The “Baby Boomer” generation saw the biggest accumulation of wealth in history and will lead to the largest intergenerational transition of wealth Australia has ever seen. Once a simple concept, the transition of wealth is now a maze of complex family arrangements and structures, often put in place for the purpose of protecting assets. These structures work well to preserve assets for the next generation, however when it comes to transitioning wealth they can lead to a hefty serving of tax if not dealt with appropriately.
A 2021 Productivity Commission report outlined $1.5 trillion of wealth had passed from one generation to the next during the period 2002 to 2018, with $120 billion transferring in 2018 alone. These numbers are only expected to increase as the population continues to age in years to come.
The diversity and the size of this wealth pool and the variety of structures that hold it mean careful estate planning is a must. It’s not uncommon to see people using a combination of companies, trusts, and self-managed super funds to hold assets and in many cases all the above. If you are someone who holds assets in a variety of structures, you may be surprised to hear that a “will” isn’t always sufficient to direct all the assets you control.
Why your will may not be the best way to control your assets
Assets held via a family or discretionary trust do not form part of an estate, nor is an individual’s will able to deal with them. This leaves limited options on how to direct these assets. In the past, many trust deeds contained clauses that would vest the trust upon the death of a set individual which can lead to significant tax at both federal and state level. A better option is to think about who you would like to take over control of the trust and where the trust deed allows it, build in clauses that support a transition of control. Most modern deeds generally allow this, however you should always read the deed. Consideration needs to be given to who will ultimately have control of the trust and its underlying assets (the appointor) as well as who will manage the day-to-day activities of the trust (the trustee – be that an individual or company).
A simple solution may be to include a statement of wishes as an additional appendix to your will. Whilst not binding, a statement of wishes can be a simple way to clearly communicate what your objectives are and give an insight into overall intent.
Further consideration needs to also be given where a trust has multiple assets and the intention is to pass these to different beneficiaries – can this be dealt with without triggering potential income tax and stamp duty consequences? The answer will depend upon many different factors and needless to say, careful planning and consideration should be exercised to ensure no unexpected tax consequences are borne by the trustee or a beneficiary.
Superannuation
Substantial accumulated wealth is also held within a superannuation environment. Like trusts, assets in superannuation do not automatically form part of a person’s estate and are therefore often overlooked by an individual when it comes to estate planning.
The payment of superannuation on death is governed by both superannuation law and the deed of the superannuation fund. Most superannuation funds allow members to nominate who the recipient of their superannuation will be on death, however superannuation laws limits this to a dependent or the individual’s legal personal representative. Nominations are a legal document, so it is essential they are completed correctly and revisited regularly. These can often lapse after a period of three years and if a valid nomination form is not in place, the decision as to where superannuation proceeds are paid on death is generally left up to the trustee of the fund. Accordingly, payment may not be to the intended recipient and may therefore come with an unintended taxation consequence.
How to gift assets to future generations
With the number of inheritances growing, a trend picking up momentum is for assets to be bestowed onto future generations now, rather than waiting for it to be done through a will or estate. Perhaps this is to provide for a home deposit or see a dream realised as an investment into a business. No matter the reason, providing funds now gives the benefit of seeing them enjoyed and put to good use during the lifetime of the individual. But how do you make it work?
Commonly where the ultimate result is to be an equal distribution of funds between multiple persons, a loan is granted, with the intention being a reduction in the amount that beneficiary will receive upon the passing of the individual. However, careful consideration needs to be given as this may trigger an immediate tax consequence under the provisions of Division 7A, particularly if those funds are sourced from within the family group of entities. Even if the loan is not immediately covered by Division 7A it may be subject to these provisions upon the death of the individual, particularly if the intention was that the loan was to be ultimately forgiven.
Gifting an amount out of an individual’s personal asset pool is a viable option, particularly if the individual has surplus cash or liquid assets. However, this provision of funds will not automatically reduce a future distribution or be taken into account when a beneficiary receives an entitlement under a will. Where the gift has been made from assets not held in the personal name of the deceased individual the loan arrangement outlined above can further complicate this. Consequently, it is important to ensure that estate planning and an individual’s will uses specific wording to take into consideration any amounts intended to be offset against future distributions and protect the ultimate intention of the deceased.
A last will and testament will often have the provision for a Testamentary Trust which a beneficiary can utilise to hold assets bequeathed under a will. Whilst this can have benefits from a taxation and asset protection perspective it should be noted that is not always a fool proof solution.
For example, where a testamentary trust is used to safeguard family assets within a particular blood line, the trust assets may still be considered when a court is deciding on a settlement as part of a relationship break down. That is, trust assets may not be specifically divided by the court as part of a divorce, but taken into account when deciding on the final split of assets from the overall martial asset pool.
Testamentary trusts also introduce complications where beneficiaries are overseas residents. In a post-COVID world, overseas travel is quickly returning, and with that brings various residency complications. If you intend to leave assets to a foreign resident under a will, the capital gains consequences could be substantial. Likewise, where an individual becomes a non-resident and acts as a trustee of a testamentary trust, the trust itself may then be considered a non-resident for tax purposes. This in turn triggers taxation consequences and can see some of the concessions offered to Australian residents foregone.
As can be seen, estate planning is no longer just “creating a will”. If careful planning and a holistic approach is not undertaken, what was intended to be a generous gift and legacy may be significantly diminished and not safeguarded for the next generation. With wealth transfers having doubled since 2002 it’s imperative to get it right. Contact the Private Business Tax & Advisory team today to discuss your plan and determine your next steps.
