Estate Planning | Episode 04 – What passes under your estate and what doesn’t: How to get the most out of your estate planning

Teresa, does estate planning involve more than perfecting your Will?

Good question, Rob. Probably only half, depending on what’s happened with his superannuation nomination. Also, the property, if it’s jointly held, wouldn’t be part of his estate at that point if the other joint tenant had outlived him.

It absolutely does. And Georgia, you and I have talked about this many times in the office. The Will only captures the assets you hold in your personal name when you die. So it might be things like property that you own solely or as a tenant in common with someone else.

Or it might be superannuation if you’ve directed that it be paid to your estate, or if the trustee of that super fund or the insurer directs that it be paid to the estate. Bank accounts, term deposits, shareholdings and crypto in your sole name pass under your Will and form part of your estate.

However, as we might have touched on in previous episodes, family trust assets are different. Company assets are held by the company, and the treatment of company shares depends on who owns them. With unit trusts, you might not be the personal unit holder because another trust structure holds the units.

Superannuation and life insurance work in reverse again. If you haven’t nominated your estate, you might have nominated a dependant directly. Those assets can then pass outside your estate and therefore are not dealt with under your Will.

And we have to look at it in its entirety.

Teresa and Georgia, please explain why some assets don’t pass under your Will, and how to ensure they land where you want them to.

Property

One type of asset that does not pass under your Will is property held as joint tenants. Survivorship applies to property held this way, so it does not pass under the Will of the first person to die. It passes to the surviving joint tenant. If the couple died together and it cannot be ascertained who died last, it is the youngest who is deemed at law to have died last. The property then passes under their Will.

An example of this is a second marriage. The home is held as joint tenants with the new spouse. The Will leaves my share of the property to the children of the first marriage. The children of the first marriage get nothing, and even if they contest the Will, the property is not available.

The solution to this is severing the joint tenancy. It is often a simple solution to ensure that your share of the property passes under your Will and avoids costly disputes.

Family trusts

Family trust assets do not pass under your Will. The deceased never owned the trust assets, so they cannot gift them. What matters is who controls the trust next, whether that’s the appointor, the principal, the trustee or, if it’s a corporate trustee, who holds shares in that company.

An example of this is a Will that carefully divides the trust properties between the children, while control of the trust passes to someone else entirely.

The solution to this is to give control of the trust to the person or persons you wish to benefit under that trust on your death, or to arrange during your lifetime to transfer properties in specie outside the trust, either to the intended future beneficiary or to yourself so that they can pass to the beneficiaries of your choice under your Will on your death. In doing so, you do need to consider the stamp duty consequences or potential tax implications.

Company assets and shares

Company assets do not pass under your Will. The company owns the business assets, and you own the shares. The shares are usually estate assets, but their transfer can be constrained by the constitution, pre-emptive rights or a shareholders’ agreement.

Also, where there is a sole director and shareholder, the company can freeze completely on the death of the controlling individual until the estate is administered and the shares are transmitted to the executor.

An example of this is a business owner who dies intestate, that is, without a Will. No person has the ability to appoint themselves as a director of that company to make decisions on behalf of the business until they have obtained a grant of letters of administration of the estate. This can cause unnecessary stress and delay, including when dealing with matters such as payroll.

The solution to this is to ensure that you have appointed a replacement director during your lifetime or successors to act in your place if you die or become incapable.

What about superannuation?

A lot is put out in the media about super and life insurance. It still absolutely amazes me, and Georgia, I know you deal with this as well, that people don’t realise that you can’t nominate certain people as the direct beneficiary of your superannuation.

I know we’ve talked about this, Rob, in previous podcast episodes, but it is really a function of the nomination that you leave when it comes to super or life insurance.

Some of the industry and retail funds are slowly offering what we call non-lapsing binding nominations, but some still only have the lapsing binding nomination option, which means that every three years it will lapse unless you renew it. Others still only offer non-binding nominations, or some clients still only have a non-binding death benefit nomination in place. This means that the trustee of those funds can ultimately exercise discretion when that member dies as to where that super or life insurance passes, which is not ideal.

As for self-managed superannuation funds, I know a lot of our clients have those funds. There was a case back in 2022, Hill v Zuda Pty Ltd [2022] HCA 21, that clarified the position on non-lapsing binding nominations for self-managed superannuation funds. If the fund’s trust deed doesn’t provide for these nominations, we can look at amending it. That’s something for all our viewers to be aware of.

If your superannuation trust deed for a self-managed super fund is quite old, we are able to amend it to bring it up to date with current rules and laws and to allow members to make non-lapsing binding nominations. Once you do it, you can set and forget. In terms of who you can nominate, again, I know we’ve gone through this before, but just to recap for our viewers, you can only nominate a superannuation dependant or your estate.

If you nominate your estate, it’s then a function of whatever we put in your Will, and you can leave it to anyone, like anything else in your Will that you direct us to. A superannuation dependant, though, is a partner, a child of any age or anyone else you’re in an interdependent financial relationship with at the time you die.

Something to be aware of on that point is that nominations might be valid at the time you make them, but at the time you die, you may no longer be in a relationship with that person or in an interdependent financial relationship. So the nomination might not be valid and binding for that reason alone.

Again, it’s important to stay on top of those nominations because the Will has no bearing on that unless the super finds its way to your estate.

Buy-sell agreements

Buy-sell agreements are quite important in the context of businesses, especially family businesses. I think sometimes in family businesses people take for granted the succession of control, especially if there are, let’s say, three children succeeding the matriarch and the patriarch in the control of that business. What’s going to happen? Do you allow third parties, such as a standout key employee, to take a stake in the business?

There are also lots of businesses started by friends. For example, two or three friends get together, make an informal agreement and start a business from scratch with nothing. Now it’s quite valuable, with a lot of equity in the business.

I always say to clients that you don’t want to leave your family members with that headache. You may own the shares personally in terms of your interest in that business, so those shares might pass to your partner or your children under your Will on your death.

But then they’re left to deal with these business partners of yours. They might be fighting it out with them to get a payout if they no longer want to be involved in the business. There might be risks, and they may not understand the business or how it is to be valued or continued. Having buy-sell agreements in place can deal with the incapacity or death of a particular stakeholder in the business.

They can be funded by insurance, which I think is quite important where possible, provided that insurance can still be obtained in a cost-effective manner. This means there is a direct cashing-out event if one of the stakeholders dies, and the agreement dictates how the business is to be valued. Family members who might not be financially or legally astute are not left to fight for a payout from the business with people they may not like or know.

When a client has a business interest, in addition to looking at their Will and estate planning, we might be advising on a buy-sell agreement or reviewing an existing one and having it funded by insurance. We can’t give financial advice, obviously, and we work with other professional advisers on that side of it.

External liabilities

There are also external liabilities that clients need to be aware of when they’re turning their minds to estate planning, because these liabilities can reduce the pool or net equity that they’re giving their beneficiaries and successors.

It’s a matter of looking at whether there are ATO debts, potential ATO debts or historic debts that they haven’t considered and paid. Are there any creditors? Are there bank facilities with personal guarantees, and what’s the impact of those if they were to die? There are also leases, licences, registrations and Division 7A loans in trusts to consider.

We can advise clients on the legal side, how to mitigate this risk and how to ensure these things are properly reviewed and dealt with. But clients ultimately need to get accounting and financial advice on these matters as well.

How do you get the most out of estate planning?

Control map

One of the first steps to getting the most out of your estate planning is to start with a control map, not a Will. Start with one page that lists every asset, its legal owner, how it passes on death and who controls that mechanism or entity. Most clients have never seen their own wealth laid out this way, and the gaps become obvious in just a few minutes.

Alignment

The second thing you can do to get the most out of your estate planning is to align all of your instruments. Align your Will, binding death benefit nominations, trust deed and appointor succession arrangements, company constitution, shareholders’ agreements, buy-sell agreements, enduring powers of attorney and insurance nominations.

The plan is only as good as its least aligned document.

Sequencing the money

Also, look at sequencing the money. Different assets passing to different people will carry different tax or stamp duty implications. We’re seeing more and more that children can be quite aggrieved by the fact that one child might inherit an asset tax-free, for example, super if they’re still a tax dependant, while another child might inherit an asset with an embedded capital gains tax (CGT) implication.

We are increasingly incorporating equalisation clauses in Wills. Historically, these clauses have sought to equalise gifts that a parent has given their children during their lifetime, so that they can make up for that on death and say, “This child got a million dollars more, for example. I need to make sure my other child or children get an equivalent gift on my death.”

But they’re now also being utilised to equalise inheritances in respect of different tax implications. We’re dealing with a lot more clients and their advisers on this. I think financial advisers and accountants are completely on top of it, which is amazing, and they’re suggesting to us and to clients that this needs to be looked at because there are very different tax implications.

Particularly in Victoria now, there are a lot more tax implications that we need to deal with. That is another way clients can ensure that they are truly equalising the inheritance given to their children.

Testamentary trusts, you hear me talking about this all the time, are still very useful structures, despite what the government may have scared people off about at the start of those May budget announcements.

How important are testamentary discretionary trusts?

They’re very important. There now appears to be a clear carve-out, and they won’t be taxed in the same way that the government is proposing to tax discretionary trust structures. So, again, they are a very useful tool from a tax perspective.

They are also useful in preserving the concessional tax treatment of minors. There is an exception that allows you to distribute to minors tax-effectively and concessionally, which you can’t do in a discretionary trust structure, as long as we’re talking about assets passing to those minors through the estate environment.

You can add other assets to the testamentary trust once the original person has died and that testamentary trust is settled and in effect. You can still utilise the structure in a tax-effective manner for other purposes; you just won’t get the concessional tax treatment for minors in terms of income derived from assets outside the estate environment.

These structures are very tax-advantageous. We are also in a phase of intergenerational transfer of wealth in Australia, and they really serve a purpose in preserving the capital for those successors and ensuring that they are given asset protection in the context of family law and creditor claims.

It does work if it’s structured correctly, and cases are continuing to support that position.

I think it’s important to deal with the human layer as well. At the end of the day, when Georgia and I sit with clients, we are dealing with real people and real families. We can’t fit them into a particular box or structure when it comes to a Will or an estate plan. We need to be very attuned to their needs and what concerns them.

We have a higher incidence of blended families, different family structures, an ageing population and different vulnerabilities. We’re increasingly dealing with elderly clients who we need to protect and who are quite vulnerable to abuse from certain people in their lives.

It’s about reviewing these structures regularly, checking in, getting it right and getting that comfort and peace of mind. Checking in doesn’t cost anything. It’s also about ensuring that relationships are preserved beyond your death.

We are seeing a rise in executor disputes, for example. Georgia and I were just having a discussion about what we do now when clients want to appoint two or more people as their executors. It might be their children. They might have two or three children, and it might not be a blended family, but even that is causing issues now.

We literally have to ask the question directly: “Do these children get along? Are they going to get along? I know they do while you’re alive as the parents, but will they get along if you’re not here?”

That might seem quite a direct and frank question from people like ourselves, but we’re having to ask it to try to save and preserve your estate from attack when you’ve passed away. More importantly, it’s also to help families preserve those familial relationships, which can be destroyed if litigation comes into play on death.

Review triggers. When do you need to review your estate plan?

Review triggers include any of your nominated beneficiaries having died or become incapable; children, grandchildren or great-grandchildren having been born since your last Will; divorce or separation; marriage; or a new domestic relationship, whether registered or unregistered.

You might also have new structures, dissolved previous structures or set up a new family trust or self-managed super fund. Again, check in and see if anything needs to be tweaked in your estate plan. It’s not just your Will; it’s your powers of attorney and all the corporate documents that sit outside your estate environment.

Three things to do this week

Go to your superannuation fund. Most of it’s accessible online these days, or you can give them a call. Find out if you’ve got a nomination. I’d be very surprised if your nomination is still binding and valid. Most clients I talk to daily check it when I prompt them to do so, and they find that their nomination has lapsed or is non-binding.

With whatever funds you hold super in, or with life insurance if it’s external to your super, check your nomination. Is it in place? Is it correct? Do I need to update it? And is it the correct form, for example, binding or non-lapsing binding?

Obtain your property title

Check the title on your property. There have been cases against lawyers in this space where a Will seeks to dispose of a property held as joint tenants. That property can’t be disposed of by Will until the death of the last surviving joint tenant, as Georgia was explaining before.

If your property is jointly owned, you need to ask yourself whether that is what you want, especially if you’re seeking to deal with what you perceive to be your interest in that property if you die and the other joint tenant is still alive.

For asset protection purposes, should it be in joint names or should you have it in your partner’s name? If you’re involved in business and quite exposed to creditor claims, do you need to change that title into your partner’s name now?

Again, you need advice from lawyers and accountants on the tax side to see if that’s going to trigger any CGT or stamp duty implications, but it’s something that you should check.

Who controls your family trust?

Also, look at your family trust. If you have a family trust, check it. Everyone seems to know who the trustee is, the day-to-day controller of that family trust. But who is the hidden controller? In some deeds, it’s called the appointor, the principal or the guardian. They all have very similar roles, but that’s effectively the hidden controller.

Does that need to be changed? Is control going to revert to someone you wouldn’t want to control that trust if you became incapable or died? Do you need to tweak that? Or, during your lifetime, do you need asset protection and therefore shouldn’t be in that role on your own? That needs to be reviewed.