Estate Planning

What does it mean?

An estate plan sets out how your financial assets will be distributed after you die. Estate plans involve such things as a will, power of attorney and testamentary trusts.

TheBull says...

It's probably fair to say that the majority of people think estate planning involves drafting a will and perhaps buying life insurance. Unfortunately the checklist of estate planning items is considerably longer than this, and failing to tick all the boxes can produce a raft of unintentional consequences, including a big tax bill for your beneficiaries to pay, delays in probate and even the possibly of having your will contested.

Probably the biggest mistake that people make is placing too much trust in the power of their will. In fact, the will is probably the weakest link in an estate plan, especially compared to the protection offered by family trusts and companies, and even super if structured correctly. Indeed, the beneficiaries named on super and insurance policies will override the terms of the will, and the distribution of assets in a family trust will be determined by the trust deed. Similarly, property that is held as joint tenant will automatically revert to the surviving joint tenant, regardless of what the will might say.

Putting it simply, a more complicated life - both personally and financially - makes for a more complex estate plan. Clearly, a person who has children to other marriages, an ex-spouse or spouses, a greedy son-or daughter-in-law, children under 18, or a family business to pass on is in greater need of an estate plan, than most. However complications can also arise in the most simple of cases when an estate plan is not thought out holistically - for instance, when the distribution of assets across beneficiaries is unequal or set out in a manner that is unsuitable (for example, a non-working spouse receives the house but no ongoing income, whereas a working child receives a super pension).

To some extent, an estate plan lets you dictate proceedings from the grave. As an example, you don't trust your son-in-law and think he will leave your daughter and take her inheritance. To prevent this, you could set up a Testamentary Trust, which, if drafted correctly, should protect the inheritance from a family law dispute should your daughter eventually divorce her unlikeable other half.

Furthermore, the Trust could dictate that your daughter receives her inheritance as an income stream rather than a lump sum, which would also prevent her from blowing it on a frivolous spending spree or a sinking business. In brief, a Testamentary Trust is a trust established under a will, which comes into existence on your death.

For some, the thought that a surviving spouse may remarry and use their inheritance to support a second family would cause them to turn in their grave. In this situation, a Testamentary Trust could be used to provide for the surviving spouse only. Further reasons for using a Testamentary Trust are for children under 18, since it enables estate income to be distributed to minors in the most tax-effective manner (normally children under 18 are subject to penalty tax rates on investment income).

As already mentioned, the will is only one aspect of an estate plan. Setting up Testamentary Trusts, listing your beneficiaries for insurance policies and super accounts, electing someone to be your enduring power of attorney - a person who is empowered to deal with your financial, personal or health matters should you become incapacitated - and naming guardians for your children, are all integral functions of an estate plan. You should also give some thought to the ownership structure of the family home and any investment properties to ascertain whether joint tenancy or tenants-in-common is the preferable option. In most cases, joint tenancy is preferable since it means that the surviving spouse skips the delays involved in probate, which is granted by the Supreme Court to the executor of the will enabling them to distribute the assets of the estate.

Business owners in a partnership structure should also have special arrangements in place in the event of their own, or their business partner's, death. People in partnerships are encouraged to have a buy-sell agreement in place, which involves each partner taking out life insurance on the other partner's life.

Basically, this means that should one partner die, the surviving partner's life insurance is used to buy out the remaining stake in the business - providing much needed funds to the deceased's family, but just as importantly, ensuring the continuation of the business for the surviving partner.

Estate planners, financial planners and lawyers can be called upon to design an estate plan for you. Remember to update your estate plan - not just your will, but also your life insurance and super policies - after significant events such as separation, divorce or the birth of a new child.

Defensive Company

What does it mean?

In a Defensive Company, the revenue and earnings tend to stay considerably stable in comparison to other companies during the economic cycles. It implies that a steady flow of income is received by the company, regardless of the boom and slump in the business cycle.

TheBull says...

Usually, the companies dealing with the products/services having inelastic demand could become a defensive company. In simpler terms, anything having ‘inelastic' demand is essentially required by the general public, irrespective of price changes. Such product/services can include: healthcare, water, electricity, fuel, etc. The shares of defensive companies are called Defensive Stock.

The stability offered by defensive stock is its greatest attraction. You can invest into defensive company's equity and the value of your investment remains relatively intact in times of stock market decline. People don't stop using life-saving drugs or consuming utilities during economic depression. The historical data available on the stocks depict consistency in defensive stocks.

So, does it make defensive company the BEST? No, it does not. Stability is a good feature to have. However, it's also true that a defensive company does not gain market value as easily as other companies during the times of prosperity. Compared to before, the people cannot ‘over-consume' the levels of utilities or food.

It's a good thing to keep a portion of your investment into defensive stocks. It secures your position in the market and cushions the blow for your portfolio. Still, if you're not losing much...you're not gaining much either. That's why people only retain defensive stocks as a certain part of their securities portfolio.

By http://www.compareshares.com.au/ - for more articles like this click here.
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