Having a legally valid will can go a long way to avoiding disputes over the division of your assets.
What did the artist Picasso, musicians Bob Marley and Aretha Franklin, and billionaire entrepreneur Howard Hughes have in common?
If you’re thinking they had amassed large fortunes before their deaths, you would be correct. But another key fact is that they all died without a valid will.
Picasso died in 1973 with an estate, including an extensive collection of artworks, later appraised at US$250 million. The eccentric Hughes passed away in 1976, leaving an estimated US$1.5 billion. His fortune was eventually split between hundreds of people after years of legal battles.
The estates of the musicians were lower, but still sizeable: Marley (US$30 million) and Franklin (US$18 million).
In each case, their estates needed to be settled in court after challenges by family members, former spouses, and other parties.
The importance of inheritance planning
Inheritance planning, unlike business succession planning, is an area that’s rarely discussed at the family level.
Most families regard subjects such as death and the future division of wealth as unpleasant, and potentially sensitive when multiple heirs are involved.
But there’s a lot to be said for having open discussions within your family about the intended treatment of assets and future inheritances.
Beyond accumulating wealth over time, one of the most important aspects of estate planning is determining in a legally valid will how you intend to have your accumulated wealth distributed after your death.
Dying without a will can potentially be treacherous, and costly, if your intended beneficiaries need to contest how your assets are divided.
And consider that the next 20 to 30 years will see the biggest transfer of family assets in history as many members of the so-called “Baby Boomer” generation (people born just after the end of World War II through to 1964) die, in most cases with the intention of leaving their accumulated wealth to their children and other heirs.
Assets will include homes, investment properties, unspent superannuation money, direct shares, life insurance payouts, and a wide range of other financial and non-financial assets.
Why you need a will
Creating a valid will, and specifically documenting how you want your assets to be managed and divided between your nominated beneficiaries after your death, should be a key step in the inheritance planning process.
Dying without a will (intestate) will invariably create complications, because your estate will be passed over to the state or territory in which you live to administer.
This can result in your assets not being distributed to your surviving family members in the way you would have preferred.
Residential real estate and superannuation, which combined make up more than three quarters of total household assets, are the largest components of most financial legacies.
Federal Treasury estimates that assuming there’s no change in how most retirees draw down their superannuation balances, superannuation death benefit payouts will increase from around $17 billion to just under $130 billion by 2059.
Ensuring that any super you have left over at the time of your death is distributed according to your wishes requires you to complete a binding death benefit nomination form provided by your super fund.
It’s important to be aware of any potential tax implications. For example, while superannuation distributed to a surviving spouse or dependent children as a lump sum is generally tax free, non-dependents (including adult children) may be required to pay tax on amounts they receive.
That comes down to how much of your super is made up from pre-tax and after-tax contributions.
Capital gains tax does not apply if someone inherits direct shares or other financial securities, but tax may apply if they later dispose of them.
Any unapplied capital losses that could be used to offset capital gains tax cannot be transferred to beneficiaries.
Estate planning can be complex. Consulting a licensed financial adviser to help you and your intended beneficiaries map out an inheritance framework that also identifies issues such as potential tax liabilities is a prudent step.
Contact us if you have any questions.
This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™
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