What is Estate Planning?
Estate planning is something the vast majority of people will encounter at one stage or another in their lives. To put it simply, Estate Planning is used as a method of ensuring that your personal estate is preserved and distributed to your beneficiaries in the most tax effective and financially efficient manner possible.
Due to the common misconceptions/myths in relation to Estate Planning, large portions of many individual estates are distributed to the government instead of their family members or intended beneficiaries. By becoming aware of these common misconceptions, you are likely to be in a position to leave a much larger portion of your wealth to those who deserve it.
The Myths in Estate Planning:
1. Since the Government abolished Death Taxes in 1980, Estate Planning is not important?
The concept of Estate Planning was initially used when there were death taxes and estate duties. While the government did abolish Death Taxes in 1980, 1985 saw the introduction of Capital Gains Tax (CGT), which now claims a larger portion of estates than Death Taxes ever did.
Many other changes have also occurred. At the time of its introduction, the government made the family home exempt from CGT. In the last fifteen years, however, that has all changed. Now, all assets within one generation, including the family home, may attract CGT and it can cost your beneficiaries a large portion of your wealth.
2. Estate Planning involves tax-evasion and puts my assets in danger?
Proper Estate Planning doesn’t involve manipulating the law, nor does it put your estate in danger of government inspections, audits or seizure. Estate Planning is simply about distributing your assets in a legal and transparent manner, in a way which minimises taxes. You’ve paid tax on this money already in sales tax, income tax, stamp duty and the like. Why then, should you be paying taxes on it again after you die? With proper Estate Planning, you don’t have to!
3. Only wealthy individuals need Estate Planning
You don’t need a six figure income or a property portfolio to benefit from Estate Planning. Estate Planning should be considered by those individuals who have money in superannuation, a reasonable level of assets, and would rather see their created wealth distributed to their intended beneficiaries rather than to be lost to unnecessary taxes.
4. Estate Planning can be fixed-up after you pass away
Unfortunately, many elements of a well-planned estate, such as a Testamentary Trust, can only be set up during the course of your life. When it comes time to execute, it is often simply too late, and not even the best lawyer, business manager or accountant can avoid losing a greater portion of your estate to unnecessary taxes.
5. Estate Planning has no benefit to you whilst you are alive?
Whilst Estate Planning is predominately used for preserving and distributing your created wealth after you die; you will also be able to explore opportunities that will enable you to balance the lifetime enjoyment of your assets and income with preserving those assets for your family and loved ones after your death.
Case Study – Estate Planning, the Reality
While poor Estate Planning often means passing less of your wealth to your loved ones, it can also mean passing on financial hardship.
Let’s put this concept in real terms. David passes away, leaving behind a wife and three children. He owns a block of land in Coffs Harbour on which he planned to build a home to retire in. Like many husbands, David leaves the entirety of his estate to his wife, Patricia.
Patricia, however, no longer wants to move to Coffs Harbour. At this difficult time of change, Patricia prefers to stay close to her friends and the places she knows. She elects to pass on the property to their eldest daughter, Mary.
Mary is extremely pleased to take the land. She has decided she needs a change, and as a teacher just starting out she finds she can get a job at a reputable school in that region. She accepts the block of land very gratefully, which is now worth $175,000. However, weeks later Jenny gets a stamp duty bill for more $4,337.50. Suddenly, this gift has put tremendous financial pressure on her and her young family.
Following this, Patricia receives a bill from the tax office informing her she now owes $28,000 in Capital Gains Tax, even though she didn’t keep the land! Concerned about how she will be able to afford this huge burden, her problems only worsen when the government informs her that her age pension, as a result of her inheritance of the block of land, is being reduced.
Suddenly, following the tragic death of a loved one, David’s family is faced with even more stress and worry, at a time when they simply don’t need it. You’ve worked hard for your assets! The last thing anyone wants is to leave your loved ones with financial pressures to couple with their emotional distress. What could David have done? The answer is simple: Estate Planning.
Estate Planning: The Possibilities
Through proper Estate Planning, David could have avoided all these complications and made his estate immensely more valuable to his family. Most importantly, David still could have given exclusive control over all the assets to his wife. By simply forming his will in a specific way, David could have left everything in the exclusive control of his wife, though, as far as the tax man is concerned, his wife would only inherit what she chose to.
Does she have the power to take everything that David wanted her to?
Absolutely. Patricia has total control over the entirety of David’s Estate, but in the case above, Patricia could give the land to her daughter exactly as she wanted to, and completely avoided the CGT. In addition, her daughter would not have been slapped with a stamp duty bill, and Patricia’s aged pension would not be affected.
What changed?
Simply that she was empowered as the “controller” of the assets rather than the “owner”. Her position was effectively the same. The only thing that is really different is that she and her family have avoided losing more than $32,000 in unnecessary taxes as well as many thousands in reduced benefits.
It is worth noting that all this was possible in an estate of only one asset, totalling $175,000. Substantially larger benefits may have been achievable with a larger estate involving more beneficiaries.
For example, say David decides to give $5000 to his three grandchildren, aged 14, 16 and 17 as an unconditional gift. Without the appropriate documentation in place, more than 45% of this money would go straight to the tax office. Almost half of the money he had earned, and already paid tax on, would end up with the government, and not with his grandchildren.
Proper Estate Planning, however, could make sure every cent of that money would go where David intended, allowing for a $6000 tax-free threshold as opposed to the conventional threshold of $416 for minors. This would save David’s extended family paying almost $7,500 in additional unnecessary taxes.
The Next Step
Now that you are aware of these unnecessary taxes and the potential burdens which can be placed on those close to you, it’s time to make sure your estate is well planned. You owe it to those you leave behind and to yourself, to make sure that as much of the wealth you’ve worked hard to accumulate throughout your lifetime stays where it belongs; with your loved ones.
For further information or advice regarding estate planning, contact the experienced estates planning team at Rockliffs today.