Part 1 of this series on estate planning looked at the decision-making processes involved in preparing an effective plan. Part 2 outlined the documentation required to ensure that your strategy is effectively executed, starting with your will.
In this final part, we look at areas that are easy to overlook in the overall estate-planning process but are vitally important for ensuring that your funds go to those you intended them to and that your house is in order way before that time arrives.
Powers of Attorney
An Enduring Power of Attorney is a legal document where you appoint a person of your choice to manage your assets and financial affairs if you are unable to do so due to illness, accident or absence (such as being overseas). It also applies in the event that you lose mental capacity to make decisions, and may therefore apply for many years in the event of dementia or other cognitive illness.
A medical power of attorney allows you to appoint someone to make decisions about your medical treatment if you become mentally or physically incapable of deciding for yourself.
These two documents give your chosen attorney or attorneys almost limitless power, and therefore require careful consideration and great trust. While the Power of Attorney can be challenged and an alternative Guardian appointed in the event that your attorney is behaving unscrupulously, there is no guarantee of success and a publicly appointed Guardian may be less cognisant of your personal wishes than a close family member or friend.
To guard against unscrupulous behaviour, many solicitors will advise that two or more attorneys be appointed jointly. While this can cause conflict, it creates a system of checks and balances. In the event that you have no preferred loved one or professional to appoint, you can appoint the Public Trustee in your state. Often, however, a close acquaintance will take a more personal interest and therefore be more likely to look after your wishes, and many solicitors will recommend this option.
Superannuation death benefits
Superannuation death benefits are often an individual’s largest asset, particularly if the family home is held in joint names. These are not automatically captured by your estate, and therefore you should take steps to ensure that benefits are distributed according to your wishes.
Firstly, understand how your super fund trustee deals with death benefits. Some automatically pay all death benefits to the deceased’s estate and do not distribute benefits directly. Others distribute according to their discretion, which generally favours a spouse and minor children over other potential beneficiaries such as adult children. Some offer binding (and even non-lapsing) death benefit nominations which allow you to direct to whom your funds are paid.
An SMSF generally allows all of these options, however the trust deed must explicitly provide for binding nominations. Only certain individuals can receive a superannuation death benefit directly, including your spouse (which could be de facto and same sex partners), children (including step, adopted and adult children), any tax dependants and a person who is in an interdependent relationship with you. The tax treatment of your benefit differs depending on these relationships. Others, such as parents or siblings, can only receive your superannuation benefit via your estate.
Once you know what options are available to you, choose your preferred option and document it. Some solicitors will advise to have all proceeds paid to the estate, so the will can deal with distribution. This is often the case where a testamentary trust has been incorporated into the will. In this case, make a binding nomination to your estate if this option is offered by your fund. Other specialists believe the tax benefits and flexibility of paying a death benefit pension (generally only available to a spouse, minor child or disabled child) make this a better option. Again, ensure this is documented in a binding nomination or consider a reversionary pension, while being mindful of social security and other potential considerations.
SMSFs are a particularly important area of estate planning, as the surviving trustees of the fund have full discretion as to how your death benefits are paid in the event that you have not documented your wishes in a valid binding nomination. This has led to some high-profile court cases and adverse outcomes for potential beneficiaries, which cannot be overturned, despite the clearly valid claim (in principle if not in law) of the wronged beneficiary. Ensure your solicitor has experience in this area, and ensure your trust deed and nominations are carefully prepared; inadequate documentation has caused much grief and expense.
Insurance
Non-superannuation insurance policies should have clearly specified, up-to-date beneficiaries nominated. Check these each time you receive your annual statement to ensure nothing has changed. This includes total and permanent disablement and trauma/critical illness policies that may have life cover attached. The proceeds of these policies will be paid directly to the nominated beneficiary and bypass your estate entirely, so can be an effective way of equalising an otherwise unequal distribution or ensuring your loved ones have access to funds that may otherwise take some time to become available.
Insurance policies held inside superannuation are treated as super death benefits as per the above (albeit with different tax treatment, but that’s for another article).
Ultimately, ensuring your wishes will be met after your death or in the event of your illness or incapacity can be expensive and time-consuming. However, it may be the greatest gift you leave your loved ones, making their lives a little easier in a time of grief. The complexity of these issues illustrates why a well-qualified professional is imperative in ensuring the right outcome for you and those you care about.
Gemma Dale is the Head of SMSF Solutions at National Australia Bank. This information is general only and does not take into account the personal circumstances or financial objectives of any reader. Readers should consider consulting an estate planning professional before making any decisions.