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Ownership of Your Assets

ownership-of-your-assetsOwnership of Your Assets

The more wealth you acquire, the more important it becomes to look at how your significant assets such as your home, investments and insurance policies are owned. Ownership has flow on effects in terms of tax, estate planning, and protection of your property against claims from creditors or former partners.

At the simplest level, assets can be owned individually or jointly if you are in a committed relationship. Owning assets in your individual name does not protect you against a relationship property claim from your partner in the event a relationship ends. Individual ownership of investments can, however, have tax benefits if you are your partner are on different tax rates. In the event that one partner dies, ownership of jointly owned assets will automatically pass to the survivor, whereas individually owned assets transfer to the estate, resulting in time delays and cost. ‘Tenants in common’ is a variation of joint ownership where on death of a partner, ownership of the deceased person’s share transfers to the beneficiaries of their estate. This can be useful as a way of transferring wealth away from the survivor so they fall within asset thresholds for means tested benefits, or as a way of ensuring children from a prior relationship receive their inheritance.

Family trusts are particularly useful for easy estate planning and protection of assets from creditors or relationship property claims. However, it is becoming very difficult to use them as a protection from means testing, for example for rest home subsidies. They are costly to set up and administer, and have to be looked at in relation to the benefits offered.

There is no perfect solution for asset ownership. Every solution has pros and cons, and it is a matter of weighing them up to see which offers the greatest benefits overall.

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Are Family Trusts Still Worthwhile?

FilesAre Family Trusts Still Worthwhile?

The family trust gained popularity as an ownership structure for property and investments to help minimise tax and estate duty and maximise entitlement to residential care subsidies. The abolition of estate duty some years ago, reduced income tax benefits and the increased scrutiny placed on trusts within residential care subsidy applications have all lessened the importance of some of the key benefits of family trusts. However, this does not mean trusts no longer serve a useful purpose.

Trusts are expensive to operate. There is the cost of establishing the trust, the cost of preparing an annual tax return for the trust if it owns income-producing assets, and the annual cost of administering the trust. These costs must be compared to the benefit gained from the protection of assets from a variety of different risks as well as other ancillary benefits. Trusts can provide protection against a number of potential risks, of which the key ones are:

  • The possible reintroduction of estate duty
  • Claims on personal assets by business creditors
  • Relationship property claims

Trusts can also offer benefits, such as the ability to split income to family members on lower marginal tax rates, ease of transition of assets on death, and safeguarding of assets for vulnerable children.

The purpose of establishing a trust should be clearly identified. Trusts which have been established for the sole purpose of avoiding tax or increasing eligibility for government subsidies are unlikely to withstand scrutiny. It is important that trust administration and record keeping be diligently attended to if the trust is to be considered genuine, or not a ‘sham’. Consideration needs to be given to which assets should be held in the trust and how the trust should be structured. Due to the complexity of issues, good advice from a solicitor and accountant is essential.

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Plan Your Legacy

Plan Your Legacy

With careful planning, most people don’t run out of money or assets before the end of life. Money, as they say, is something that has no use to you when your life ends, however it can provide benefit for others. Planning a legacy is something that often gets overlooked, yet everyone, even a person of very modest means, has the ability to have an ongoing beneficial impact on the world after death. It can be so much more than simply leaving your estate to your closest living relatives.

There comes a point when retirees, especially those with relatively large amounts of money invested, realise they are not going to use up all their funds within their lifetime. In fact, this applies also to younger people who may be facing a terminal illness. The advantage of putting these funds to good use while you are still alive is the satisfaction that comes from seeing the impact on others. Donations to a registered charity are tax deductible for the donor, whereas bequests are not, and this is another reason to think about giving prior to death while still retaining sufficient funds for personal security.

Legacies are very much a personal thing and there are a huge range of options as to what form they may take. They can be simple or complicated, often requiring legal or other specialist input. The thought and effort that is required to put a legacy in place is much more easily dealt with well before the final stage of life. Planning a legacy is about setting some goals for the impact you want to achieve, choosing appropriate beneficiaries, whether they be family members or charitable purposes, and putting in place legal structures such as a will, memorandum of wishes or trust, to ensure your intent is implemented.

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Fighting Over the Family Fortune

swordfightFighting Over the Family Fortune

Sibling rivalry is common, but add to the mix the death of parents and a sizeable estate and you have a recipe for the destruction of family relationships. The baby boomer generation is very susceptible to this problem. Typically, their parents grew up in the Depression era and were good savers, unlike the baby boomers. Those baby boomers who have managed to save have seen their nest eggs eroded through financial market crises, redundancy and divorce. Little wonder then, that many rely on receiving an inheritance to fund their retirement. When there is a large sum at stake, family love can turn to family hatred.

Parents often don’t think through the effect of the provisions of their will on surviving children. A parent may feel inclined to favour one child over another in the will for a variety of reasons. The favoured child may be one who has cared for the parent in their final years, or who is more in need of financial assistance or more responsible with money. Further complications can arise when children from two different relationships are not treated equitably.

Avoiding conflict requires careful thinking, planning and communication. Parents are often secretive about the contents of their will and so the contents come as a surprise. This can be overcome by explanations given to the children while the parents are still alive, or by parents documenting the reasons for how the property (money and possessions) is to be divided. The choice of the executor of a will is critical and ideally children need to be told who the executor is and why they have been chosen. Children can help by ensuring they make their own financial plans so they are not in the awful position of waiting for their parents to die so they can retire.

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One of Life’s Certainties

Making a Will

There is a well known saying that there are two certainties in life; death and taxes. Despite the certainty of death, many fail to plan for it by making a will. Lack of time, lack of money, and indecision about who should be the executor or the guardian of young children are the usual excuses.

The most expensive part of dying is administration of the estate (typically several thousand dollars) and that becomes even more expensive and time consuming if there is no will. Dying without a will also means that your estate is divided up according to the Administration Act using a specific formula, and this may not be how you wish it to be divided.

While you can write a will yourself, it pays to get professional help from a lawyer or trustee company to ensure that your will is valid and deals with your property as you intend.

These days, with many relationships ending before death, there are some traps to watch out for. Unless you have updated your will after a separation or divorce, it will still remain valid. If you enter a new relationship, then after three years or more, your partner can claim half your assets on your death under the Property (Relationships) Act unless you have previously entered into a ‘contracting out’ agreement that sets out a different division.

Other documents you should consider preparing are Enduring Powers of Attorney, which enable specified people to manage your affairs and your welfare should you become mentally incapacitated, and a Living Will, or advance directive, which states what medical care you should be given if you become physically or mentally unable to decide, for example if you are on life support.

Review your will and other documents regularly to ensure they remain up to date.

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