The Value of Estate Planning

Following are 3 examples of savings to be had from good estate planning:

1. Benefits from having a Binding Death Benefit Nomination (BDBN) in favour of your estate.
2. Benefits from NOT having a 30 day survivorship clause.
3. Benefits from having a discretionary testamentary.

1. The Benefits of A Binding Death Benefit Nomination (BDBN)

Let’s use an example:

• Molly is a Widow
• Molly has 2 adult children, Mary and Fred
• Molly has $500,000 in superannuation
• Should Molly have a BDBN giving 50% to each of her children directly; or a BDBN in favour of a “legal personal representative” and a Will which leaves 50% to each?

Should Molly have a BDBN giving an equal share to her children directly, on her passing:

• they each get $250,000;
• but lose 15% tax each initially -$37,000;
• plus a further $5,000 each through the 2% Medicare levy.
• This leaves each of her children with $207,500 each.

	Mary	Fred
Superannuation	$250,000	$250,000
Tax at 15%	-$37,500	-$37,500
Medicare Levy at 2%	-$5,000	-$5,000
Balance	$207,500	$207,500

While nothing can be done about the 15% tax, the 2% Medicare levy would not have been payable if Molly had a BDBN in favour of her “legal personal representative” and the balance of her funds came from her estate. Therefore, through this method, Mary and Fred would have each received $212,500, saving $10,000 overall.

	Mary	Fred
Superannuation	$250,000	$250,000
Tax at 15%	-$37,500	-$37,500
Medicare Levy at 2%	$ NIL	$ NIL
Balance	$212,500	$212,500

The moral of the story: Seek to ensure that your parent’s super is paid into their estate, not directly to you!

2. Should you have a 30 day survival clause?

Let’s use another example:

• Consider a couple, Molly and Dave, with 2 independent adult children, Mary and Fred
• Molly and Dave have super worth $300,000 each, made up of concessional contributions
• They have Binding Death Benefit Nominations (BDBN) in favour of their “legal personal representative” (see above)
• One night they get hit by a drunk driver. Molly sadly dies at the scene, but Dave is in a coma for a couple days before succumbing to his injuries
• Each of their wills state that they give all of their estate to each other, failing which it goes to their children in equal shares

So what happens to Molly and Dave’s super?

A typical provision in a Will states that a person has to survive by 30 days in order to receive a gift.
Due to the BDBN, Molly’s superannuation is paid into her estate, however as Dave does not survive her by 30 days, the proceeds go to their children, Mary and Fred, and 15% of the super is lost in tax (i.e. $22,500 each, or $45,000 total).
Dave’s superannuation then also goes to their children and another $22,500 each (or $45,000 total) is lost to tax:

	Molly’s Super		Dave’s Super
	Mary	Fred	Mary	Fred
Superannuation	$150,000	$150,000	$150,000	$150,000
Tax at 15%	$22,500	$22,500	$22,500	$22,500
Balance	$127,500	$127,500	$127,500	$127,500

While nothing can be done about the tax on Dave’s superannuation, had Molly and Dave left their superannuation to each other without the 30 day clause, Molly’s superannuation would have gone to her husband tax free (because he is a financial dependent), and then on Dave’s passing, that $300,000 would have been split between Mary and Fred pursuant to the terms of his Will, and as a result, tax would only be payable on one amount instead of both, saving a total of $45,000:

	Molly’s Super		Dave’s Super
	Mary	Fred	Mary	Fred
Superannuation	$150,000	$150,000	$150,000	$150,000
Tax at 15%	$ NIL	$ NIL	$22,500	$22,500
Balance	$150,000	$150,000	$127,500	$127,500

The moral of the story: Gifts of super to spouses should probably not be conditional upon them surviving by 30 days!

3. Discretionary Testamentary Trust (DTT)

Let’s use a final example:

• Consider a grandmother, Madeline, with an estate totaling $800,000
• Madeline has a daughter, Mary, with a stay at home husband, Fred, and a granddaughter, Jill, who is 8 years old
• Mary earns about $90,000 a year

If Madeline leaves the estate to Mary outright:

• Mary invests it at 3% and earns an extra $24,000 per year
• All the income is Mary’s and Fred and Jill have no income
• Therefore, Mary pays tax on the extra income at the rate of 34.5%, including the 2% Medicare Levy, losing nearly $32,000 in tax:

	Mary	Fred	Jill	Total
Regular Income	$90,000	$ NIL	$ NIL	$90,000
Estate Income	$24,000	$ NIL	$ NIL	$24,000
Sub-total	$114,000	$ NIL	$ NIL	$114,000
Tax at 34.5% (top marginal rate)	-$31,957	$ NIL	$ NIL	-$31,957
Balance (without a DTT)	$82,043	$ NIL	$ NIL	$82,043

Instead, if Madeline were to leave everything to her daughter as the primary beneficiary of a discretionary testamentary trust, the beneficiaries of which include Madeline’s son-in-law and grandchild, Mary can control the trust and distribute half of the income each to her husband and her daughter who are both taxed as adults and pay no tax on the income.

The total paid in this scenario is a little under $32,000, which is a saving of $9,360. Over 5 years this becomes a saving of $46,800, and over 12 years this becomes a saving of $112,320.

	Mary	Fred	Jill	Total
Regular Income	$90,000	$ NIL	$ NIL	$90,000
Estate Income	$ NIL	$12,000	$12,000	$24,000
Sub-total	$90,000	$ NIL	$ NIL	$114,000
Tax at 34.5% (top marginal rate)	-$22,597	$ NIL	$ NIL	-$22,597
Balance (with a DTT)	$67,403	$ NIL	$ NIL	$91,403

The moral of the story: Pay for your parents to have a decent Will as you will be the one to benefit!

 

Should you wish to learn more about any of these examples:

At Michael Paterson & Associates, we have extensive experience in estate planning and the related documents. We tailor these documents to suit your specific needs and wants, and will take the time to explain the important aspects of each document to you. We can help you to maximise the value of your estate and avoid paying more income tax, capital gains tax and inheritance tax than necessary. Let us assist you with:

• Wills – for dealing with your personal assets
• Binding Death Benefit Nominations – for dealing with superannuation assets
• Partnership Agreements – to specify how your partnership interest will be sold or transferred
• Shareholder and Unit Holder Agreements – to specify how your shares or trust units will be sold/transferred
• Put/Call Option Agreements – are another way to specify how your business interests will be sold or transferred
• Enduring Powers of Attorney – to allow others to make financial and property decisions on your behalf, even if you become mentally incapable
• Enduring Powers of Guardianship – to allow others to make lifestyle and medical decisions on your behalf if you become mentally incapable
• Advance Health Directives – to specify how you want, or do not want, to be treated in relation to various medical conditions
• Probate and Letters of Administration – Court-endorsed authority to allow executors or administrators to deal with the deceased’s estate

We can help you put plans in place so you can sleep better at night, knowing everything is taken care of. For advice on estate planning from our expert team, call us today! Call: (08) 9443 5383 or use the contact form below.