Common misconceptions about estate planning
An estate plan involves more than signing a Will and leaving it in a safe place.
An effective estate plan requires consideration of your assets and affairs as a whole, and ongoing review to ensure it continues to reflect your testamentary wishes and covers unexpected events.
In this article, we look at some common misconceptions about Wills and estate planning, and try to dispel some common myths to put you on the right track to prepare an effective estate plan.
I have a Will – isn’t that a sufficient ‘estate plan’?
A Will is a great start to planning your estate, however a Will alone does not:
- deal with death benefits to which you may be entitled – the proceeds of your superannuation account and any life policies (see below);
- appoint a trusted person to look after your financial and property affairs if you are incapacitated or away;
- appoint a guardian to make health and lifestyle choices on your behalf if you are incapacitated, taking into consideration your principles and values;
- maximise the value of your estate through effective tax planning, to improve the net outcome for your beneficiaries;
- minimise uncertainty and expense for your family by reducing the likelihood of a family provision claim;
- provide for business succession planning, or if required the winding up of a business;
- deals with any trusts you control during your lifetime.
Tip: Various legal documents form part of your overall estate plan. Think about what you would do if the unforeseen happened suddenly and you could no longer manage your affairs. Talk to us about the benefits of appointing an attorney or guardian to assist you if you are incapacitated.
Only the rich need an estate plan
This is certainly not the case. No matter what your financial status, an appropriate estate plan enables you to appoint a trusted person to administer your assets when you die, ensure your hard-earned property passes 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 crisies (illness and incapacity) by appointing somebody you trust to deal with your affairs if 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 practically achievable) and can be carried out when you die.
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 an asset held as joint tenants that asset automatically vests in the surviving owner/s. Any contrary intention expressed in a Will is simply ineffective.
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 your 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 relevant superannuation laws, they are not ‘tax-dependants’ according to taxation laws and will often be required to pay tax on certain components of the benefits paid (particularly including any life insurance in super – which will be subject to 30% tax!).
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?
Only in very rare circumstances, however not a 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 (e.g. recent highly publicised case in which on the death of young males large sums payable from life insurance in super was paid equally to the mother who had raised the son and the father who had abandoned him, and never paid any child maintenance!).
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 whenever if I have a child or more children, or move or acquire new assets
Not necessarily, but you still need to review your Will regularly and always when your personal and financial circumstances change significantly.
Be careful of specifically-named assets. A gift in your Will of a specific asset of considerable value which is disposed of during your lifetime may fail and may 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 protects 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 you should contact your lawyer immediately to see how these changes impact your existing Will and, where necessary, prepare a new Will.
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 (07) 5443 4866 or email firstname.lastname@example.org.