BY WEALTH ADVISER
Introduction: The importance of estate planning in the modern era
Estate planning is a crucial aspect of financial management that extends far beyond simply writing a will. It encompasses a range of strategies and legal arrangements designed to manage and distribute your assets after your death, as well as to plan for potential incapacity during your lifetime. Despite its importance, estate planning is often overlooked or misunderstood by many individuals.
As Noel Whittaker points out in his book ‘Wills, death & taxes made simple’, “It’s a sad indictment of our attitude to this important topic that almost 50% of Australians still die without a will. But it gets worse - apparently for those who do have a will, 70% of them don’t know where it is, couldn’t locate it easily if asked to, and haven’t reviewed it in the past 20 years.”
A will is the cornerstone of any estate plan. It’s a legal ,, document that outlines how you want your assets distributed after your death. However, as Whittaker notes, “An effective will minimises the risk of challenges and considers what the beneficiaries will receive after taxes and duties, and makes things as simple as possible for your executor.
This statistic underscores a common misconception about estate planning - that it’s a one-time task involving the creation of a will. In reality, effective estate planning is an ongoing process that requires regular review and updates to reflect changes in your life circumstances, financial situation, and the legal landscape.
In this comprehensive guide, we’ll explore the key components of modern estate planning, including wills, asset ownership structures, superannuation, and other often-overlooked aspects. We’ll also discuss practical steps you can take to ensure your estate plan accurately reflects your wishes and provides for your loved ones in the most effective way possible.
Understanding Wills and Asset Ownership
The Critical Role of Wills in Estate Planning
A will is the cornerstone of any estate plan. It’s a legal document that outlines how you want your assets distributed after your death. However, as Whittaker notes, “An effective will minimises the risk of challenges and considers what the beneficiaries will receive after taxes and duties, and makes things as simple as possible for your executor.”
Creating an effective will involves more than just listing your assets and beneficiaries. It requires careful consideration of various factors, including:
The relevance of asset ownership
Which assets will be distributed as part of the estate and which separately
The characteristics of different types of assets
The various types of trusts that may be relevant to inheritances
Centrelink issues, particularly relevant to anyone receiving the age pension
Property considerations
Extra needs for your will if you have dependent children
Types of Asset Ownership and Their Impact on Inheritance
One of the most crucial aspects of estate planning is understanding how different types of asset ownership affect the distribution of your estate. Whittaker explains that assets can generally be categorized as either estate assets or non-estate assets.
Estate assets are those held:
In your name only
As tenants in common
Non-estate assets are those held:
As joint tenants
In discretionary trusts
In superannuation
Estate vs. Non-Estate Assets: What You Can and Can’t Control Through a Will
Estate assets can be bequeathed through your will. These may include household goods, a share portfolio, or your share of property held as tenants in common. On the other hand, non-estate assets cannot be disposed of via your will.
For example, if you own a property as joint tenants with your spouse, upon your death, the entire property will automatically pass to your spouse, regardless of what your will says. This is known as the “right of survivorship”. Whittaker advises, “Obviously, you should not hold an asset as joint tenants unless you wish the other holder to have your share if you die first.”
Understanding these distinctions is crucial when planning your estate. As Whittaker notes, “It’s important to think about the ownership if you are considering making a bequest of a specific property or proposing a testamentary trust in your will. Because a jointly owned property automatically goes to the surviving owner and is not part of your estate, it cannot pass to a testamentary trust.”
Superannuation and Death Benefits: An Often Overlooked Aspect
How Superannuation Fits into Estate Planning
Superannuation is a significant part of many Australians’ wealth, yet it’s often overlooked in estate planning. As Brooke Logan from UniSuper explains, “When you die, your superannuation (super) death benefits can be paid to anyone who meets the definition of ‘dependant’ under the Superannuation Industry Supervision (SIS) legislation and/ or the Legal Personal Representative (LPR) (i.e. the trustee of your deceased estate).”
It’s crucial to understand that your superannuation does not automatically form part of your estate and is not governed by your will. Instead, the distribution of your superannuation death benefits is determined by the rules of your superannuation fund and any valid beneficiary nominations you have made.
Nominating Beneficiaries for Your Superannuation
Logan emphasizes, “Nominating beneficiaries with your super fund is the only way to direct your death benefits to the people you want to receive it.” There are several types of nominations you can make:
Binding nominations: These direct the trustee of your super fund to pay your death benefit to the person(s) you nominate.
Non-binding nominations: These act as a guide for the trustee, but the final decision rests with them.
Reversionary nominations: These are available for some pension accounts and allow you to nominate a beneficiary to continue receiving your pension after your death. When nominating beneficiaries, it’s important to consider who qualifies as a ‘dependant’ under superannuation law. This can include your spouse, children (with some restrictions for adult children), and anyone financially dependent on you or in an interdependent relationship with you.
Tax Implications of Superannuation Death Benefits
The tax treatment of superannuation death benefits can significantly impact the amount your beneficiaries receive. Logan explains, “Children under 18 are considered dependants for tax purposes, so they can receive death benefits tax-free and have the option of receiving death benefits as a lump sum or, in some cases, as a pension.”
However, for adult children who are not financially dependent, the situation is different. Logan notes, “Adult children who are not financially dependent may pay tax of up to 17% on the taxable component of a super death benefit (15% plus the 2% Medicare Levy).”
These tax implications highlight the importance of careful planning when it comes to superannuation death benefits. In some cases, it may be more tax-effective to direct superannuation benefits through your estate rather than paying them directly to non-dependent beneficiaries.
Comprehensive Estate Planning: Beyond the Basics
Considering Different Family Situations in Estate Planning
Modern families come in all shapes and sizes, and effective estate planning needs to account for these diverse situations. Whittaker provides a case study that illustrates this point:
“David and Susan have both been married before. He has two children from a previous marriage, and she has four. As they don’t intend to have any more children, they hold assets as tenants in common. This enables David’s children to have half the proceeds when he dies and Susan’s children to have half the proceeds when she dies.”
This example demonstrates how asset ownership structures can be used to ensure fair distribution in blended families. However, it also raises additional considerations, such as what should happen to the family home when one partner dies. Should the surviving partner have the right to continue living there? Should the property be sold and the proceeds distributed? These are complex questions that require careful thought and often, professional advice.
Planning for Incapacity: Enduring Power of Attorney and Advance Care Directives
Estate planning isn’t just about what happens after you die; it’s also about preparing for potential incapacity during your lifetime. Two key documents in this regard are:
Enduring Power of Attorney (EPA): This legal document allows you to appoint someone to make financial and legal decisions on your behalf if you become unable to do so.
Advance Care Directive: This document outlines your wishes for medical treatment and end-of-life care if you’re unable to communicate these yourself. Whittaker emphasizes the importance of having these documents in place and easily accessible: “Are these documents up-to-date and readily available to the family? True, the EPA ends on your death but if you lose capacity — or just the desire — to deal with practical matters as time passes, the EPA could be essential for a range of financial and medical matters.”
Digital Assets and Loyalty Programs in Estate Planning
In our increasingly digital world, estate planning needs to consider digital assets and online accounts. Whittaker advises, “Ensure that you have put in place the appropriate delegations for your online accounts to enable another person to access your accounts to operate, close, or delete them.”
This can include social media accounts, email accounts, online banking, and cryptocurrency wallets. It’s important to provide instructions on how these should be handled after your death.
Loyalty programs and points are another often-overlooked aspect of estate planning. Whittaker notes, “Loyalty programs and points are often not transferable after death (they usually revert back to the provider); however, it is sometimes possible to transfer these points during your lifetime to another family member.”
Preparing for the Future: Practical Steps and Considerations
Organizing Important Documents and Contacts
One of the most practical steps you can take in estate planning is to ensure all your important documents are organized and easily accessible to your executor or family members. This includes your will, EPA, advance care directive, superannuation statements, insurance policies, and details of your assets and liabilities.
Whittaker suggests creating a list of important contacts, including “your plumber, electrician, gardener, bank staff, solicitor and various healthcare professionals.” This information can be invaluable to those managing your affairs after your death or during a period of incapacity.
Discussing Your Plans with Family and Executors
Open communication with your family and executors about your estate plan can help prevent misunderstandings and conflicts after your death. Whittaker recommends meeting with your executors “to discuss your affairs in depth and give them an idea of how you would like things managed after you die.”
This is particularly important if you have made decisions that might be seen as unequal or unexpected. Explaining your reasoning can help prevent hurt feelings and potential legal challenges to your will.
Regular Review and Updates of Your Estate Plan
Estate planning is not a one-time event but an ongoing process. Your estate plan should be reviewed regularly and updated whenever there are significant changes in your life circumstances, such as:
Marriage, divorce, or remarriage
Birth or adoption of children
Death of a beneficiary
Significant changes in your financial situation
Changes in tax laws or other relevant legislation Whittaker advises, “Take a close look at your will. Have there been any major changes to your assets since you made the will? What about the beneficiaries: look for any changes in their situation since the will was executed.
Conclusion
Estate planning in the modern era extends far beyond simply writing a will. It requires a comprehensive approach that considers various aspects of your financial and personal life, from asset ownership structures to superannuation, digital assets, and planning for potential incapacity.
By taking a proactive approach to estate planning - understanding the complexities, seeking professional advice when needed, and regularly reviewing and updating your plans - you can ensure that your wishes are carried out effectively and your loved ones are provided for in the way you intend.
Remember, as Whittaker points out, “The more transparent you keep the finances, the less chance there is of squabbles later.” Open communication, careful planning, and regular reviews are key to creating an effective estate plan that truly reflects your wishes and provides for your loved ones in the best possible way
References:
Estate planning made simple, Part I (firstlinks.com.au)
Estate planning made simple, Part II (firstlinks.com.au)
What happens to your super when you die? (firstlinks.com.au)
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