Q&A: How do I protect assets bequeathed to beneficiaries?

Planning for the future is about more than just accumulating wealth. It's ensuring that what you leave behind benefits your loved ones as intended.

There are many reasons why your full remit of assets may not end up in the right hands, from unclear documents to unexpected taxes and family conflicts. So, what can you do to protect yourself from the risks?

In this straightforward Q&A, you’ll find answers to some of the most common questions to help you ensure your beneficiaries enjoy the full extent of your generosity. 

What is asset protection, and why is it important?

Asset protection involves using smart legal strategies to safeguard your business and personal assets from potential risks. Assets are anything valuable you own that can be converted into cash. They include:

• Physical assets – Home, business property, vehicles, equipment, jewellery
• Financial assets – Shares, bonds, mutual funds
• Intangible assets – Patents, trademarks, copyrights, licencing, franchises 

Protecting your estate assets is important to ensure that your beneficiaries, such as your loved ones, including your family members, receive and retain the maximum benefit from their inheritance. 

What are the common risks you need to protect inherited assets from?

There are a few common risks to your inherited assets, these are:

• Taxes – Inheriting assets can trigger taxes such as capital gains taxes (CGT) and income taxes on assets generating revenue.
• Divorce and family disputes – Sometimes, inherited assets can get tangled up in divorce settlements or family disagreements, which might affect how they're shared or managed.
• Creditors and bankruptcy – If you or your loved ones face financial difficulties, creditors could claim inherited assets, or they might be at risk if bankruptcy becomes an issue.
• Poor financial management by beneficiaries – Managing inherited assets wisely is key. If beneficiaries don't handle things carefully, for example, by overspending or making risky investments, it could lead to the assets losing their value over time.

What legal tools are available for asset protection?

Here in Australia, there are several legal tools you can use to protect assets you’ve bequeathed to nominated beneficiaries.

Wills

A will helps protect your bequeathed assets by legally specifying how they should be distributed after your death. It ensures your wishes are honoured, reducing the risk of disputes among family members.

It also allows you to appoint guardians for minor children and can minimise estate taxes by strategically planning asset transfers.

Trusts 

There are several types of trust you can use to protect inherited assets: 

• Testamentary trusts – Created within a will and activated upon your death, these trusts can protect assets for beneficiaries, especially minors or individuals who may not manage funds well or who don’t want to inherit assets directly for their own asset protection reasons.
• Special disability trusts – Specifically designed to provide for the care and accommodation needs of individuals with severe disabilities, offering tax benefits and asset protection.
• Charitable trusts – Assets are held and managed to benefit charitable causes, providing a way to protect and distribute assets while supporting your philanthropic goals.

Each trust type has specific legal and tax implications, so we recommend you seek professional advice to figure out the best one for your situation. 

Binding death benefit nominations (BDBN)

Does a large portion of your wealth sit in super? As it’s not technically a ‘personal asset’, it doesn’t fall directly under your deceased estate. 

A Binding Death Benefit Nomination (BDBN) is a formal instruction you can give to your superannuation fund, specifying who you want your super benefits to be paid to when you die. Unlike a non-binding nomination, which provides the fund with trustee discretion, a BDBN legally compels the trustees to follow your wishes.

It's a way to ensure your super benefits go to the people you intend, providing clarity and peace of mind for your beneficiaries.

Power of Attorney and guardianship

A Power of Attorney (POA) and guardianship play crucial roles in safeguarding your bequeathed assets. Here’s a quick explanation of each: 

Power of Attorney (POA) – This legal tool lets you appoint someone you trust—a legal personal representative (LPR)—to manage your finances if you can't. If you inherit assets but can't handle them due to illness, incapacity or other reasons, your POA can step in, making sure your assets are protected and managed as you wish.

Guardianship – For minors inheriting assets, a guardian ensures these assets are looked after until they're old enough to manage them. The guardian oversees how the assets are used, ensuring they benefit the children and are used wisely.

How can I minimise tax on my bequeathed assets?

Minimising taxes on your bequeathed assets involves strategic planning and an understanding of tax laws. 

Here are some things to consider: 

• Estate planning – Structuring your estate with legal documents such as wills and trusts can help minimise taxes by distributing assets in a tax-efficient manner and using available exemptions.
• Capital Gains Tax (CGT) considerations – Understanding the CGT implications of inherited assets is important as, depending on the circumstances cost base may be reset to market value, or the deceased cost base transfers across, so can have significant implications for the beneficiaries. If you want to ensure there’s a fair allocation of assets after potential tax consequences, then you should consider these CGT implications.
• Superannuation planning – Assets held in super funds have specific tax rules. Planning how these assets will be distributed to beneficiaries can optimise tax outcomes.
• Gifts and donations – Making charitable donations or using gifting strategies during your life can reduce the taxable value of your estate and potentially qualify for tax deductions.

Because tax laws are complex, we suggest you seek expert advice from a qualified tax advisor or estate planner for personalised advice tailored to your financial situation and goals. 

How do I protect my bequeathed assets in a divorce?

If you pass away before the Divorce Order (DO) has been made, your spouse may inherit any property bequeathed to them in your will, even if you didn’t want them to. 

To prevent any issues and your assets going to your ex, it’s best to make a new will every time your relationship status changes. The period of separation is a crucial time. 

How can I protect my bequeathed assets from creditors?

Protecting your bequeathed assets from creditors involves smart planning and understanding your legal options. 

Setting up a discretionary or testamentary trust can be a great way to protect assets for your beneficiaries, as these trusts can provide a layer of protection against creditor claims. 

Again, it's wise to chat with legal and financial experts who specialise in estate planning to ensure everything aligns with Australian laws and your intentions. Keeping your estate plan updated ensures your assets are well-protected.

How can I ensure my superannuation is protected?

To make sure your superannuation is protected, make sure you have a Binding Death Benefit Nomination in place. This legal document ensures your super goes directly to your chosen beneficiaries, reducing the chance of disputes. 

What is a testamentary trust, and how does it work?

A testamentary trust is a tool within a will that kicks into action after you pass away. 

You designate a trustee (someone you trust) to manage the trust and its assets for the benefit of specific beneficiaries you name in your will. It's designed to protect your assets and comes with great benefits. 

It can offer asset protection, shielding your wealth from things like creditors or family disputes. Plus, there are tax advantages. You can manage how assets are taxed and potentially lower the tax bill for your beneficiaries. 

Most importantly, you can keep control over how and when your assets are distributed to loved ones, ensuring your wishes are followed to the letter.

Are there special trusts for vulnerable beneficiaries?

Yes. Protective trusts can be set up for beneficiaries who are minors, disabled, or financially inexperienced. These include Special Disability Trusts and Protective Trusts. 

• Special disability trusts – These trusts are for individuals with severe disabilities, ensuring assets support their long-term care needs while maintaining eligibility for government benefits like disability pensions.
• Protective trusts – Designed for beneficiaries who may struggle with financial management due to age or incapacity, these trusts offer flexibility. Trustees oversee asset management to safeguard against misuse while supporting the beneficiary's needs.

Together, these trusts provide effective management and legal protection for bequeathed assets, ensuring they benefit vulnerable individuals according to their specific circumstances.

How do I choose the right executor and trustee?

Choosing the right executor and trustee is important to ensure your wishes are carried out smoothly. When it comes to picking them, it's all about trust and reliability. 

Your executor (who handles your will) should be someone organised and capable of managing paperwork and legal details during what can be a tough time. They should also be impartial and able to carry out your wishes fairly.

For a trustee (who manages any trusts you set up), look for someone financially savvy and responsible. They'll be handling money or assets for your beneficiaries, so trustworthiness is key. It's smart to choose someone who also understands your values and goals.

How often should I review my estate plan?

It’s good to check in on your estate plan regularly. 

Life changes fast, so reviewing it every 3-5 years—or whenever a major life event happens, such as marriage, divorce birth of children—will ensure it stays up-to-date with your wishes and current laws. 

Related: Estate planning: Q&As for small business owners

If you’d like some personalised strategic advice on protecting your bequeathed assets, reach out to your Maxim Advisor or contact our team today.