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  • Writer's pictureAndre Dirckze

Getting intergenerational wealth transfer right.

In a nation grappling with the challenges of an increasingly ageing population, the discussions surrounding wills, estates, and asset transfers have surged to the forefront of public attention.

The epoch of the "Baby Boomer" generation witnessed an unprecedented accumulation of wealth, marking the onset of Australia's most extensive intergenerational wealth transition. What was once a straightforward process has evolved into a convoluted labyrinth of familial arrangements and intricate structures, often engineered to shield assets from potential threats. While these structures effectively safeguard assets for the succeeding generation, navigating the terrain of wealth transition demands meticulous attention to tax implications.

According to a 2021 Productivity Commission report, a staggering $1.5 trillion in wealth transitioned from one generation to the next between 2002 and 2018, with a notable $120 billion transferred in 2018 alone. As the population continues to age, these figures are projected to soar even higher in the years ahead.

Given the diversity and magnitude of this wealth reservoir, coupled with the myriad of structures housing it, prudent estate planning is indispensable. Many individuals employ a combination of companies, trusts, and self-managed super funds to manage their assets, further complicating matters. For those with assets dispersed across various structures, relying solely on a will may prove inadequate in directing all controlled assets.

Why Relying Solely on a Will May Be Inadequate:

Assets held within family or discretionary trusts fall outside the purview of an estate, rendering individual wills ineffective in their management. Traditionally, trust deeds often included clauses triggering the trust's dissolution upon the demise of a designated individual, potentially incurring substantial federal and state taxes. A more efficacious approach involves contemplating successors for trust control and, where permissible within the trust deed, incorporating provisions facilitating a seamless transition of authority. While modern deeds typically accommodate such provisions, it's imperative to scrutinize each deed meticulously. Deliberations should extend to designating the appointor, responsible for ultimate trust control, and the trustee, tasked with daily operational oversight, whether an individual or company.

Supplementing your will with a statement of wishes can provide additional clarity regarding your objectives and overall intentions, albeit non-binding.

Further complexities arise when a trust comprises diverse assets earmarked for different beneficiaries, potentially triggering unforeseen income tax and stamp duty ramifications. Mitigating such consequences necessitates meticulous planning and consideration.

Superannuation Considerations:

A substantial portion of amassed wealth resides within superannuation structures, often overlooked in estate planning endeavors due to their exclusion from personal estates. The disposition of superannuation assets posthumously is governed by both superannuation law and the fund's deed. While most funds permit members to nominate beneficiaries, such selections are typically confined to dependents or the individual's legal representative. Consequently, ensuring accurate completion and periodic review of nomination forms is paramount to prevent unintended tax implications and ensure the desired recipient receives the proceeds.

Facilitating Inter-Generational Wealth Transfer:

Amidst the escalating inheritance landscape, a growing trend involves bestowing assets upon future generations during one's lifetime, circumventing traditional testamentary routes. Whether facilitating homeownership or catalyzing entrepreneurial pursuits, advancing funds affords the gratification of witnessing their utilization firsthand. Commonly, equal fund distribution among multiple beneficiaries is achieved through loans, albeit necessitating careful scrutiny to avoid immediate tax liabilities, particularly under Division 7A provisions. Alternatively, gifting from personal asset pools may offer a viable solution, though such transfers don't automatically offset future distributions outlined in a will. Careful drafting of estate planning documents is essential to account for intended offsets and preserve the deceased's ultimate wishes.

Navigating Testamentary Trusts:

While testamentary trusts offer advantages in taxation and asset protection, they aren't impervious to pitfalls. Trust assets may still be factored into divorce settlements, notwithstanding their separate legal standing. Moreover, complications arise when beneficiaries reside overseas, with residency fluctuations potentially triggering significant capital gains consequences and tax implications.

In Conclusion:

Estate planning transcends the mere drafting of a will; it demands a comprehensive, strategic approach to safeguarding legacies for future generations. With wealth transfers doubling since 2002, precision in planning is imperative. Connect with our Private Business Tax & Advisory team today to chart your course and ensure your legacy endures.

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