ensure your final wishes related to your assets are carried out.
Review your will and estate plan documents
Having a valid will is the centre-piece of any estate plan, as it provides the instructions for where and how your assets will be distributed.
It’s worth reviewing your will regularly, and particularly whenever your circumstances change. According to the MoneySmart website, some events may invalidate your will. For example, a new marriage will void your will but divorce will not. Laws vary however depending on your state or territory, so you should confirm the laws in your region.
According to Daniella Elchaar, Senior Financial Adviser at BT Financial Group, it’s important to get something in place as a priority if you are one of the at least 45% of Australians without a will (NSW Trustee & Guardian, Wills Frequently Asked Questions).
“We advise clients to speak with their spouse or partner, and write down what they want to do with their assets. Dying intestate [without a will] is messy, and is the worst possible scenario for you and your family,” she said. “Don’t put your family through the stress and drama of dying without a valid will in place.”
There are various kits available to help you write a will, but given complexities, it can be helpful to receive expert help, whether from a lawyer or through the public trustee in your state. Some public trustees offer free services, while others may include a charge for a will and an enduring power of attorney.
The next most important document in your estate plan, is an enduring power of attorney (EPOA) or known as an Advance Personal Plan in the Northern Territory. An EPOA is a legal document in which you nominate a representative or representatives to make personal, legal and financial decisions on your behalf. It can provide a safety net that gives you peace of mind that your wishes will be followed when you’re unable to do so personally.
Using a testamentary trust to hold your assets
If you have a complicated family structure and want to ensure your assets stay directly with your children (as opposed to their spouses, ex-spouses, children or step-children), a testamentary trust can help do this.
While a family trust can be set up while you are alive to hold your assets, a testamentary trust is created by instructions in your will, in the event of your death.
“This needs to be noted in the will. A solicitor will set up the testamentary trust upon death, and it’s managed through the estate,” Elchaar said. “I think this will come up more frequently with the growth in divorce rates and blended families.”
The main advantage of a testamentary trust is that it gives you more control over how your wealth is distributed to first, second and future generations – particularly if you’re concerned that one of your children for example, may spend their inheritance quickly, leaving little, if anything of your legacy and assets to be passed on to future generations.
Ensure your superannuation nominations are up to date
Next to the family home, a superannuation investment can often be your next most substantial asset, so you may want to consider nominating a beneficiary, that is – the person who will receive the remaining balance of your funds upon your death.
Superannuation nominations can be binding or non-binding. If your fund allows a binding death nomination, you can nominate one or more dependants and/or your legal representative to receive your super.
However, if you do not specify a nomination, the trustee of your super fund can either use their discretion to decide which dependants your fund balance is paid to – or they can make a payment to your executor for distribution according to your will.
The distribution of super death benefits is governed both by superannuation law and taxation law, and different rules and tax implications exist for dependants under each law. It’s worth speaking with your financial adviser, accountant or solicitor to navigate through these complexities and ensure your super will be distributed as per your wishes.
Using annuities to create an ongoing income
Annuities, also known as a lifetime or fixed-term pension, can be set up with your super fund or life insurance company, and use a lump sum from your super or other savings to create an ongoing income stream for you – or your nominated beneficiary when you pass away.
If you nominate a ‘reversionary beneficiary’ then the income stream payments will continue to be paid to your nominated beneficiary, such as your spouse or dependant.
As explained on Moneysmart: “usually they will receive a reduced level of income payments from what you received. For example, if you bought an annuity and nominated your spouse as the reversionary beneficiary, they might continue to receive 60% of your income for the rest of their life, after you have passed on.
“Alternatively, you can choose the guaranteed period option. If you die within the specified guaranteed period, your beneficiary will receive the remaining income payments as an income stream or lump sum. Unlike the reversionary beneficiary option, the income payments received under a guaranteed period will not reduce and are only paid for the guaranteed period.”(Moneysmart, Annuities)
Estate planning, and the transfer of wealth from one generation to the next can be complex, and very specific to your wishes and your personal circumstances. Speaking with a financial adviser and a lawyer can help you navigate through the many rules and regulations that govern how assets can be distributed to your loved ones after you have gone.
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Information current as at July 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.