What is estate and succession planning?
Estate and succession planning is a critical process aimed at ensuring that your assets and/or entities pass to your intended beneficiaries in a tax and duty efficient manner.
Understanding your testamentary intentions (that is, what you want to do with your assets on passing) in the broader tax and duty context is the key to making fully informed decisions in preparing your will.
Equality can be inequality
There are various exemptions or concessions in relation to the passing of assets on death, however, estate and succession planning allows you to identify which assets should pass to which beneficiaries and why, for example:
- should beneficiaries receive assets directly?
- Should beneficiaries receive assets indirectly (for example, through a testamentary trust) and what are the advantages and disadvantages?
- how does your superannuation fit into the overall estate and succession plan?
- different assets have different tax profiles and/or are taxed differently depending on variables such as:
- when you purchased the asset;
- the type of asset involved;
- whether it was your main residence when you passed away;
- whether your legal personal representative (LPR) or your beneficiaries need to sell the asset within a certain timeframe in order to take advantage of any exemptions or concessions;
- whether the beneficiaries of your estate are Australian tax residents or foreign tax residents;
- whether any concessions available to you during your lifetime are effectively reversed out in the hands of any foreign tax resident beneficiary (for example, the general 50% CGT discount); and
- whether you were eligible for one or more of the small business CGT concessions when you passed away and if so, whether your LPR or beneficiaries can essentially stand in your shoes and access them on sale.
Without understanding how different assets are taxed in the hands of the LPR or different beneficiaries, focusing on ‘top-line’ value in distributing assets under your will and mask very significant tax imposts and, therefore, the net amount ultimately available.
What about non-estate assets?
Australians hold considerable wealth in investment vehicles such as discretionary trusts.
A trustee holds trust assets on behalf of the class of beneficiaries and may be one or more individuals or a company.
Whilst you may be able to control a discretionary trust during your lifetime, you do not own the assets of the trust, therefore:
- the assets of a trust are not estate assets (even if there was an individual trustee of the trust); and
- cannot be distributed through your will.
Therefore, part of any estate and succession plan is reviewing the documentation in relation to any discretionary trust (such as the trust deed and the constitution of any corporate trustee) to ensure that their terms facilitate your broader goals.
If you hold the shares in the corporate trustee personally, those assets form part of your estate and you can gift them through your will, however, you may wish to:
- Amend the constitution of the corporate trustee to provide for a successor director in favour of the person you choose to control the corporate trustee following your passing; and
- ensure that the terms of the trust deed provide for your intended successor appointor (also known as a principal or a guardian) to fill that role following your passing.
At Mosaic Tax Legal, we work with wills and estates lawyers, accountants, financial planners and end-clients to help them understand their options and explore available alternatives to facilitate the transfer of estate assets and control of non-estate entities in a tax and duty efficient manner.