Intro: Frequently neglected, the absence of a will can cause serious problems for your family and your business
STORY MATHEW BIRCH
The importance of having a valid will cannot be underestimated. If you die without one, control over distribution of your assets is taken out of your hands and determined by law, potentially leaving your loved ones with unnecessary distress, uncertainty and expense.
The risk of having no will
Everyone has a right, and perhaps even a responsibility, to plan and document a will.
The law is impersonal and might not specifically recognise the relatives to whom you want to leave assets or those you might prefer to exclude. If you die without a will (in legal speak, dying intestate), many people may be entitled to share your estate using a rigid legislative formula.
Without a will, the distribution of assets is generally a difficult, protracted process. Prior to any division of property, a family tree will have to be constructed, proven and family members located. The time lost will be inconvenient to your dependants and additional legal fees and court costs will further deplete the capital of the estate.
Changes to families are increasingly common. Marriages, divorces and blended family structures can further impact the problems caused by intestacy, ensuring lengthy, messy and expensive efforts from your survivors to secure their share of your assets.
A will is your opportunity to apply your personal preferences to your estate. You are free to make these decisions based on personal, financial or taxation factors.
Assets included in a will
The only assets that can be distributed via a will are those that you own personally. These may include cars, shares, property and other investments in your name. Assets owned in conjunction with others are distributed according to the legal status of the ownership. This may be either as joint tenants or tenants in common.
Assets owned as joint tenants, for example the family home, pass automatically to the surviving joint owner on the death of the other. In contrast, tenants in common arrangements are set up so that the property belongs to all involved and each person owns a separate portion of the asset. On death, the deceased’s portion transfers to their estate and is distributed according to their will.
Some assets may also have been bought, nominating an owner after death, such as some pensions or annuities. To avoid tax consequences or nominations overriding a will, seek professional advice.
Superannuation and death benefits
Superannuation investments have special rules on death. These assets fall outside of a will and are not considered estate assets, unless they are paid to the deceased’s estate by your super fund (or trustee). In most cases, the trustee will pay death benefits directly to dependants of the deceased.
Generally, you may request that your super monies are distributed to a number of dependent beneficiaries or into your estate. If a nomination of beneficiary form has been completed, trustees will take it into consideration but ultimately it makes the decision at its discretion. A binding death nomination is available with some funds and allows you to determine who your super money is paid to.
Nominating the beneficiaries of your super allows quick distribution, bypassing the time and costs associated with administering your estate, and protecting the funds from creditors.
If you choose to nominate your estate to receive your super funds, these will be distributed according to the desires expressed in your will. However, bear in mind that this could potentially expose the funds to unnecessary tax consequences and to creditors. The taxation of superannuation death benefits can be complicated and you should seek advice.
The Capital Gains Tax time bomb
Assets distributed on death generally attract no tax but this does not necessarily mean they are tax-free. It just means that someone else may have to pay the tax at some point in the future, perhaps several generations away.
Capital Gains Tax (CGT) is a complicated legal area full of traps, even for the professionals, and is too large to even scratch the surface of in this article.
It is important to note that CGT may be a liability on your beneficiaries upon sale of CGT assets inherited under your will. Just one of the critical elements in determining what will be taxed, when and how much, is the date the asset was originally purchased. Two assets of the same market value at the date of death may have two very different values net of CGT because they were bought at different times. It is, therefore, very important to maintain accurate records so that your beneficiaries are able to prove the costs of the assets and the purchase date, avoid penalties and possibly save them paying unnecessary CGT.
CGT can be planned for and legally minimised by thoughtfully drafting the will.
Wills for SME owners
It is essential for SME owners to have a will and to understand which of their assets are included. SME business affairs will typically be structured in a manner where their interests in business assets are held via a business entity rather than by themselves personally.
A typical entity structure of an SME owner may include a Partnership, Family Trust, Company and, potentially, a Self-Managed Superannuation Fund (SMSF). The assets of a SMSF may include certain assets used in a business such as premises leased to the related entity which conducts the business, one of the rare situations in which assets of a SMSF can be used by related parties of the fund members.
Obviously, where such structures are in place, the estate planning of an SME owner becomes significantly more involved and the potential considerations, among others, must be considered in putting together a comprehensive estate plan.
Planning your finances, without including a will, is to only partly complete the job. A properly drafted, current will is one of the most responsible acts of planning you can undertake for your family and your business.
–Mathew Birch is a Technical Research Analyst with Centric Wealth (www.centricwealth.com.au).
BREAKOUT: Considerations for SME owners
• Family trusts: Where the deceased is the appointer of the trust, provisions must be made to pass on this power after their death. This may be possible through their will.
• Continued operation of an SME business: It is important that the executor of the deceased estate is appropriately skilled to facilitate the continuation of the business before beneficiaries decide whether to continue or wind it up.
• When the deceased is not the sole owner or operator: Family members could assume the deceased’s role or remaining owners could buy out the deceased’s interest. Structuring buy/sell agreements and fund raising can give rise to significant tax implications.
• CGT: Where business assets are held personally, death is a CGT event for which there may be various small business CGT concessions such as rollover relief or other taxation concessions.
• Illiquid SMSF assets: Superannuation law requires the beneficiaries to be paid quickly. This can present problems in relation to continuity of the business if, for example, the commercial property is the main asset and it must be sold to pay the death benefit.
Frequently neglected, the absence of a will can cause serious problems for your family and your business. It is essential for all SMEs to have a will.
The importance of having a valid will cannot be underestimated. If you die without one, control over distribution of your assets is taken out of your hands and determined by law, potentially leaving your loved ones with unnecessary distress, uncertainty and expense.
The risk of having no will
Everyone has a right, and perhaps even a responsibility, to plan and document a will.
The law is impersonal and might not specifically recognise the relatives to whom you want to leave assets or those you might prefer to exclude. If you die without a will (in legal speak, dying intestate), many people may be entitled to share your estate using a rigid legislative formula.
Without a will, the distribution of assets is generally a difficult, protracted process. Prior to any division of property, a family tree will have to be constructed, proven and family members located. The time lost will be inconvenient to your dependants and additional legal fees and court costs will further deplete the capital of the estate.
Changes to families are increasingly common. Marriages, divorces and blended family structures can further impact the problems caused by intestacy, ensuring lengthy, messy and expensive efforts from your survivors to secure their share of your assets.
A will is your opportunity to apply your personal preferences to your estate. You are free to make these decisions based on personal, financial or taxation factors.
Assets included in a will
The only assets that can be distributed via a will are those that you own personally. These may include cars, shares, property and other investments in your name. Assets owned in conjunction with others are distributed according to the legal status of the ownership. This may be either as joint tenants or tenants in common.
Assets owned as joint tenants, for example the family home, pass automatically to the surviving joint owner on the death of the other. In contrast, tenants in common arrangements are set up so that the property belongs to all involved and each person owns a separate portion of the asset. On death, the deceased’s portion transfers to their estate and is distributed according to their will.
Some assets may also have been bought, nominating an owner after death, such as some pensions or annuities. To avoid tax consequences or nominations overriding a will, seek professional advice.
Superannuation and death benefits
Superannuation investments have special rules on death. These assets fall outside of a will and are not considered estate assets, unless they are paid to the deceased’s estate by your super fund (or trustee). In most cases, the trustee will pay death benefits directly to dependants of the deceased.
Generally, you may request that your super monies are distributed to a number of dependent beneficiaries or into your estate. If a nomination of beneficiary form has been completed, trustees will take it into consideration but ultimately it makes the decision at its discretion. A binding death nomination is available with some funds and allows you to determine who your super money is paid to.
Nominating the beneficiaries of your super allows quick distribution, bypassing the time and costs associated with administering your estate, and protecting the funds from creditors.
If you choose to nominate your estate to receive your super funds, these will be distributed according to the desires expressed in your will. However, bear in mind that this could potentially expose the funds to unnecessary tax consequences and to creditors. The taxation of superannuation death benefits can be complicated and you should seek advice.
The Capital Gains Tax time bomb
Assets distributed on death generally attract no tax but this does not necessarily mean they are tax-free. It just means that someone else may have to pay the tax at some point in the future, perhaps several generations away.
Capital Gains Tax (CGT) is a complicated legal area full of traps, even for the professionals, and is too large to even scratch the surface of in this article.
It is important to note that CGT may be a liability on your beneficiaries upon sale of CGT assets inherited under your will. Just one of the critical elements in determining what will be taxed, when and how much, is the date the asset was originally purchased. Two assets of the same market value at the date of death may have two very different values net of CGT because they were bought at different times. It is, therefore, very important to maintain accurate records so that your beneficiaries are able to prove the costs of the assets and the purchase date, avoid penalties and possibly save them paying unnecessary CGT.
CGT can be planned for and legally minimised by thoughtfully drafting the will.
Wills for SME owners
It is essential for SME owners to have a will and to understand which of their assets are included. SME business affairs will typically be structured in a manner where their interests in business assets are held via a business entity rather than by themselves personally.
A typical entity structure of an SME owner may include a Partnership, Family Trust, Company and, potentially, a Self-Managed Superannuation Fund (SMSF). The assets of a SMSF may include certain assets used in a business such as premises leased to the related entity which conducts the business, one of the rare situations in which assets of a SMSF can be used by related parties of the fund members.
Obviously, where such structures are in place, the estate planning of an SME owner becomes significantly more involved and the potential considerations, among others, must be considered in putting together a comprehensive estate plan.
Planning your finances, without including a will, is to only partly complete the job. A properly drafted, current will is one of the most responsible acts of planning you can undertake for your family and your business.
