Tax, Estate And Wealth Planning

It is natural for people to die at some point. An individual expects to die sooner or later because death is imminent. When this happens, they expect their loved ones to continue enjoying the same kind of lives they had when they, the deceased, were still alive. Therefore, it becomes necessary to document how their property would be distributed amongst the beneficiaries upon their death. This document, otherwise known as “will”, must be written during a person’s lifetime for it to be enforceable by law.

If an individual dies without having written a legally valid will to enable smooth transfer of their wealth, he is said to have died intestate, hence his property will be distributed amongst his beneficiaries by the established procedures of law (Renton 1999).

Distribution of Richard’s wealth upon intestate death

If Richard wrote no will that expresses how to distribute his wealth, then his property would be distributed according to Administration and Probate Act 1919 (SA).

 Richard has a spouse, who is his wife, Justin. The legal doctrine of survivorship allows Justin to retain all property they co-owned with Richard before he dies. This means that his wife will own the title to the family home in Hazelwood and the holiday home on Hamilton Island. These assets are not included in Richard’s estate and therefore cannot be affected by any intestacy rule. Justin will then receive $10,000 and one half of the excess balance. The remaining shall be shared equally among the children.

Estate Funding and Benefits of Holding Insurances

Richard is a director and a shareholder of Richardco Pty Ltd, in conjunction with Pat Jones, each holding 50% of stake in the company. This means that Richard’s worth in the company is about $1,000,000. This business has no insurance, and therefore any risk that the company faces is borne by the partners in equal amounts, causing a contagion effect on personal property at home.

The family home that Richard owns jointly with his spouse, Justin, was acquired two years ago. This property has a face value of $1,000,000, although its actual value currently stands at $250,000 (1,000,000 less the outstanding mortgage $750,000). A holiday home at Hamilton Island has a face value of $450,000 but a real value of $250,000 subject to an outstanding mortgage of $200,000. These assets are precariously held since they are not insured by any policy. The couples’ superannuation account balance cannot offset these mortgages, and in case Richard died now, disagreements may arise on the division of ownership of the company between his partner and his family.

The above facts indicate that Richard’s estate is not adequately funded, and therefore something needs to be done about their stability. Richard might try to secure his assets and the well-being of his family members by using insurance. Richard should purchase a term risk insurance policy which compensates the death of the insured, permanent disability and trauma.

Risk insurance is advantageous since it ensures uninterrupted cash flow. The premiums are deducted from superannuation balance, and therefore the cost of funding the cover does not affect the daily cash flows. This means that the insured can perform whatever activities he carried out before purchasing the insurance policy.

Having a Total and Permanent Disability (TPD) insurance coverage is also tax-effective to the holder. Premiums for TPD and life insurance are tax deductible, and can be paid with pre-tax dollars (Perkins 2005). Holding other business insurance coverage will also ensure stability and continuity in the operations of the business. Should there be a colossal peril in business, it will be indemnified by the insuring company, and hence the personal funds would not be used to offset these costs.

Advantages of Establishing a Family Trust

A family trust is a fund that is set up to be managed on behalf of a family member by a person otherwise known as a trustee. A family trust has many benefits both to the provider and the beneficiary. Some of the benefits are discussed below:

The trust creates a single large pool of investment which is well diversified and has a potential to perform well. This allows the development of long-term strategies that can be used to secure the future of particular groups of people in the family, like children or disabled members (Renton 1999).

It can be used to give children the benefits that are associated with family wealth without losing control of certain assets. This is important since, when ownership of a company is transferred to beneficiaries that have no expertise in running them, they may interfere with the management and smooth operation of these companies, leading to malfunctions or even collapse. This ensures that wealth is effectively and successfully passed from generation to generation.

Most important is the fact that setting up a family trust integrates all the management functions like administration, record keeping, and investment for effective and efficient handling by a professional trustee. This allows for certain conditions to be attached, so that they are not misused.

Planning for the Administration of Family Trust

A family trust is administered by a trustee, who is appointed by the people that are setting up the trust. After any of the settlor’s has died, the trust becomes a going concern as long as it is necessary to identify and collect assets belonging to the trust and pay trust debts and taxes. The beneficiaries must be made aware of the existence of the trust fund. The law also requires that the trustee provide the beneficiaries with full accounting reports concerning the trust transactions annually or on change of trustee, unless stated otherwise in the trust deed (Probate code section 16062)

Planning for a family trust should start with Mr. Richard looking for legal owner of the trust or the trustee. He can be the trustee himself or together with his spouse or a company. The person who has the power to appoint and fire the trustee, called the appointer or guardian, should be selected. The group of assets or businesses should then be ascertained, as these constitute the trust fund. Finally, those who will benefit from the trust are then determined, these will be the trust beneficiaries.

Richard’s Interest in the Accounting Business

When Richard dies intestate, there might be conflicts over the issue of who is supposed to own his shares in the company. If his son joined the company, it would worsen the situation, since he might claim the full rights. Without a clearly written will, his partner may also claim that Richard had sold him his shares, and therefore left none in the company.

However, Richard can plan for that now in case of eventuality by using four planning phases (Perkins 2005).

The first step is to determine the time of his exit and requirements of his partner, Mr. Pat. Family members should be included so as to resolve possible conflicting issues regarding the plan. The second step is to prepare the business for smooth succession. The current financial position should be assessed. A research is then carried out to ascertain the best succession option; this may either be family replacement option or liquidation of the business. Lastly, the best option is selected and an implementation plan developed. This plan will act as a ‘contract’ between the stakeholders. If planning for exit is not prepared earlier, there might be chaos after the death of Richard.

The Benefits of Establishing Testamentary Trust within Richard’s and Justine’s will

This type of a trust is created under the terms of a will, and hence comes into existence after the testator dies. It is more beneficial for the couple to establish this type of trust within their wills because of the following reasons:

Taxation on the income received from a testamentary will is deducted at an ordinary marginal rate, as opposed to the ordinary family trusts, where taxation is done based on the penal rate. In this case, the income is considered as expected trust income. (Division 6AA of the income tax assessment Act 1963) The income of a testamentary trust is also taxed at an ordinary rate if the beneficiary is an infant.

The couple may also want to protect the future well-being of certain individuals in the family. For instance, Mr. Richard and Mrs. Justine may want to protect their underage daughter Olivia and their son Phil who has drug problems. This kind of trust arrangement will therefore be effective for these issues.

Testamentary trusts empower the testator’s spouse or child to be the trustee and appointer of the trust at the same time. It will enable them to use the trust assets in the same way as if they were given them personally.

Control of Superannuation Proceeds

Since superannuation proceeds are not treated as the deceased estate, they are not normally governed by terms of a will. The family can arrange for their superannuation funds to be paid to their executor upon death, and later be distributed through their wills. This method, however, is not the most effective when it comes to tax minimization (Perkins 2005).

The couple can also decide to have a family member as an individual trustee or a company trustee. This means that, upon death, the remaining trustee gains control of superannuation proceeds. Directions should therefore be given to the trustee on whom the benefits should be given; otherwise, they would give the entitlements to whoever they please. Caution should be taken so that none of the children were a trustee, as they might be unfair and allocate the benefits to unintended beneficiaries.

Mr. and Mrs. Richard can ensure that their underage girl can get the same share of their estate with other beneficiaries. The couple can indicate in their will that all their children are joint tenants of the couple’s assets. This will mean that their assets will be distributed equally among all the beneficiaries, irrespective of their age and gender.

This method will also be tax effective, since there is a provision for Capital Gain Tax exemption on the assets that were acquired before 20^th September 1985 (Renton 1999).

Benefits of Executing Enduring Powers of Attorney and Guardianship

The Enduring Power of Attorney provides continuous decision making of the attorney even after the decision making capabilities of both spouses are impaired. This ensures that management of financial affairs is not interrupted, hence reducing financial difficulties when one is unable to make sound decisions. It also provides confidentiality in property affairs, enabling an individual to customize the power given to the EPA by imposing terms and conditions.

Appointing an enduring guardian gives a person an opportunity to select someone they trust so as to make appropriate personal and lifestyles decisions on their behalf. The appointment comes into effect when the need for the guardian arises, that is, when the person is not in a capacity to make sound decisions.