What is collaborative intergenerational estate planning?

From
Brian Hor

Brian Hor

Example 1: Planning while family is able to decide

It’s estate planning which involves thinking outside the immediate family unit and looking at future generations. A key issue is in protecting assets for generations from creditors and unexpected financial threats.

Let’s say you’re a medical doctor in sole practice, so you’ve been very careful over the years to ensure that all your assets have been acquired in the name of your non-working or low-risk occupation spouse. You’ve also ensured that, with your own estate planning, your spouse’s Will passes those assets into a Testamentary Discretionary Trust for the benefit of you and your children if your spouse passes away before you do, so as to ensure that the assets remain protected against any potential claims against you arising from your medical practice.

Unfortunately, your mother passes away and you are stunned to discover that she has left a substantial real estate portfolio to you – directly to your personal ownership under her “traditional” simple Will. Whilst you are grateful for receiving the significant inheritance, you are nervous that being inherited directly by you it is now exposed to the risks of your professional practice. Any attempt by you to divest yourself of the assets (for instance, by transferring them to your spouse, or perhaps to a new discretionary family trust established by you) will attract significant capital gains tax and stamp duty liabilities – as well as be subject to various “clawback” provisions under the bankruptcy laws.

Planning ahead

If only you took the opportunity to speak with your mother whilst she was still alive to make known to her your concerns and how you have arranged your own estate planning, so that she may have made hers consistent with yours and changed her Will to direct your inheritance into a Testamentary Discretionary Trust for the benefit of you and your children where it would be safe.

Example 2: Simple Wills can lead to complex issues

Suppose your parents have traditional simple Wills that give everything to each other. Your father passes away and all of his assets, including investments worth $1.5m providing a net annual return of 5%, go to your mother directly into her personal ownership. Now your mother (whose marginal tax rate is 37%) is complaining that she is paying so much in tax on the investment income!

If only your father’s Will had established a Testamentary Discretionary Trust with your mother and other extended family members as potential beneficiaries, that income could have been allocated between your four non-working minor children completely tax free (saving your mother almost $30,000 per annum in additional tax and Medicare levy)! Plus, what a great way to help pay for their private school fees!

Example 3: SMSFs and testamentary discretionary trusts

Maximise the ability of your intended loved ones to make the most of their inheritances. This is particularly the case where significant superannuation death benefits are involved.

For example, suppose that your father has $4m in his SMSF. He wanted to look after his second wife by paying her a pension using $1.6m of this super and giving the rest to you and your sibling equally, so he made a binding death benefit nomination to that effect. You only discovered this after he passed away when being informed of the gift to you and your sibling by your step mother, who is his executor. Whilst you and your sibling are very grateful for the gift, receiving it directly into your personal ownership is not ideal as you are each in your own small businesses and you each have minor children.

In fact, you would have much preferred that your father consulted with you about it and directed that super into his own estate.

Then, had your father made a Will that established a Testamentary Discretionary Trust for each of you and your sibling, the gift would be fully protected from any of your business risks, plus you could have had the opportunity to save tax by distributing some or all of the investment income amongst your children. After all, as you and your sibling were not financially dependent on your father, there would have been no tax disadvantage in terms of any tax payable on the death benefit being paid from the SMSF to your father’s estate rather than to you and your sibling personally – but now you and your sibling have both lost the opportunity to protect your inheritances plus take advantage of highly concessional tax treatment on the investment income if paid to your minor children.

By Brian Hor, Special Counsel

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