Estate planning is a crucial process that ensures your assets are distributed according to your wishes after your passing. For parents, protecting children's inheritance is often a primary concern. In Australia, several tools and strategies can be employed to safeguard your children's future. This article explores various estate planning mechanisms, including Binding Financial Agreements (BFAs), wills and testamentary trusts.
Wills - The foundation of estate planning
A will is a legal document that outlines how your assets will be distributed after your death. It is a vital part of estate planning. A properly drafted will can ensure that your children receive their inheritance as you intended. Without a will, your estate will be distributed according to the rules of intestacy, which may not align with your wishes, or may end up in court with family members battling over who gets what.
What’s important to include in a will for your children’s benefit?
Appointing Guardians: For parents with minor children, appointing a guardian in your will is crucial. This ensures that someone you trust will take care of your children if you pass away unexpectedly.
Specific Bequests: Clearly outline specific bequests in your will. This includes not only financial assets but also sentimental items that you want your children to have.
Regular Updates: Life changes, such as marriage, divorce, or the birth of a child, necessitate updating your will to reflect your current wishes. It’s also very important to make sure that your will reflects your wishes when your memory and mental health are at optimal levels.
Binding Financial Agreements (BFAs)
Binding Financial Agreements (BFAs) are legal agreements between parties that outline how assets will be divided in the event of a relationship breakdown. For parents, BFAs can be a valuable tool in protecting children's inheritance from the complexities of family law.
Using BFAs for Estate Planning
Protecting Assets: BFAs can help protect assets intended for children by clearly delineating what is to be considered separate property in the event of a divorce or separation.
Clarity and Certainty: By having a BFA in place, you can provide clarity and certainty regarding the distribution of assets, reducing the likelihood of disputes.
Testamentary Trusts: What sets them apart?
Testamentary trusts deserve special attention due to their unique benefits in estate planning. These trusts are created through a will and become effective upon the testator's death.
Advantages of Testamentary Trusts
Tax Efficiency: Income distributed to minor children from a testamentary trust is taxed at adult rates, which can result in significant tax savings.
Protection from Creditors: Assets held in a testamentary trust can be protected from creditors of the beneficiaries.
Control Over Distribution: You can specify the terms under which beneficiaries receive their inheritance, providing control over the timing and use of the assets.
Setting Up a Testamentary Trust
- Drafting the Will: Work with an experienced estate planning lawyer to draft a will that includes provisions for a testamentary trust.
- Appointing a Trustee: Choose a trustworthy and competent individual or institution to act as the trustee.
- Defining Terms: Clearly define the terms and conditions under which the trust will operate, including how and when distributions will be made.
Upon the testator’s death, the executor of the will should engage a solicitor who specialises in wills, estates, and trusts can provide legal advice and assist in the administration of the testamentary trust. They can help ensure that the trust is set up in accordance with the terms outlined in the testator’s will and comply with relevant laws.
The executor should also engage an Accountant and/or Financial Advisor. Engaging these professionals can provide financial advice and assist with tax matters related to the testamentary trust. They can help ensure that the trust complies with tax obligations and provide guidance on financial management.
Other Considerations for Protecting Children's Inheritance
Superannuation
Superannuation is an important part of estate planning in Australia. Ensure your superannuation nominations are up to date and consider the tax implications for your beneficiaries.
Prenuptial and Postnuptial Agreements
These agreements can provide additional protection for your children's inheritance by clearly defining the distribution of assets in the event of a divorce.
Gifting During Your Lifetime
Making gifts to your children during your lifetime can reduce the size of your estate and potentially minimise estate taxes. However, it's important to consider the implications of such gifts on your financial security and eligibility for government benefits.
Education and Trust in Decision-Making
Even though we’ve left this to last - it’s probably the most powerful thing you can do to help your children protect their own inheritance. Educating your children about financial responsibility and estate planning can empower them to make informed decisions about their inheritance, and other aspects of financial planning that will benefit them for a lifetime. Encouraging open communication and involving them in the planning process can also help ensure their needs and wishes are considered.
Professional Advice
Engaging professionals, such as estate planning lawyers, financial planners, and accountants, is an essential part of developing a comprehensive estate plan. These experts can provide tailored advice and ensure that all legal and financial aspects are properly addressed.
Protecting your children's inheritance requires a multifaceted approach that incorporates legal, financial, and personal considerations. By utilising tools such as wills, trusts and BFAs, you can create a robust estate plan that safeguards your assets and provides for your children's future.
Regularly reviewing and updating your plan, engaging professional advice, and involving your children in the process can further ensure that your estate plan reflects your wishes and protects your legacy. Estate planning is not just about distributing assets; it's about securing your children's financial well-being and providing peace of mind for you and your family.
If you’d like more information on planning your estate to keep your children’s inheritance secure, please get in touch with our estate planning team.
