8 Common Mistakes in Estate Planning

8 Common Mistakes in Estate Planning

Estate Planning is a vital part of your overall wealth management plan and too often we see people taking a no or low-advice approach to their estate planning, usually with less than stellar outcomes for the family involved at the back end. Here are 8 of the most common mistakes people make in their approach to estate planning, written by our partners at Equity Trustees.

1. Underestimating estate size

An estate is rarely too small to justify some kind of planning.

For example, most if not all working Australians have superannuation which can include significant life insurance. This alone can be enough to warrant an estate plan. It may be as simple as ensuring that someone has been nominated as the beneficiary of the super fund, but even this is worth doing properly.

Keep in mind that a divorce does not nullify the nominated beneficiary.

2. Waiting until ‘later’

Few people want to think about it, but the sad truth is that people do die before their time. Indeed, people in their thirties or forties with young children are probably those who most need an estate plan. Every parent should make sure they have a plan in place in case anything should happen to them, so that their children have someone to look after them and any money that can be left.

Not doing so exposes loved ones to needless stress and financial hardship, as well as potentially eroding wealth through unnecessary taxes and legal fees.

Those who die intestate (i.e. without a valid Will) will have their assets distributed according to a legislative formula – a formula that might not reflect their wishes.

Anyone aged over 18 and earning an income or owning any assets (including superannuation) should  have a thorough estate plan in place, regardless of whether or not they have children or own their own home.

3. Ignoring competency issues

This is another area that few people – understandably – want to think about, but the statistics suggest that 1 in 10 people aged over 65 are affected by dementia.

Estate planning is not just about planning for death; it should also take into account what happens if someone becomes mentally incompetent. Areas such as appointing a power of attorney should be included in estate planning

4. Dismissing family feuds

Sadly, it is becoming increasingly common for family members – and even other parties – to challenge a Will in court.

Each state in Australia has its own specific legislation covering who can challenge an estate. In some states, the list is very broad and can include anyone that an individual has an obligation or responsibility to.

For example, in Victoria, a neighbour who believes that they have helped take care of someone, perhaps by helping with their food shopping or walking their dog, can make a claim on their estate. Another example is where someone is in a relationship with, but doesn’t live with, another person. Whether or not such a challenge is successful will depend on the individual circumstances of the case including the nature of the relationship and the size of the estate.

Therefore, creating a proper and detailed estate plan can help minimise the chance of successful claims against the estate. This can include specifying why one child has been left certain assets and another child other assets, for instance if the parents have already helped one child financially.

5. Not keeping up-to-date

An estate plan is not a ‘set and forget’ approach.  They should be reviewed every few years to make sure they are still current and that the beneficiaries, and the assets left, are still correct.

As a general rule, it’s a good idea not to dictate exactly what is to happen to each specific asset. A better approach is to plan based on the value of the estate, as assets may have been sold, or may be valued  differently to when the plan was first created.

Another potential problem in this area is that people leave assets in their Will that they don’t actually own.

While most assets can be dealt with in a Will, there are some significant exceptions which, by law, are not included in the estate and must be covered separately in an estate plan. These include:

  • Jointly held property – i.e. property owned with another person as joint tenant. If, however, the property is held as tenants in common, the share in the property can be passed on to beneficiaries named in the Will.
  • Superannuation – super assets are held by the trustee of the super fund and, as such, might not be included in an estate. Many superannuation funds include the option to nominate a beneficiary and this nomination will over-ride the Will.
  • Proceeds of life insurance policies – if a policy is held with a nominated beneficiary, the proceeds will pass to that person upon death, regardless of the beneficiaries named in a Will.
  • Assets held in trust – these are not included in an estate but continue to be held in trust.
  • Company assets – a company is a separate legal entity and, as such, its assets are not included in an estate.

 

As mentioned above, superannuation needs to be treated separately to the will. Most people today have assets in superannuation – and in some cases this could be an individual’s largest asset. Yet many people are unaware that super may not necessarily be dealt with in a will.

Legally, super assets are controlled by the trustee of the fund and, on the death of a member, death benefits (accumulated super investments as well as the proceeds from any associated life insurance policy) are normally paid out at the trustee’s discretion – not necessarily according to the member’s will. People should make a nomination to say how they would like their death benefit to be paid, but the trustee is not legally obliged to follow these instructions unless it is a binding nomination.

6. Using will kits

Any document that is properly witnessed can act as a Will, and the DIY kits available at the newsagent or over the internet may be enough to fulfil some people’s needs. But proper estate planning requires understanding of the whole picture of finances and personal goals, and the ability to identify the best legal structure to accomplish objectives.

Careful consideration needs to be made of all aspects of asset ownership and family relationships to ensure that the estate plan includes a will and powers of attorney as well as an understanding of how assets outside of your estate will pass to prospective beneficiaries.

Trying to save money now can cost significantly more later and cause angst and frustration amongst those left behind, at a time when they are least capable of dealing with these problems.

7. Forgetting tax planning

There are a number of tax considerations that will impact on how much beneficiaries end up receiving from an estate, such as income tax, capital gains tax (CGT) and land tax.

In most instances, any assets owned at the time of death can be transferred to beneficiaries without having to pay capital gains tax at that time. But there are notable exceptions, such as growth assets (e.g. Australian shares) gifted to a foreign resident, which may attract capital gains tax.

One of the most effective ways to minimise tax on income, particularly when leaving assets to minor beneficiaries, is to establish a testamentary trust.

A testamentary trust is simply a trust set up via a will that can be used to protect a beneficiary’s inheritance and tax-effectively distribute income.

They work by separating the beneficiary’s inheritance into a separate trust (whose terms and conditions are listed in the will) that is controlled by a trustee. The trustee then has the power to distribute income (and capital if allowed) to nominated beneficiaries. In many cases, distributing income rather than capital is a more tax-effective option.

This approach also separates the capital in the trust from the rest of the estate, providing greater protection against an inheritance being carved up in a family law dispute or spent by a spendthrift beneficiary.

8. Will vs estate plan

A will is not an estate plan. There are a number of other areas  that need to be considered, not least of which is appointing an appropriate person to act as ‘attorney’ (through a power  of attorney), and choosing the right executor.

Financial advisers who wish to offer clients assistance in their estate planning needs are well-placed to help identify their requirements and the assets that will form their estate, thanks to their existing relationship with clients and their knowledge of their financial situation.

Advisers can also bring in specialist advice for those who require assistance with some of the more technical aspects of estate planning, while still retaining their role as primary adviser  to the client.

As more and more people enter retirement with sizeable estates, the importance of providing accurate and comprehensive advice will only become more essential.

If any of the information in this article has hit home for you and you want to investigate your options we can have our solicitors from Equity Trustees help you work our your estate planning needs. Orion Financial Group and Equity Trustees have been working together to help clients just like you properly understand, set up and manage their estate planning needs. Please call us on 02 9633 5530 or complete this contact form to speak with us. 

This article was written by, Anna Hacker senior manager  – estate  planning at Equity Trustees Limited, and an LIV accredited specialist in wills and estates. Any information presented in this article is of general nature only. Make sure you seek specialist advice before acting on any of this information.

 

Sacha Loutkovsky
sacha.l@orionfg.com.au
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