Having a will is extremely important. However, an estate plan is just as crucial as it is an extension of your will. Estate planning helps ensure that your assets are distributed in the most effective matter and without adverse tax consequences for your beneficiaries amongst many other things.
As a small business accountant it's our role to ensure clients have planned ahead in the event of an unforeseen event occurring. As trusted advisors, all small business accountants need to make sure these areas have been discussed and options considered with their clients as they can make a massive financial difference if planned ahead carefully.
There are many good reasons to have an estate plan and here are the top ones below.
Figure 1: Dying without a plan could see those left behind needing a defib as well!
1. avoid family anxiety & hardship
You won't want to add to your family's stress if you don't have your affairs in order when you pass. Making sure you have planned ahead will allow you to discuss these plans now rather than after you have gone and will offer some peace of mind if the worst occurs.
Part of this is also reviewing your insurance coverage and checking what necessary cover you require to pay off any debt etc should you pass away.
2. ensure your hard earned assets end up in the right hands
In Australia, if you die without a will you will be known as what is dying 'intestate'. An administrator will be appointed by the courts who will decide where your assets should go and even who should look after your children.
Generally they will follow a pre-determined formula which may not work in accordance with your wishes. This could also result in a delay in settling your estate.
Studies show that 45% of Australians don't have a will so if you don't have one it's time to join the 55%.
Figure 2: Don't pay the ferryman until you have had your estate planning completed!
3. minimise tax on your loved ones' inheritance
The disposal of your assets in accordance with your will may have tax consequences including capital gains tax.
An estate plan can be tax effective by:
- ensuring the proceeds of an insurance policy paid from a superannuation fund is paid to dependants so they are tax free;
- distributing an asset (rather than proceeds of an asset sold) to a beneficiary to defer any CGT liability;
- using a discretionary trust to minimise tax a beneficiary pays on receipt of an inheritance;
- using testamentary trusts to provide an inheritance to young children tax effectively to avoid minors' penalty tax.
4. avoid tax 'bombs'
An asset you leave to one child maybe subject to capital gains tax while one asset to another child maybe exempt.
This could mean that the net proceeds are very different to what you planned each child to have. You should also consider the likely tax position of each beneficiary at the time the distribution will be made to help calculate the net position for each child after tax.
5. protect assets
Different structures offer different benefits. For example, you can help minimise the risk that some of your estate might be lost in the event of divorce or bankruptcy with your children/beneficiaries.
6. your wishes such as medical treatment
You may want to give additional direction to your power of attorney in the event you become extremely ill and can't make decisions for yourself. This can include wishes for your medical treatment and funeral arrangements.
Nobody likes to think of the worst but it's a fact of life that unexpected things do happen.
If you died or became permanently incapicitated tomorrow where would this leave those close to you who have been left behind?