An estate plan involves more than signing a Will and leaving it in a safe place. An effective estate plan requires consideration of several matters and ongoing review to ensure it reflects your testamentary wishes and covers unexpected events.
In this article, we look at some common misconceptions about Wills and estate planning and dispel some of the myths to put you on the right track to prepare an effective estate plan.
I have a Will – isn’t that an ‘estate plan’?
A Will is a great start to planning your estate however a Will alone does not:
- deal with your death benefits – the proceeds of your superannuation account and any life policies (see below);
- appoint a trusted person to look after your financial and property affairs when you are away or if you are incapacitated;
- appoint a guardian to make health and lifestyle choices on your behalf if you are incapacitated, taking into consideration your morals and values.
Additionally, many basic Wills may not maximise the value of your estate through effective tax planning to improve the net outcome for your beneficiaries, or minimise uncertainty and expense for your family by reducing the likelihood of a family provision claim. A Will may also not provide for business succession planning or, if required, the winding up of a business.
Tip: Various legal documents form part of your overall estate plan. Think about what you would do if the unforeseen happened and you could no longer manage your affairs. Talk to you lawyer about the benefits of appointing an attorney or guardian to assist you if you are incapacitated and the potential benefits of using a testamentary trust for effective tax treatment and protecting at-risk beneficiaries.
Only the rich need an estate plan
This is certainly not the case. No matter what your financial status, an estate plan enables you to appoint a trusted person to administer your assets when you pass, ensure your hard-earned property is left to beneficiaries chosen by you and not others, maximise the gifts and benefits you leave to your loved ones through appropriate taxation strategies, and prepare for unexpected crisis (illness and incapacity) by appointing somebody you trust to deal with your affairs when you cannot.
A plan needs to consider who matters, what you have now, what you may have in years to come, and what your final wishes will be.
Tip: Think about your current assets and the assets you aim to accumulate in the future – they soon add up. Think about who you would like to benefit from your estate and how you can maximise the value of your assets for your beneficiaries. Your lawyer’s role is to document your wishes to ensure they are legally enforceable and can be carried out when you pass.
I can leave joint property to whomever I wish
Property owned jointly with others does not form part of your estate. The right of survivorship means that upon the death of an owner of a jointly held asset that asset automatically vests in the surviving owner/s. Any contrary intention expressed in a Will is void.
The right of survivorship is an important principle when estate planning. Jointly held assets such as real estate often comprise the bulk of the estate’s value. For spouses and de facto partners, this may be ideal as many would simply wish the surviving partner to benefit. However, there are many situations where joint ownership is not appropriate such as property held with certain other family members, non-family members or other entities, or property that remains jointly held after divorce or separation.
Tip: Review your assets (real estate, bank accounts, investments) and check how they are held. Your lawyer can assist in this process and if necessary, sever joint tenancies so that your share of property can be separately held and left to whomever you wish.
Superannuation forms part of my estate
Superannuation does not automatically form part of your estate assets for distribution under your Will. Death benefits, comprising the superannuation account balance and any life insurance payments, are paid to a ‘dependant’ determined by the fund trustee, or in accordance with a Binding Death Benefit Nomination (BDBN).
In most cases, fund members can nominate their intended beneficiaries by completing a BDBN. Without a valid BDBN, the beneficiaries are paid to a dependant decided by the trustee or otherwise, to the estate. This may not reflect the deceased member’s intentions.
Fund members should also consider the way death benefits are taxed in the hands of the nominated beneficiary. Essentially, a spouse or partner will be considered a tax-dependant under taxation law and accordingly, receive death benefits tax free. Alternatively, whilst adult children can receive death benefits under the relevant superannuation laws, they are not ‘tax-dependants’ according to taxation laws and will need to pay tax on certain components of the benefits paid.
Tip: Review your superannuation and life policies to determine whether you have in place a valid and updated BDBN. Talk to your lawyer about the formalities required to execute a BDBN and strategies to minimise adverse tax implications on the payment of your death benefits.
If I die without a Will my assets go to the Government
Essentially, this is incorrect however not reason to avoid making a Will.
If you die intestate your assets are distributed according to pre-determined formulae set by legislation in each state and territory. The rules attempt to reflect society’s ‘expectations’ as to who should benefit from a person’s estate. They provide a specific order of distribution to the deceased person’s next of kin.
The problem with these statutory rules is that they do not consider the wishes of a deceased person nor his or her unique circumstances. Without a valid Will, the rules cannot be altered to take account of the real intentions of the deceased whether or not these were expressed during his or her lifetime.
Tip: Don’t rely on a statutory formula to determine those entitled to benefit from your estate. Although only in the most extreme cases will the Crown have a right to an intestate’s estate, a Will is essential to nominate with clarity your executor and chosen beneficiaries.
I need to update my Will when I have a child or more children, move or acquire new assets
You should always review your Will when your personal and financial circumstances change significantly. Your Will may already provide for children (or future children) and you may not need to update it for every change, but it is good practice to review it when you experience major changes in your life.
You should also be careful about naming specific assets in your Will, for example details of a particular vintage car that you may own. A gift in your Will of a specific asset of considerable value which is disposed of during your lifetime may fail and cause an unintentionally unequal distribution amongst beneficiaries.
Wills are generally drafted to provide flexibility with respect to the nature and value of assets held, and to provide for future generations (unborn children) and substitute executors and beneficiaries.
A testamentary discretionary trust provides flexibility in distributing your assets and helps protect your estate from unintentional distribution to estranged partners or creditors of insolvent or bankrupt beneficiaries. A testamentary trust also helps to protect vulnerable beneficiaries such as those with a disability, drug, alcohol, or gambling problem.
Tip: Flagging to review your Will each year, for example when your annual tax return is prepared, makes good sense. In many cases, no changes will be needed but it is good practice to make a habit of a regular review. If you separate, divorce, or your financial or personal circumstances change significantly contact your lawyer immediately to see how these changes impact your existing Will and, where necessary, prepare a new Will.
This article is intended to provide general information only. You should obtain professional advice before you undertake any course of action.
Effective estate planning takes time and careful consideration. If you or someone you know wants more information or needs help or advice, please contact us on 02 9790 7000 or email [email protected]