Estate Planning - A Financial Planning Perspective

Estate Planning - A Financial Planning Perspective SWA Financial Planning 16 th May 2012 1

Agenda 1. Power of Attorney and Guardianship 2.Treatment of Super and Pension 3.Wills and Testamentary Trusts 4. Other Estate Planning Tools 5. Practical issues around Death 4 2

General Advice Disclaimer The information in this presentation is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. The information does not constitute specific legal or investment advice and does not include recommendations on any particular securities. Although statements of fact in this presentation have been obtained from and are based upon sources we believe to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this communication constitute our judgement as of the date of this communication and are subject to change without notice. This presentation has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making any decision you should consider, with the assistance of your personal financial adviser, whether it is appropriate in light of your particular investment needs, objectives and financial circumstances. We do not accept any liability for any direct or indirect loss arising from any reliance on the information contained in this presentation. The contents of this document may not be reproduced or distributed in any manner without prior permission. Agenda 1. Power of Attorney and Guardianship 2. Treatment of Super and Pension 3. Wills and Testamentary Trusts 4. Other Estate Planning Tools 5. Practical issues around Death 6 3

Power of Attorney (POA) General Power of Attorney - legal document allowing you to appoint and authorise another person (Attorney) to act on your behalf. Allows Attorney to make financial decisions and transactions on your behalf. Enduring Power of Attorney - continues to be valid if you lose mental capacity. Important A POA can be used only whilst you are still living it is invalid and cannot be used after your death! Who can Grant a Power of Attorney? Must have sufficient mental capacity to understand the scope and implications of granting a POA. What is capacity? Understand the power you are granting to the Attorney, the decisions Attorney can make on your behalf, and that your Attorney can make these decisions without consulting you. Judgement of solicitor at time of making POA. 4

Who should be your Attorney? Carefully consider who you appoint as they are not supervised. Potential for misuse of power! Note you can appoint more than one person jointly, severally or jointly and severally Can appoint more than one attorney or have cascading POA Limitations of POA Cannot create or alter your Will May be restricted with regard to making gifts or renewing Binding Death Nominations on your superannuation and pension funds Unable to act as an officer of a company POA will start immediately unless specified 5

Common uses of POA Attorney is able to sign if you: Are on holidays Are injured in an accident Are ill Are in a nursing home Have low mobility Have lost capacity (eg. dementia) Example Phil and Christine Phil has advanced dementia and now needs full time care (entry cost $200,000). Phil and Christine s assets are as follows: Home $500,000 Joint Phil Christine Savings $25,000 $5,000 Superannuation $260,000 Without an Enduring POA, Christine couldn t sign to withdraw Phil s superannuation, or sign a contract to downsize home and release funds for care costs 6

Example Phil and Christine Fortunately Phil has granted Christine an Enduring POA so Christine uses Phil s superannuation and savings to help pay for costs to enter into aged care facility Within a year, Christine passes away unexpectedly, and Phil s assets are then as follows: Phil Home $500,000 Savings $10,000 Superannuation $40,000 Without an alternative Enduring POA, Phil s adult children cannot assist with managing his finances or selling the vacant family home to provide for Phil s ongoing care costs What if I do not have a POA? Your spouse / family will need to make application to the Court or Guardianship Tribunal to have a Financial Manager appointed. The Financial Manager appointed could be spouse, family member, or Public Trustee. The Protective Commissioner may be required to supervise the ongoing management of your affairs. 7

Enduring Guardianship What is Enduring Guardianship? Legal Document that allows you to decide who will make personal and lifestyle decisions on your behalf when you are no longer able to. Who can appoint an Enduring Guardian? Must have sufficient capacity to understand what they are doing and the powers they are granting. Enduring Guardianship Responsibilities of an Enduring Guardian Must act in your best interests at all times Must take into account your wishes Limitations of Enduring Guardianship Cannot create a Will Cannot manage your finances When does it start? Only commences when you can no longer make decisions for yourself 8

What if I do not have an Enduring Guardian? Generally decisions fall to next of kin If any parties to decision do not agree, may need to apply to Guardianship Tribunal to have a Guardian officially appointed Guardian could be a relative, close friend or the Protective Commissioner. Advanced Health Directive An Advanced Health Directive is a document that can be prepared in addition to your Appointment of Enduring Guardian that allows you to be more specific in stating what treatment you desire 9

Enduring POA Allows for financial decisions and transactions to be made on your behalf Enduring Guardianship Allows for health and lifestyle decisions to be made on your behalf Remember Both documents are Living Documents They are used whilst you are still alive and become invalid upon death Agenda 1. Power of Attorney and Guardian 2. Treatment of Super and Pensions 3. Wills and Testamentary Trusts 4. Other Estate Planning Tools 5. Practical issues around Death 20 10

What happens to Super and Pension funds on death? Often not part of your Estate (ie. not covered by your Will). Trust Deed of the fund determines how and to whom superannuation death benefits may be paid. Superannuation law imposes restrictions on trustees. 21 Who can receive a Super Death Benefit? 1. Dependants at the date of death: Spouse -including de facto partners and same sex partners (subject to the fund deed) Child (any age) including natural, step and adopted children Financial Dependant Interdependant 2. Legal Personal Representative (ie. Estate) 22 11

Important Note: Step Child ATO released interpretative decision in September 2011 which states that a person ceases to be a stepchild for the purposes of being a dependant when the legal marriage of the natural parent to the member ends. ie. upon death of the natural parent or divorce. 23 Who decides who will receive a Super Death Benefit? 4 methods: 1. Reversionary nominated at commencement of pension. 2. Trustee Discretion If no valid Binding Death Nomination trustee of the super/pension fund decides who gets the benefit and how much. 24 12

Who decides who will receive a Super Death Benefit? 3. Deed Default Governing rules of the fund outline how death benefits are paid. - For example fund trust deed may state that benefits are automatically paid to spouse or to children or to the estate. 4. Binding Death Nominations (BDN s) Allow you (rather than the trustee of the super fund) to determine who will receive your death benefits. 25 Binding Death Nominations Trustee is bound to pay to the beneficiaries nominated as long as nomination is: Allowed for under the terms of the trust deed; Properly completed and is still in effect (eg. it has not lapsed); Is made in favour of beneficiaries who are still dependants at the date of death (eg. spouse, children of any age, financial dependent, interdependent), or in favour of your Estate 26 13

2 types of Binding Death Nominations 1. Lapsing Nominations Valid for 3 years only so must be updated. 2. Non Lapsing Nominations Valid indefinitely. Only allowed in some fund deeds and must meet trustee requirements. 27 Some examples of Nominations offered? Fund Colonial First State Macquarie MLC Masterkey Perpetual Wealth Focus Russell BHP BlueScope First State State Super Auscoal Super Auscoal Pension Self Managed Super Fund Nomination Available Non Lapsing BDN Non Lapsing BDN Non Lapsing BDN Lapsing BDN Lapsing BDN Lapsing BDN Lapsing BDN Lapsing BDN Deed Default Lapsing BDN Deed Default / Lapsing BDN??? - Depends on Trust Deed 28 14

Important Note: Lapsing Nominations Consider what the implications are if you are unable to renew the nomination when it expires (eg. if you no longer have capacity)? Who is your Attorney (under POA) and can they renew the nomination? If Attorney is the beneficiary on the nomination they may not be able to renew. 29 Example Bob and Jean Bob has appointed his wife as his POA with a basic Enduring POA. Bob now has dementia. Jean is nominated as the beneficiary of Bob s pension fund but the BDN has lapsed. Jean may not be able to renew as she will be conferring a benefit on herself. If Bob dies may be subject to trustee discretion as to how benefit paid or may pay under default to Estate. 30 15

Example - Bob and Jean Possible Solution: Consider clause in POA that gives express power to renew or update BDN (could be very specific that can only renew not change) If more than one attorney they may be able to renew in favour of Jean. Need to be very careful so should seek legal advice or talk to your adviser at SWA. 31 How are Super Death Benefits Paid? Can be paid as a lump sum or as a pension. Determined by the Trust Deed of the fund. Law restricts payment of pensions to child beneficiaries. Child must be: under 18;or between 18 and 25 and financially dependent; or disabled. Payments to estate are lump sum. Trustee usually takes into account preferences of the beneficiary when determining payment method. 32 16

How are Death Benefits Taxed? Definition of dependant for tax differs from super definition of who can be paid the benefit: Beneficiary Spouse Child under age 18 Child aged 18 or over Financial dependant Interdependent Legal Personal Representative (Estate) Tax Dependant? Yes Yes No Yes Yes Only to the extent that one or more of the tax dependants listed above may be expected to benefit from the estate 33 How are Death Benefits Taxed? Tax Dependant -100% tax-free Non Tax Dependant Component Tax Free Tax Payable on Lump Sum Tax-free Taxable Taxed Element: 16.5% Untaxed element: 31.5% 34 17

Example Elaine and Bill Elaine (age 63) is married to Bill (age 68). Bill nominates Elaine as beneficiary of his super/pension funds via a BDN. 100% tax free if taken as lump sum. Option to continue as death benefit pensions tax free as Elaine and Bill over 60. Possible Anti-Detriment Payment if taken as a lump sum? 35 Example Jim Jim is divorced and leaves his super ($500,000) to his two children (50/50) under a BDN. Katie age 22 and full-time student living at home with Jim. Sam age 25 working full-time. 36 18

Example Jim Katie s benefit is 100% tax free as she is a financial dependent of Jim receives $250,000 Sam s benefit will be subject to tax as follows: Component Amount Tax Payable Tax Free $100,000 Nil Taxable (Taxed Element) Possible Anti-Detriment Benefit? 37 $150,000 @ 16.5% = $24,750 Net Death Benefit $225,250 What is an Anti-Detriment Payment? Additional lump sum amount paid by super fund on death as compensation for the tax deducted from contributions. Payable to eligible beneficiaries: spouse or former spouse; a child of any age, or an Estate to the extent that the ultimate beneficiaries are your spouse, former spouse or children (unless Testamentary Trust has other beneficiaries) 38 19

Anti-Detriment Payments Can be paid whether the deceased was in the accumulation (super) or income stream phase (eg account based pension). Only payable if death benefit taken as a lump sum. Not payable by all funds. Can be difficult for Self Managed Super Funds to pay. 39 Example - Jim Jim left super/pension ($500,000) to his beneficiaries Katie - Student - age 22 Sam - Working - age 25 Both Katie and Sam are eligible for Anti Detriment payments. 40 20

Example - Jim Component Katie s Benefit Sam s Benefit Gross Death Benefit - Tax Free 40% - Taxable 60% $250,000 $250,000 Anti- Detriment Payment $21,215 $21,215 Total Benefit $271,215 $271,215 Tax Payable $Nil $26,850 Net Benefit Payable $271,215 $244,365 41 Lump Sum versus Pension Death Benefit Which is Best?? SWA consider Financial Situation Goals and Objectives Amount of Anti-Detriment Payment Ongoing Tax Implications Ongoing Centrelink Implications Ability of beneficiary to re-contribute to Super 42 21

Example Elaine and Bill Elaine Age 63 Bill passes away with $500,000 in pension funds* Elaine has other investments that generate taxable income of $29,500 Elaine has to decide whether to continue the pension or take a lump sum payment * Assumes 80% taxable component, eligible service period start date 1/1/1980 43 Example Elaine and Bill Lump Sum $500,000 Anti-detriment payment $56,300 Elaine under 65 - can contribute up to $600,000* back into pension funds where internal earnings and pension payments will be tax free SWA would advise Elaine to take the payment as lump sum * Over two financial years using non-concessional contribution cap of $150,000 per financial year with bring forward rule (two future financial years) triggered. 44 22

Example Sally and Jack Sally Age 68, good health and not working Jack passes away with $500,000 in pension funds* Sally has other investments that generate taxable income of $29,500 Sally has to decide whether to continue the pension or take a lump sum payment * Assumes 80% taxable component, eligible service period start date 1/1/1980 45 Example Sally and Jack Lump Sum $500,000 Anti-detriment payment $56,300 Given age can not contribute to superannuation If lump sum taken and invested in a term deposit paying 6% pa increased tax liability of $12,869 pa SWA would likely advise Sally to continue the pension Note: Anti-detriment amount payable to Sally and Jack s adult children when Sally dies. 46 23

Example Mike and Sue Mike and Sue both age 67 are in a 2nd marriage and have adult children from previous relationships. Mike and Sue share their cost of living but hold some assets individually. Mike is concerned who he should nominate as beneficiary when he completes his BDN s. 47 Who does Mike leave super to? 1. Sue Tax-free Pension or Lump Sum + Anti-Detriment 2. Adult Kids Children will receive lump sum and likely be subject to tax on taxable component at 16.5%. 3. Estate Testamentary Trust to provide for Sue and also ensure that remaining benefit is left to his children Risks: - Sue spends all money - Sue remarries and lists new partner as beneficiary - Sue lists her own children as beneficiaries (excluding Mike s children) Children will receive Anti-Detriment Payment. Sue may have insufficient funds to live? May be eligible for Anti-Detriment Benefit (depends on ultimate beneficiary entitlements). 48 24

Example - June June is Widowed and is unsure whether she should nominate her adult children as beneficiaries on her BDN or her estate? Make sure children are not step children who are not an eligible superannuation dependant under ATO ruling. 49 Who does June leave super to? Children Estate Funds will not form part of Estate so may reduce cost. Distribution to children will be more timely. Children eligible for Anti-Detriment Benefit. Children subject to tax at 16.5% on taxable component. May offer some protection from Estate challenges. Can be distributed to any beneficiary - not just super dependant. May be eligible for Anti-Detriment Benefit (depends on ultimate beneficiary entitlements). Estate subject to tax at 15% on taxable component (no Medicare Levy). May offer some asset protection and tax benefits if Testamentary Trust included in Will. 50 25

Death Benefit can be paid to the following Summary Dependant for Tax purposes? Eligible for Anti-Detriment Payment? Spouse Yes Yes Child under age 18 Yes Yes Child aged 18 or over No Yes Financial dependant Yes No, unless a former spouse Interdependent Yes No, unless a former spouse Legal Personal Representative (Estate) Only to the extent that one or more of the dependants listed above may be expected to benefit from the estate Only to the extent that a spouse, former spouse or child of the deceased can reasonably be expected to benefit from the estate 51 Important Super/pensions are a major asset of many. Making BDN s and keeping them up to date can be as important as having an up to date Will. When making BDN s must consider your Will for consistency and equity. 52 26

How do SWA help? SWA Financial Planning monitor when Lapsing BDN s expire and send you replacement nominations. Your Annual Review includes a table showing what nominations you have in place, who your beneficiary is and when they expire. Where available we suggest Non Lapsing BDN s. 53 Agenda 1. Power of Attorney and Guardian 2. Treatment of Super and Pensions 3. Wills and Testamentary Trusts 4. Other Estate Planning Tools 5. Practical issues around Death 54 27

Why Do You Need A Will? Outline your wishes for distribution of your assets after you die. Nominates the person you wish to appoint as executor and your beneficiaries. Without a Will assets are divided according to law which may not be in line with your wishes. Who Can Make A Will? Must be 18 years of age. Must have sufficient capacity: To understand that you are making a Will. Must understand the property that you have and the potential claims of your beneficiaries or any people excluded from your Will. 28

Laws of Intestacy (Dying Without A Will) Family Circumstances Spouse and no children Spouse and children of the relationship Spouse and children where at least one child is from another relationship Who Receives 100% to surviving spouse 100% to surviving spouse Spouse receives - First $350,000 - Personal effects - Half of any remainder of the estate Other half of remainder distributed equally among all children of all relationships Children and no spouse Other relatives if no surviving spouse or children Estate divided equally among all children Estate distributed based on order of priority: a) Parents b) Siblings c) Grandparents d) Aunts and Uncles e) First Cousins If there can be no distribution to cousins the Estate passes in full to the NSW Government Example Michael Michael married to Betty for 42 years. 3 children together. Michael has a son from another relationship. Michael has assets worth $900,000 (including family home in his name valued at $600,000). Michael has not made a Will. 58 29

Example Michael Distribution of Estate Betty First $350,000 plus 50% of remainder plus Personal Effects $625,000 plus personal effects 4 Children 50% of amount above $350,000 - shared equally $68,750 each child Note: If Betty keeps the house she will have only $25,000 in financial assets to supplement her Centrelink payment for the rest of her life! Wills Understanding The Roles 1. Testator the person making the Will. 2. Executor the person responsible for administering your Will after death (becomes Trustee upon the Grant of Probate). should be someone who is trustworthy, capable and available and who is likely to survive you. 3. Beneficiaries those who will receive benefit from your estate. TIP: Ensure your Executor/Beneficiaries know where your Will is located. SWA can record on your file 30

Important to Review your Will Will should be reviewed on a regular basis. You should ensure that your nominated executors are appropriate, still living and are still willing and able to act. You should ensure that your beneficiaries are current and that there are no special circumstances that apply to your beneficiaries that should be taken into account (eg addiction, marital or financial problems). When Should You Review Your Will? Marriage breakdown Getting married Death of a partner Problems with one of your beneficiaries You need to change your executor/s You wish to change your instructions You make a large gift/loan to your children 31

Example David David was divorced and was living happily with a new partner. He had 3 adult children with large mortgages and young children. He owned his home (value $500,000). Other financial assets of approximately $300,000. Example David 8 years before he died David made a free Will. He provided the following instructions: Gift of $100,000 to Charity $100,000 as a lump sum to his new partner His partner was granted life tenancy in his home Residual of estate split between his 3 children 32

Example David At time of death David had $50,000 of financial investments remaining. Problem: - Estate had an obligation to pay $200,000 to specified beneficiaries Not enough funds to make gifts Children as residual beneficiaries were invoiced $150,000 for shortfall They had no capacity to pay $50,000 each Partner upset + children put in untenable position What assets are distributed by your Will? Asset Type Estate Assets Non Estate Assets Real estate If in individual names or held jointly as Tenants-in-Common If held under joint tenancy Bank accounts If held individually If joint accounts Shares & Managed Funds Superannuation Personal Property (personal effects, car etc) If held individually Where Estate has been nominated or trustee bound to pay to Estate If held individually If joint accounts Valid nomination to a dependant If held jointly 33

What is a Testamentary Trust? A trust established by your Will upon death. Trust is funded from Estate Assets. Many forms of Trust can be tailor made. Ideal succession vehicle for people who have significant assets, a complex family situation or at risk beneficiaries. Complex Family and At Risk Beneficiaries Complex Family Situation may include: Second or more marriage Children from previous relationships At Risk Beneficiaries Drug, alcohol, gambling dependencies 68 Mental illness or disability Business owners Occupations at risk of being sued eg. professionals 34

Advantages of a Testamentary Trust The two main advantages are: Income Splitting tax effective passing of wealth. Asset Protection protection of inheritance from claims. These advantages arise from: Flexibility as to how and when assets are distributed; and Separation of ownership and entitlement. Advantages Income Splitting Minimise tax paid on distributions to beneficiaries. Split income to beneficiaries on low marginal rates of tax. Example:- Non working spouse; Children or Grandchildren Distributions to children from a Testamentary Trust are taxed at adult tax rates instead of minor penalty tax rates. Tax free threshold of $18,200 from 1 July 2012 Ordinarily minors have a tax free threshold of $416, and a tax rate of 45% to 66%. 35

Example Amelia Amelia is 75 with $1.5 million in assets. 2 adult children, Marcus and Donna. Marcus is married to Michelle and has 2 children Zac age 10 and Ava age 7. Donna is single. Both children are debt free. Marcus and Donna are both on 38.5% marginal rate of tax due to their work income. Michelle is a stay at home Mum and does not have any taxable income. Example Amelia Amelia Marcus Trust $750,000 Donna s Trust $750,000 Marcus Michelle Zac Ava Donna 36

Example - Amelia Marcus Trust- $45,000 Income Donna s Trust - $45,000 Income Beneficiary Amount of Tax Beneficiary Amount of Tax Distribution Payable Distribution Payable Michelle $15,000 $Nil Donna $45,000 $17,325 Zac $15,000 $Nil Ava $15,000 $Nil Marcus can save $17,325 pa in tax. 73 Advantages Asset Protection Protection of inheritance from claims: By Creditors for beneficiaries in business or occupations at risk of being sued; On Divorce upon breakdown of beneficiaries relationship. Safeguard inheritance for beneficiaries who may be spendthrift or have addictions eg. drugs, alcohol, gambling. Protection for minor children, beneficiaries with mental illness or disabilities. 74 37

Example Ruth Ruth aged 76 passed away. Her Will leaves her entire estate of $800,000 to her only son Bill. Bill is a problem gambler and has accrued a debt of $50,000. Ruth s Will sets up a Testamentary Trust. Example Ruth How Bill s inheritance is protected: No day to day control (Ruth appoints an alternate trustee) Trustee pays Bill s rent and bills and provides monthly income for his cost of living No large lump sums available so Bill is unable to gamble away his inheritance. Ruth is at peace as she knows that Bill will not end up homeless or hungry. 38

Example Jimmy Jimmy is aged 65 His only daughter Marcy is a lawyer running her own practice. Jimmy makes a Will directing that his estate of $1 million be placed in trust for Marcy. Example Jimmy How Marcy s inheritance is protected: Protection from third parties should Marcy be sued by a client or should her practice fail and the business owe creditors. The ownership of the assets remains in the trust so cannot be claimed. Marcy may be able to benefit from splitting income with her spouse and kids in order to save tax. Marcy s trust may be more discretionary in nature and may provide the flexibility to access capital. 39

Example - Simone Simone aged 66 cares for her only daughter Celia aged 40. Celia was born with a disability and requires full time care. Simone s Will provides that her entire estate of $850,000 is to be held in trust for Celia. Special Disability Trust which receives concessional treatment by Centrelink. Trustee acts as Celia s financial manager and has the flexibility to use income and capital to meet Celia s ongoing care and accommodation needs as they arise. Example Ken and Marion Second marriage Both have adult children Family home in joint names Assets owned as follows: Ken Marion Joint Motor Vehicles $20,000 $10,000 Savings $70,000 $7,000 $20,000 Superannuation $1,200,000 $35,000 Ken would like to provide a reasonable inheritance for his children, but he wants to provide for Marion during her lifetime as well. 40

Example Ken and Marion Considerations for Ken: Asset Current Arrangement Options to consider? House Will transfer automatically to Marion Change to Tenants in Common so 50% Marion and 50% Estate and/or life tenancy Savings Will form part of estate Transfer to joint names and balance will revert to Marion Superannuation Depends on current death nominations 1. Nominate LPR (Estate) and use Testamentary trust to control distribution 2. Nominate children directly 3. Nominate Marion directly 4. Combination Example Ken and Marion Things to watch: Transfer of super to adult kids not as tax effective as transfer to Marion. Marion or Children can lodge a Family Provision Claim if insufficient provision made for them. 41

Example Ken and Marion Ken decides to leave the house in joint names. Ken transfers his savings account to joint names so that these funds will automatically transfer to Marion. Ken decides that would prefer to forego the tax concessions associated with superannuation pensions and direct his Super Death Benefit to his Estate. He complete BDN s on his super and pension funds nominating his Legal Personal Representative (ie. his Estate). Ken updates his Will to include a Testamentary Trust. Example Ken and Marion As only beneficiaries of Ken s Estate are his spouse and his kids the Estate should be eligible for Anti Detriment payment. (Note: this may not be the case if Grandchildren nominated as potential beneficiaries of Testamentary Trust). 84 42

Example Ken and Marion Ken s Will states that his two children will each receive an immediate capital distribution of $150,000 ie. $300,000. Balance of Estate to be held in trust. He specifies that Marion can access income from the trust. He specifies also limited circumstances when capital can be drawn eg. house maintenance. Ken appoints his favourite nephew who is an accountant to control the trust to avoid disputes. 85 Agenda 1. Power of Attorney and Guardian 2. Treatment of Super and Pensions 3. Wills and Testamentary Trusts 4. Other Estate Planning Tools 5. Practical Issues of Death 86 43

Other Estate Planning Tools a) Life Tenancy b) Joint Tenants versus Tenants in Common c) Using Binding Financial Agreements d) Loans and Gifts to Children Life Tenancy Provides right for someone to reside in a property under specific terms. Ownership can be retained in the Estate or transferred to beneficiaries. Can specify cease date life tenant s death or a specified event, eg: marriage Common uses second relationships Where family member has lived with long term (eg. single adult child) 44

Example - Margaret Margaret has 3 daughters Janine lives with and now cares for Margaret Margaret has two other daughters Ellie and Barb Example Margaret Margaret s Will gives Janine life tenancy. Will gives Janine the ability to sell the property and relocate. Any surplus to be distributed in accordance with the residual terms of Will (split evenly between 3 beneficiaries) Property to be distributed under the terms of the Will (eg. Evenly to 3 beneficiaries) in the event of Janine s death or should she marry 90 45

Joint Tenants vs Tenants in Common Joint Tenants automatically reverts to surviving joint holder (does not pass through your estate) Tenants in Common allows your share of an asset to pass to your estate and be distributed in accordance with your Will. Transferring ownership to Tenants in Common can see your share bequeathed to your children, whilst your spouse owns their share independently. Can be used in conjunction with life tenancy. Example Ian and Judy Second marriage, both have adult children Both sold own homes to purchase a new home together On Ian s death: Ownership Structure Who lives in the house? Who owns the house? Joint Tenants Tenants in Common - 50/50 (with Life Tenancy in Ian s Will) Judy Judy Judy 100% Judy 50% Ian s Estate 50% 46

Transfer of Main Residence Can transfer home from Joint Tenants to Tenants in Common in equal shares (ie. 50/50) or vice versa without stamp duty. Where property is in one name can transfer into joint names with spouse or defacto or Tenants in Common in equal shares (50/50) without stamp duty. 93 Example Ken and Marion Second marriage, both have adult children Assets owned as follows: Ken Marion Joint House $650,000 Motor Vehicles $20,000 $10,000 Savings $70,000 $7,000 $20,000 Superannuation $1,200,000 $35,000 Marion very little funds but Ken wants to ensure she is taken care of. 47

Example Ken and Marion Considerations for Ken: Asset House Current Arrangement Will form part of Ken s estate and Marion may need to vacate Options to consider? 1. Life Tenancy to Marion (owned 100% by estate) 2. Joint Tenants (owned 100% by Marion) 3. Tenants in common with Life Tenancy (50/50 Marion and estate) Transfers will not incur stamp duty. Binding Financial Agreements (BFAs) Mechanism to reduce uncertainty and protect assets Mutual agreement as to split of assets Each party must receive their own advice Important: Can be made before, during or after marriage or defacto relationship 48

When should Binding Financial Agreements be used? Second and subsequent relationships Protects assets of both parties and their respective families Particularly if asset imbalance coming into relationship Often used in conjunction with Life Tenancy and Testamentary Trust arrangements If particularly concerned about family wealth protection, consider clause for children to have BFA in place in order to access capital of Testamentary Trust Example Bob and Betty Bob has 2 children and Betty has 2 children Both come into the relationship with financial independence and want to ensure assets are protected for their respective children Bob Betty Main Residence $400,000 Other property $350,000 Savings $70,000 $400,000 Superannuation $800,000 $600,000 Motor Vehicles $30,000 $30,000 49

Example Bob and Betty Obtain Binding Financial Agreement detailing what assets they are bringing to the relationship and how they will be split in the event of relationship breakdown Update Superannuation BDNs to pay funds to respective children or Estate Update Wills Bob provides main residence Life Tenancy for Betty Each providing part of Estate to each other, with the residual to their own children in Testamentary Trust Loans / Gifts to Children Important to receive legal advice and document loans to family members Documented loans secured against property may provide greater asset protection Need to consider Centrelink issues certain gifts allowable and may be disregarded by Centrelink, some gifts assessable as asset and income test for 5 years, loans remain an asset of the lender 50

Loans to Children Loans may form Estate assets and may be dealt with in your Will. It may be important that your Will has specific clauses to take into account loans Ensure clause that the loan is callable on the occurrence of certain events to prevent against future relationship breakdowns of children. How do I approach my partner and family with these issues? Many people are reluctant to discuss these issues with new partners and children Better to leave world knowing you have addressed the issues and treated your loved ones as equitably as you can 102 51

Agenda 1. Power of Attorney and Guardian 2. Treatment of Super and Pensions 3. Wills and Testamentary Trusts 4. Other Estate Planning Tools 5. Practical Issues around Death 103 Practical Issues around Death 1. Funeral Expenses 2. Centrelink 3. Legal 4. SWA 104 52

Funeral Expenses Check for a funeral bond or if pre-paid Upon death individually held accounts will be frozen - however funds may be released to pay for funeral expenses Provide invoice to financial institution and cheque will be issued Consider maintaining sufficient cash reserves in joint accounts or in each person s name 105 Centrelink Most funeral directors will notify Centrelink Surviving spouse/partner immediately assessed under single thresholds and payment based on single rate For example: Age Pension (home-owners): Single Couple Full Rate $755.50 pf $569.50 pf each Asset Test up to $690,500 up to $1,024,500 Income Test up to $1,661 pf up to $2,542 pf 106 53

Bereavement Payment Eligibility automatically calculated once Centrelink notified Additional lump sum payable to: Surviving spouse/partner (where both in receipt of payments) Carer Payment recipient when the person being cared for dies 107 Bereavement Payment Eligibility based on what ordinarily would have been received (as a couple) less actual single entitlement up to 14 weeks Eg: Death of an Age Pensioner (on full rate). Surviving spouse is an Age Pensioner entitled to the full rate: Age Pension before Age Pension after Difference $1,139 pf combined $756 pf $383 pf Estimated Bereavement Payment $2,681 108 54

Assessable Assets Assets of deceased (including superannuation and pensions) not assessable until transferred Centrelink allow up to 12 months to settle the estate but cannot delay in order to receive additional payments 109 Example Tom and Suzy Tom aged 88 has passed away Suzy aged 85 Total assets of $590,000 at date of death Receiving age pension of $326 per fn each Suzy sole beneficiary of estate Asset Tom Suzy Bank Accounts* $25,000 $25,000 Shares $70,000 $30,000 Account Based Pensions Lifestyle Assets* nil $400,000 $20,000 $20,000 Total $115,000 $475,000 * These assets are held jointly 110 55

Example Tom and Suzy Centrelink Implications Age Pension Suzy (once Centrelink notified) Bereavement Payment Age Pension Suzy (once assets transferred) Amount $323 per fortnight $2,303 one-off lump sum $151 per fortnight 111 Important Legal Documents Death Certificate (usually issued 2 6 weeks after date of death) Last Will and Testament (Will) who is the Legal Personal Representative (Executor) Probate (if required) 112 56

Probate A Court Order confirming the Will is valid and that the Executor can administer Generally required if any single estate asset exceeds $25,000 All estate assets must be listed in the application 113 Probate Fees Originating Fee $926 Plus Filing Fee based on assets: Between $50,000 and $250,000 $711 Between $250,000 and $500,000 $898 Between $500,000 and $1,000,000 $1,355 $1,000,000 or more $1,803 Solicitors costs payable in addition to these fees 114 57

Should Probate be Avoided? May be appropriate only in certain circumstances If appropriate minimise estate assets: Savings / Term Deposits in joint names 115 Binding Death Nominations on superannuation and/or pension accounts Consider legal and stamp duty costs versus Probate costs Must consider tax planning whilst alive! Example Mr & Mrs King Mr and Mrs King have $200,000 in term deposits and ask should they place into joint names in order to avoid probate should one of them pass away? Mr King other taxable income $40,000 Mrs King other taxable income $12,000 116 58

Example Mr & Mrs King If held jointly additional tax as follows: Mr King $2,130 per year Mrs King $Nil If held in Mrs King s name only additional tax as follows: Mr King $Nil Mrs King $Nil Additional ongoing tax liability of $2,130 per annum versus one off Probate fee of $1,637* *assumes Mrs King s estate between $50,000 and $250,000, no solicitors costs included 117 Taxation Obligations Estate may require a tax file number if assets held for some time before being distributed Executor is responsible for lodging the estate tax return Executor is responsible for lodging the final taxation return of the deceased person 59

SWA SWA generally advised via the Illawarra Mercury, family or friends Multiple Certified copies of Death Certificate and Will required initially Must consider: Centrelink eligibility Tax planning Anti-detriment payments 119 Surviving Spouse / Partner SWA will work with surviving spouse/partner (generally the Executor) Advise and coordinate investment fund paperwork Efficient and appropriate transfer of assets Minimise disruption to cash flow 120 60

Single Person Executor / Solicitor will provide instructions Assets can be cashed in or transferred inspecie to beneficiaries SWA can provide advice to beneficiaries SWA can assist Executor / Solicitor with investment portfolio assets 121 Next steps Do any of these situations apply to you? Talk to your SWA Financial Planner about your situation if you believe what you have in place now may not be sufficient for your circumstances Complete questionnaire in handout kits and return to SWA Also remember to inform us of any significant health issues if they arise 122 61

Questions? 123 62