03/11/2021
How to prevent your assets going to the "wrong" beneficiary
As the population ages, new relationships and marriages between seniors are becoming more common. As a result, I am often asked what steps can senior partners take to prevent their assets from going to the “wrong” person when they die.
There is no easy answer, and a further complication is that estate planning rules vary from state to state. However, if there is any chance of bequeathed assets being challenged after a partner’s death, seeking out legal advice sooner rather than later is the best strategy.
It is useful to know some basic estate planning principles as you work through this process.
It is imperative to have an up-to-date and valid Will.
Still, certain assets fall outside a will.
These include money held in superannuation, insurance bonds and assets held as joint tenants in common.
Let’s start with the last category. Assets in joint names, such as property, usually goes to the surviving partner, irrespective of any terms of a will. One way around this is to hold property as tenants in common. You are then free to bequeath your share of the property to any person you choose. This strategy is best implemented when a property is purchased.
Next, you need to understand that your super is not necessarily disposed of by your will. It is the trustee of your super fund that usually determines who gets the money. One way to avoid this is to consider a binding death benefit nomination, which specifies your chosen beneficiaries. It is important to seek legal advice about how to do this as, done wrongly, it could lead to unnecessary tax bills and could still be challenged.
Another solution to the super problem is to withdraw all your retirement savings tax-free before you die and deposit it in your bank account. This can also be done by someone you have granted an enduring power of attorney, if the super fund member lacks the capacity to decide.
Putting all your cash in a bank helps prevent possible challenges. It also eliminates the likelihood of a 17% death tax levied on the taxable component of your fund left to a non-dependent.
If this is your plan, you need good advice about what to do with the money. Options including making a gift to someone or investing the money in insurance bonds, which also sit outside the will and can be left to a nominated beneficiary.
For example, think about Harry aged 85, a wealthy retiree now happily remarried following a messy divorce from this first wife, who wants to leave bequests to his children from both marriages. He is aware that there is acrimony between some family members and it is important to him that his assets be split as he wishes, rather than being eroded by family battles.
He invests $250,000 in his name in each of five separate investment bonds, naming each of the five children as the beneficiary of one bond upon his death.
Because the bonds are technically life policies, the distribution of the proceeds cannot be challenged.
Harry can sleep soundly knowing he has solved the potential problem in advance.
Another option is an inter vivos, or family trust, which is established by someone during their lifetime to manage certain assets or investments and support beneficiaries, such as family members. Also known as a living trust, its duration is determined at the trust’s creation and can entail the distribution of assets to a beneficiary during or after a person’s lifetime. When a will maker dies, the assets go to a testamentary trust (or trusts) and are not held by any of the beneficiaries personally. This keeps assets separate in the event of a divorce or bankruptcy and has tax advantages. As beneficiaries of a testamentary trust there is no restriction on using its money for the benefit of grandchildren, including expenses such as school fees and uniforms. That means the first $19,200 of such non-deductible items could be paid from pre-tax dollars from the trust, instead of from after-tax dollars.
Furthermore, when children die the grandchildren can continue to be beneficiaries of the trust.
