Across a three-part series, we’ll discuss the importance of inter-generational wealth transfer, how this is established, and how commencing the process early can ease the burden in the future – ensuring your wealth legacy remains in-tact and effectively managed.

In this part, we’ll highlight the foundations of building a succession strategy and what to consider when structuring your wishes to bequeath your legacy onto the next generation. Our subsequent releases will provide a greater understanding of the accounting & tax considerations of succession, and steps to building your future plan.

Alongside this, we discuss the impacts of complacency when considering Succession and how to best mitigate impacts by acting promptly.

The Cost of Complacency

Whilst individuals and their family circumstances are unique, we are seeing an increasing trend of mixed results of succession – with many beneficiaries realising unmet expectations and issues in maintaining a stable wealth legacy.

What has given rise to this trend? A combination of complacency (the “she’ll be right mate” mentality) and a lack of awareness and preparation of how wealth can be transferred to the next generation.

We know that more than 50% of Australians do not have a current Will, and that around the same number do not have ‘Binding Nominations’ on their Superannuation. Realising assets and developing a unique process for succession is not easy, but that doesn’t mean a complacency mindset should be adopted and your wishes left to “fall by the wayside”.

To build a wealth legacy according to your wishes, we recommend you invest the time to structure these accordingly and ensure all assets, entities and investment vehicles are correctly managed and considered. If your family are left to do something after an event has happened, they may not be able to resolve matters in a timely or cost efficient manner (especially during sensitive periods).

By investing the time early, you are able transfer wealth efficiently and effectively – resulting in less tax, retaining certain assets for future generations (e.g. property), create better alignment of ownership, and ensure the needs and objectives of the family are being met as best they can.

The Foundations of Succession

Building the foundations of succession and retaining wealth for the next generation begins with a simple conversation. You’ll want to cover how your Estate will provide for your loved ones when you’re gone, checking whether your Will is up to date, and develop a decision-making framework if need be.

In this blog we discuss: Testamentary Trusts and Superannuation.

Testamentary Trusts

A Testamentary Trust is a trust (usually discretionary) created by a Will which comes into existence after death, allowing the trustee to decide how the assets should be divided amongst the beneficiaries. This process happens through the trust (as a central point) leaving assets directly to a beneficiary.

These are a powerful structure supported by Estate Law that promotes Asset Protection, flexible management, as well as possible tax concession for certain eligible individuals, dependency benefits and tax planning opportunities.

Consideration should be given to establishing a Testamentary Trust if there is concern beneficiaries will not receive the full benefit of the income generated by the assets, do not have the ability to manage or protect your assets after death (e.g lost mental capacity or suffer from substance abuse/addiction, or could face bankruptcy/divorce/legal action.)

For those seeking financial independence for disabled persons, this structure is worth consideration as it increases the legal dependency age (of a disabled persons) to 25 years from 18 years old.

There are other structures and reasons to decide upon but a Testamentary Trust can be set up within a Will. Where you may choose something different is dependent on the nature of assets nominated for succession, retaining value, future income, savings and legacy.

Superannuation

It’s widely reported that today, Superannuation members are living longer and are reserved in spending their full superannuation amounts. Therefore, what happens to the remaining money after death?

As one of the largest outside the family home, Superannuation assets are not governed by the Will and are not considered an ‘Estate Asset’.

To ensure control of the remaining money is distributed in accordance with your wishes, a ‘Binding Death Benefit Nomination’ should be completed. A ‘Binding Death Benefit Nomination’ is a notice given by you as a member of a Superannuation Fund to the trustee of your Fund nominating your beneficiaries on your death.

A ‘Binding Death Benefit Nomination’ imposes a direct obligation on the trustee to pay your death benefits in accordance with the assigned wishes.

Where a ‘Binding Nomination’ is not made, the trustee of the Super Fund may decide who receives your death benefit. It may pay the death benefit to your Estate, or it may use its discretion to decide which of your beneficiaries receives the death (in some cases this might not be the person who you want this to be).

In relation to Death Benefits, this is taxed at 17% (15% plus the Medicare Levy of 2%) on the taxable component upon the death of a member when transferred to a non-dependent.

The average male Super balance is ~$250,000 – an amount that might be mostly in the taxable component. By not structuring your wishes according, in this case there could be an unforeseen large tax cost ($40,000+ in this example) to one beneficiary. An amount which can be very useful money remaining in the family in the long run.

Given this, you need to consider how this can be effectively managed and what options can be explored. Can money be withdrawn before death? Can a dependent be nominated and under what arrangements could an equal distribution of wealth be made minimising tax?

What Next?

In part-two of our series to be released in due course, we’ll provide greater insights into the accounting considerations involved surrounding succession and subsequent Capital Gains.

However, as mentioned, building the foundations of succession happens firstly through a conversation. In the meantime we hope this provides insight and a starting point into succession and wealth transfer.

Should you require assistance in preparing your Succession Plan, please contact James Cavanough or Ian Walker at Lantern Advisory for a confidential discussion on (07) 3002 2690 | info@lanternadvisory.com.au