The kids are all right: How to plan your inheritance

Children living overseas, working out distribution to a complex family structure, and even protecting your assets from unwanted beneficiaries are some of the most common estate planning issues I’m asked to solve.

Estate planning goes beyond having a Will and Enduring Power of Attorney. A comprehensive estate plan considers how your assets will be protected, managed and distributed if you become incapacitated or pass away. Whether you're considering gifting assets during your lifetime or leaving wealth through your estate, careful planning can help minimise tax, reduce family disputes and ensure your wishes are carried out as intended.

With Australians living longer, accumulating greater wealth and helping children financially earlier in life, inheritance planning has become an increasingly important part of long-term financial planning. As one of the largest intergenerational wealth transfers in Australia's history unfolds, taking a proactive approach can help protect your family's wealth and provide certainty for future generations.

Here are some key things to keep in mind when planning your estate.

 Considering family complexities 

As family structures become more complex, parents need to consider how to manage the succession of their assets to ensure fair and equitable distribution to beneficiaries. Many family disputes occur when beneficiaries feel left out or don’t think they got a fair share.

Blended families and relationship breakdowns

Having a financial arrangement in place at the start of a relationship can ensure each party agrees on the assets they brought into the relationship and how those assets will eventually be distributed to their respective children or beneficiaries. This provides clear direction and reassurance that both natural and stepchildren have been considered.

It is also worth considering the potential for future relationship breakdowns involving beneficiaries. If children inherit assets directly in their own names, those assets may become subject to family law proceedings if a relationship ends.

An estate plan can help protect your family's wealth and ensure it is ultimately passed down according to your wishes. In many cases, a testamentary trust can provide greater control over how family assets are distributed while also offering tax and asset protection benefits for beneficiaries.

Tax considerations for beneficiaries

While Australia does not have an inheritance tax, this doesn't necessarily mean inherited assets are free from tax implications. Depending on the type of assets involved, there may be capital gains tax consequences or tax payable by either the estate or the beneficiary when assets are transferred.

If your children live or work overseas and have become tax residents of another country, they may also be subject to inheritance or estate taxes in that jurisdiction. Seeking professional advice before implementing your estate plan can help minimise unexpected tax outcomes for beneficiaries.

Protecting vulnerable beneficiaries

Parents may need to consider protecting their children who are in professions such as medicine, law or business who may be subject to professional indemnity claims. Having inherited assets held in a testamentary trust may protect their inheritance from potential future claims against their professional work.

For children with disabilities or special needs, you may wish to consider a disability trust as part of your estate plan. This could involve appointing a trustee, legal guardian and financial manager to oversee trust investments and ensure the child's financial needs continue to be met long after their parents have passed away.

Different trust structures can also be established for beneficiaries with other special needs, such as substance dependency or limited financial capacity. These arrangements can provide an ongoing income while restricting access to capital where appropriate, helping protect both the beneficiary and the family wealth.

Succession planning for family businesses

Asset equalisation strategies are also common for business owners and farming families, where one child may be actively involved in the family business while others are not.

If the intention is for the business to continue operating after the owner's death, strategies need to be implemented to ensure the enterprise can be transferred to the child involved in the business while providing equitable outcomes for other beneficiaries. This may involve insurance arrangements or other succession planning strategies that enable non-participating beneficiaries to receive value without requiring the business to be sold or divided.

 Protecting your estate from unwanted beneficiaries 

An effective estate plan ensures ownership of assets passes to the correct beneficiaries and considers potential tax liabilities and how this can be minimised. If you want to control who ultimately benefits from your assets (maybe you have no children or really don’t like your in-laws) it is important to have an estate plan that outlines your specific wishes, so assets are passed to intended beneficiaries effectively and with as little disruption as possible.

If you have assets held in other tax entities, such as a family trust, superannuation fund or company, your estate plan must be comprehensive and cover how you want these entities treated. Other legal documents (such as trust deeds, partnership agreements, buy-sell agreements and binding death benefit nominations) could be required to establish a holistic estate plan.

So, creating an effective and comprehensive estate plan may require you to engage a number of specialists, such as a financial adviser, tax adviser and estate planning lawyer. Doing so can avoid many family dramas and unnecessary legal costs and help preserve relationships and family harmony.

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This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.

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