Article written by Noel Whittaker - Finance Expert and Author
Getting estate planning right is a must for retirees, but many still don’t understand the implications of making the wrong choices, or - even worse - not having a will at all.
Here are four things to think about when drafting your will:
The first thing to look out for is that certain assets do not pass to the beneficiary in terms of the will: special rules apply. Let’s look at the three most important ones.
First, any assets held as joint tenants pass automatically to the other joint tenant on the death of one of them, irrespective of the terms of their will.
Second, the proceeds of an insurance bond are normally paid to the nominated beneficiary - which makes insurance bonds the perfect investment for someone who wants to provide for beneficiaries outside their will.
Third, it is the trustee of your superannuation fund who makes the final decision about where your superannuation goes, unless the deceased has created a binding death benefit nomination.
The next thing applies to anyone receiving the age pension: the difference between the asset cut-off point for a single person, and that for a couple. For a single homeowner the cut-off point is $574,500, whereas for a couple it is $863,500. Many pensioner couples make the mistake of leaving all their assets to each other, which can cause a lot of extra grief when the surviving partner finds they have lost their pension as well as their partner.
In fact, this situation is now so common that I am receiving many emails asking if it is possible to refuse a bequest, so as to preserve the status quo.
Unfortunately, it’s not that simple. Centrelink staff tell me that a bequest from a deceased estate is not assessable by Centrelink until it is received, or able to be received, by the beneficiary. They accept that it may take up to 12 months for an estate to be finalised. The survivor needs to advise Centrelink of the date they receive or are able to receive their bequest.
If the estate has not been finalised after 12 months, Centrelink considers what has caused the delay. If it can be proved that the delay was outside the beneficiary’s control it would still not be assessed at that time. However, if Centrelink believe that the beneficiary has contributed to the delay, the bequest would be regarded as available and therefore assessable.
It is certainly open to any beneficiary to decide that they do not wish to accept a bequest and make appropriate arrangements with the executor of the estate. However, Centrelink would treat the money forgone as a deprived asset, so the surviving spouse would be subject to the deprivation rules for five years.
There is an easy way to avoid all this. If it is likely that you will receive an age pension at some stage, ensure that your will is set up to distribute assets in a way that optimises both tax and Centrelink outcomes. The easy way to do this is to leave part of your assets to your children, or other deserving beneficiaries. The survivor will have the satisfaction of sharing the joy with the other beneficiaries, instead of having to accept all the proceeds and the grief that may go with that. But it’s complex - that’s why a conversation with a good lawyer is essential.
The third thing to look out for when you are drafting your will is the capital gains tax (CGT) status of long-term assets such as property and shares, and whether they are encumbered. The introduction of CGT in 1985, and the propensity to divorce and re-marry, have added complications.
You may own two investment properties of equal value, but if one is pre-CGT, and the other is post-CGT, two beneficiaries may not receive legacies of equal value. Furthermore, if some properties are mortgaged and some are debt free, you will need to spell out whether the beneficiaries are to receive the properties subject to the existing mortgages, or whether the loans are to be paid off by the estate before the properties are transferred.
Finally, investigate having a testamentary trust included in your will. This can give your trustee control of assets that may otherwise pass directly to your children and can enable minor children (perhaps grandchildren) to receive adult tax rates – which can be a great advantage.
Whenever I give a talk on estate planning I tell the sad story of the couple who died leaving an estate of $4 million to be divided equally between their four children. One was a builder on the verge of bankruptcy, which meant the creditors got the money; the second was a gambler, whose legacy went very quickly; the third was a daughter who was having matrimonial problems – most of her legacy went out the door when the partner left. The remaining child was a medical specialist on a high income – the legacy caused her tax problems.
If the money had been left via testamentary trust, it would have been safe from the builders’ creditors, out of the reach of the gambler and the daughter’s husband, and able to be arranged strategically for tax effectiveness.
Think about it. You've spent all your life working for your money. Doesn't it make sense to have some control over where it goes when you are gone? Even Howard Hughes couldn't take it with him.
Noel Whittaker AM CTA FCPA is one of Australia’s leading authorities on personal finance. He has been a weekly contributor to the finance pages of some of Australia’s leading newspapers for more than 30 years and has written 22 books on personal finance. In 2011, he was made a Member of the Order of Australia for his services in education on financial literacy.
Stockland commissioned the Author to compose this article for publication by Stockland for educational purposes only as well as to give you general information and a general understanding of the topic, and not to provide specific advice for your specific circumstances. Stockland recommends you seek independent legal and financial advice before making any decision. The views, information, thoughts, and opinions expressed in the article are solely those of the Author, and are not necessarily held by Stockland.
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