Want to keep your assets in the right hands and secure your family’s future? Here are nine things you need to know.
For better or worse, the circumstances of our lives are always changing. It’s far too easy for our assets to become vulnerable, placing our finances — and our family’s future — at risk.
So, how can we ensure that we keep our assets in the right hands — even when we start a new job, business or relationship, and our circumstances change?
The consequences of a faulty will (or any other estate planning document) can be disastrous, which is why our friends at Merthyr Law have come up with this list of nine things you should know — and nine ways their Family Safe Program can help you keep your affairs under control.
Your spouse’s new partner could have the potential to claim over 50 per cent of what you leave for your loved ones, even if they don’t marry
The problem: Under a typical will, one spouse leaves everything to the surviving spouse — but no matter how much you leave them, there is a genuine possibility that someone else could eventually take it away.
Whether you pass away in your 30s, your 50s or even your 70s, your surviving spouse will quite often form a new relationship in the following years.
This should be a good thing. One would hope that a new partner would bring new happiness to your spouse — but the wrong person could have the potential to claim over 50 per cent of what you left for your loved ones, even if they don’t get married. Sadly, this happens all too regularly.
The solution: The establishment of a Family Safe Trust under your will ring-fences your inheritance to preserve it for your spouse, your children and grandchildren.
The Family Court’s powers have expanded considerably over time, and there is really no such thing as a ‘bulletproof’ will. Merthyr Law can, however, help keep your family safe by keeping you and your family abreast of the latest powers of the Family Court and implementing suitable safeguards into your Family Safe Trust documentation.
By leaving your legacy via a Family Safe Trust, it is preserved for your spouse, children and grandchildren. It specifically excludes your spouse’s new partner’s children or any further children from taking any benefit from your estate.
This way, your legacy won’t end up with people you don’t even know.
It no longer matters to the Family Court if couples are married
The problem: Parents are particularly concerned that their children, if they were to receive an in their 20s, for example, might lose it through financial misadventure, divorce or separation.
Property settlements can now be sought with respect to a breakdown in any genuine domestic relationship that bares a child or survives two years. This can include property left to the parties by way of inheritance.
Historically, parents left property to children via Family Safe Trusts to safeguard against their child’s divorce. The legacies you left for the benefit of your children were not a vulnerable asset over which the Family Court could make orders. However, recent cases continue to weaken this protection.
The solution: To ensure that the assets of a Family Safe Trust are not considered by the Family Court to be an asset over which they can make orders, either the trusts must be set up such that your children don’t have control over “their trust”, or your children must enter into binding financial agreements with their spouses or partners.
The inheritance you leave your spouse or children can be claimed by creditors
The problem: While it seems quite simple that if you leave a gift to your child, it is intended only for them, a ‘standard’ will would not protect that gift from being immediately taken away if your child is insolvent or enters into bankruptcy.
That inheritance becomes the property of your child and is lost to their creditors, meaning that your child will miss out on any benefit. The same applies to your spouse.
For example, if you leave $300,000 to your son under a ‘standard’ will and he is bankrupt at the time (bankruptcies extend for three years, typically), then that money goes straight to his trustee in bankruptcy and is available for dispersal amongst his creditors. He isn’t entitled to retain that money, even though it came from his parents upon their death.
Merthyr Law sees many business owners who have carefully engineered their own affairs to minimise wealth in their own name, only to find that their careful asset protection planning comes unstuck when their spouse or their parents pass away.
The solution: To ensure the legacy you leave your child or at-risk spouse goes to them and cannot be touched by creditors, you should consider a Family Safe Trust in your will. You might also wish to talk to your parents about updating their wills.
Building wealth is as much about protecting what you’ve amassed as it is creating it
The problem: If business owners and professionals weren’t able to limit their liability, they would be less likely to continue in that business or profession.
Trusts offer good asset protection from claims by unsecured creditors. However, transferring your home to a trust is prohibitively expensive in stamp duty and the loss of the capital gains tax main residence exemption.
The solution: As part of the Family Safe Program, Merthyr Law offers the Family Safe Gift and Loan Back strategy.
This is a process where, without transferring the title to your home and other investments in your name, you are able to ensure your equity in your assets is protected against creditors.
Even after you pass away, the tax man is waiting
The problem: As the saying goes, there are two certainties in life — death and taxes.
You may have paid taxes all your life, but after you have passed away and left a legacy for your children, the tax man may well be waiting for a bit more.
Under a ‘standard’ will, you leave your estate directly to your children. If the estate comprises a rental property or share portfolio, then that income is paid to your child. If your child is already on a relatively high marginal tax rate, then they will pay tax on that additional income at their own high marginal rate.
The solution: If you constituted a Family Safe Trust under your will, then your surviving spouse or your children would have the discretion to contribute that income to your infant children or grandchildren, rather than to themselves.
Why is that important? Because if your children or grandchildren have no other income, $18,000 per infant child is tax-free.
Therefore, if you have four infant children or grandchildren, up to $72,000 in income could be tax-free and used to pay for the education, textbooks, uniforms, shelter and general provision of your grandchildren (or your children if they are under 18). That’s a benefit for each and every year until your infant children or grandchildren are earning their own income.
This can be a real financial bonus for your children. Income from your Family Safe Trust can effectively pay school fees and other expenses with tax-free dollars, instead of after-tax dollars.
If you become incapacitated, your family may have to apply to the Court to make decisions on your behalf
The problem: Have you considered what will happen while you’re still alive if you are incapacitated through injury, dementia or Alzheimer’s?
Your family will need to make decisions on your behalf to take care of you. Your family may have to apply to Court and go through a lengthy and often expensive legal process to be granted the legal right to help you.
In addition, if you are a trustee of a Self-Managed Superannuation Fund (SMSF) and you are incapacitated and do not have a person willing to step into your shoes under a validly appointed Enduring Power of Attorney (EPA), your superannuation fund could become non-complying. This means that almost half of your retirement savings risk being lost to tax.
The solution: As part of the Family Safe Program, Merthyr Law recommend you enter into an EPA during your lifetime which deals with not only your financial matters, but also health matters.
These ‘living wills’ enable you to nominate a family member or friend you trust to make decisions on your behalf regarding your SMSF, financial matters and your medical treatment. If you become incapacitated, would you want to put your family through the burden of applying to Court, or would you prefer to have this document in place?
Typically, mum and dad will give a power of attorney to each other and then, upon the incapacity of both of them, they would give power of attorney to their children. These documents may operate from the time they are executed until the time of death and can be changed or updated as circumstances require.
Speculative claims by estranged children demanding a greater share of their parents’ estate are on the rise
The problem: Estate litigation is the new frontier where many former personal injuries lawyers have moved for ‘easy money’.
More and more we are seeing speculative claims by estranged children demanding a greater share of their parents’ estate. All too often, executors are grudgingly forced to meet these claims (and override the clear wishes of the will maker) in order to avoid the estate being eroded through legal fees.
The solution: Did you know that in Queensland, a family provision claim cannot be made against assets held in trusts or superannuation, but only against a person’s estate?
As a vital component of a Family Safe Program, Merthyr Law can help will makers avoid or minimise claims by estranged partners, children or stepchildren.
The will maker’s claims can be engineered to minimise estate assets over which claims can be made, while at the same time maximising trust and related assets where control can be given to the preferred beneficiaries without risk of challenge. Careful planning can help to save money from futile legal fights.
Merthyr’s lawyers are also experienced at helping executors efficiently dismiss frivolous claims by greedy beneficiaries.
Your partner might walk away with up to half of your assets, including your children’s inheritance
The problem: People are concerned that the wealth they’ve accumulated over time may be lost to a partner, especially when there is a disparity between the parties’ asset position when they get together.
Divorced or widowed parents who are entering into new relationships are concerned that in the event that the relationship breaks down, the new partner might walk away with up to half of their assets, including their children’s inheritance.
The solution: The only way you can have certainty to protect your assets from Family Court claims is through entering into a binding financial agreement, under which both parties must receive independent legal advice and fully disclose all their assets and liabilities.
Without careful planning, superannuation benefits may not end up with loved ones as planned
The problem: 10 years ago, your most valuable single asset may have been your family home. Now, the lion’s share of your wealth is likely to be held within your Self Managed Superannuation Fund (SMSF).
The law with respect to superannuation seems to change so regularly that most clients aren’t sure what will happen with their superannuation after they die. Out-of-date SMSF deeds may not be compliant with new laws and may not allow tax-effective strategies to be implemented. This may cause difficulties on death or incapacity.
The will you drafted five years ago might adequately deal with your family home and investments outside of superannuation, but cannot adequately consider or deal with your superannuation savings.
The executor of your will does not automatically become trustee of your SMSF upon your death. Member benefits in superannuation funds do not automatically form part of a deceased’s estate. Instead they are paid in accordance with the trustees’ discretion. It isn’t uncommon for superannuation benefits to be wasted by the surviving spouse, post under Family Court orders to a non family member, or under a family provision claim.
Without careful planning, tax of up to 30.5 per cent can be payable on death benefits. Assets inside a SMSF may need to be sold or transferred in order to pay out benefits, creating capital gains tax implications. ‘Binding’ death benefit nominations can be invalid, effective, or even worse, be binding but cause benefits to be ineffective for tax purposes or to be paid to a child going through bankruptcy or divorce.
The solution: Careful planning is needed to make sure the people you want to take control of your superannuation investments after death are able to do so.
Your estate plan should include a regular review of your SMSF to avoid non-compliance, adverse taxation consequences or benefits being distributed other than as intended.
Effective estate planning is very much a journey, rather than a destination. Establishing your Family Safe Plan correctly in the beginning is crucial, but equally as important is ensuring that it remains current, taking into consideration the constant changes to your circumstances and the law.
Merthyr Law’s Family Safe Program is designed to ensure you don’t get too busy to regularly review your estate planning.
To learn more about creating your own personalised Family Safe Plan and joining Merthyr Law’s Family Safe Program, visit keepingthewealthinthefamily.com.au.
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