Are your hard earned assets at risk of slithering off to third parties or being gobbled up by the tax man?

Estate planning is a frequently over-looked area. Statistics suggest that only 4 in 10 Australians have a Legal Will. Our experience shows that out of the remaining 6 people, only 2 have documentation that is appropriate to their needs. The remainder have documentation that is either out of date or that leaves their assets at risk to third parties or the tax man!

Completing your estate plan is much more than writing your Will. Depending upon your family situation and financial structure, you may also need to review superannuation nominations; Self Managed Super Funds (SMSFs) and Discretionary Trust deeds; Company documentation, as well as Powers of Attorney.

Individuals will spend time thinking about what assets they would like to allocate to beneficiaries. However, less time tends to be given to protecting those assets and managing any associated tax consequences. The following case studies illustrate common deficiencies.

Case Study #1: Jane's father passes away leaving her an estate worth $1,000,000. She is in a de facto relationship with Paul and has three young children from a previous marriage. She earns a salary of $75,000. Assuming interest of $60,000 for the first year from her inheritance, her assessable income increases to $135,000. In turn, her tax bill increases by over $24,000 per annum. With careful planning Jane's inheritance could have been structured to largely eliminate the tax impost on the additional $60,000 per annum income.

Case Study #2: Jane uses her inheritance to pay off the home loan and to build an investment portfolio. All assets are jointly owned with her de facto partner, Paul. Jane dies and Paul immediately inherits all assets. No direct provision was made for the three existing children. Paul eventually meets another partner. Jane?s and her father?s assets have now moved outside of their bloodline and left her dependents financially vulnerable.

While we do not have death or estate taxes in Australia, it could be argued that the existence of Capital Gains Tax (CGT) and superannuation death benefit taxes can in some cases effectively constitute death taxes.

Under current law, an individual's superannuation balance can pass to a spouse or dependent tax free upon their death. However, if the beneficiary is not a dependent for taxation purposes, then a portion of the fund, aptly called the taxable component, will be taxed at up to 16.5%. If the benefit includes insurance, then the tax liability may be as high as 31.5%.

A common trap for individuals with superannuation pensions (which are essentially tax free entities), is to assume that those assets will always be tax-free. In reality, on death, if a superannuation pension is paid as a lump sum to a non-dependent, tax at up to 16.5% can apply. Depending upon the superannuation structure, CGT may also become applicable. This has the potential to become a costly matter and an unpleasant surprise for loved ones.

A well constructed estate plan will help to avoid unexpected taxes and protect the estate assets from claims and challenges. As with all aspects of a financial plan, ongoing monitoring of your estate plan helps to reduce or eliminate potential risks or liabilities in future as your situation and relevant legislation changes.

Comprehensive estate planning should be a proactive part of your ongoing financial planning. Ask yourself when did you last review your estate plan?

Many of us would like to ensure our children and grandchildren are protected and given a financial kick-start in life. Deciding on what form that assistance can take and its timing is not always simple.

Prescott Securities is producing a detailed report 'Helping Children and Grandchildren' which will look at various ways grandparents and parents can provide valuable assistance to their loved ones.

A copy of the report will be available in the New Year and covers important issues such as:

• Finding the right balance between your own financial security and helping children and grandchildren;
• Giving the help that will provide the greatest benefit even if it's not the help they think they need;
• Ensuring your help finds the mark and is not lost to taxation, other people, or through family breakdowns.

Parents and grandparents of young children have particular responsibilities. Most of the responsibility rightly belongs to parents, but grandparents can also play a role.

One Important Area Is Insurance.

Everyone's interests are best served if there is an open discussion about insurance arrangements, especially where there are young children involved.

Grandparents will often have a stake, as they may need to get involved personally and financially if there is a disaster and the arrangements have been unsatisfactory.

Investing For Young Children

Quite often parents and grandparents are keen to make investments when children are born or when they are very young.

The aim is often to provide a lump sum when the child reaches a certain age or to help with a major purchase or a car or the deposit on a home.

Despite the difficulties with ownership, many people also like young children to have some shares.

There may be taxation implications with your intended investment, so it's worth discussing with your adviser beforehand.

Helping Young Adults

Eventually children aim for independence, and the largest step towards this will occur when they fly the coop and want to buy their own home.

There are a number of ways family members can help out including:

• Buying a home to rent to the children;
• Providing family equity, security or a guarantee to support a loan;
• Lending or gifting money to help with the deposit or repayments.
• Another alternative is to assist with a young adult's superannuation.

Most young people will have at least some money going into superannuation through their employer and have little inclination to do more. This is where parents and grandparents can assist. By adding $1,000 to a young person's superannuation they may be eligible for the government's co-contribution of up to a further $1,000. Over a few years this can make a significant difference to their superannuation balance.

Estate Planning

The most important aspect to consider when providing a financial helping hand to others is to ensure that your own financial future is not jeopardised.

The last thing you would want is to become a burden to others. Securing your own financial viability is one way of ensuring this doesn't happen.

Achieving the best outcome for yourself and future generations will ultimately occur if you focus on your estate planning.

Good estate planning and a well drafted Will should protect the assets in your estate for those you want to receive them.