Part 1 of this series on estate planning looked at the decision-making process that should be followed to prepare an effective plan. Parts 2 and 3 outline the documentation required to ensure that your strategy is effectively executed, starting with your will. Given you will not be around (or perhaps not have capacity) to ensure your wishes are met, an estate plan and a will must be carefully drafted by a qualified professional to ensure the outcome is implemented as intended.
Focus on the prime objective
In Part 1, we asked to whom, when and how you would like your assets distributed. Many people are advised to plan around tax minimisation or even prepare simple plans in order to save legal costs, without keeping their primary objectives in mind. Prioritising secondary objectives or trying to minimise costs can lead to adverse and even disastrous consequences for those left behind. Tax laws change and poorly-drafted documentation is more easily challenged (and overturned), and your beneficiaries may be left fighting for what was originally intended. It is critical to draft all your documentation around your original objectives.
Many people will go to a solicitor they know, but it may be better to choose an estate planning specialist if your circumstances are complex or your current solicitor is more of a generalist (if he or she looked after your conveyancing, for example). The Law Society in your state will have a list of qualified solicitors and information regarding specialisations, such as the Wills and Estates Law Specialist Accreditation.
What a will can and cannot address
Your will is the legal document that outlines how the assets that comprise your estate are to be distributed, but some primary assets are not included in your estate:
- any assets you jointly own with another person. Unlike assets that are held as tenants-in-common, these assets automatically revert to the surviving joint owner on your death.
- your superannuation. Superannuation death benefits can only be paid to specific individuals (see below) and the trustee of your super fund generally has discretion as to how these are distributed, unless you instruct otherwise via a binding nomination.
- a reversionary income stream. If you have an income stream (such as a superannuation account-based pension or an annuity) with a reversionary beneficiary, it will not form part of your estate, but continue to be paid to that person.
- life insurance proceeds (including those held in superannuation). These will be paid to the nominated beneficiary on the policy, or according to the discretion of the superannuation trustee.
- assets held in a fixed or discretionary trust of which you are a trustee or beneficiary, or by a company in which you are a director or shareholder. Any shares or units you hold, however, generally will form part of your estate.
Your will deals with the remainder of your assets – cash, shares, property, personal effects and so on. Your solicitor will give guidance as to how your wishes regarding these assets should be documented. Some people are highly prescriptive about each asset, beneficiary and potential scenario (such as a specific bequest of each item to one person), while others avoid ‘ruling from beyond the grave’ and take a more principle-based approach (such as dividing the proceeds of the estate three ways if there are three primary beneficiaries).
Timing of beneficiary receipt
Timing of the receipt of your estate by young or otherwise vulnerable beneficiaries requires care. Some prefer their children to reach a mature age before accessing an inheritance, while others are comfortable with it being made available when they reach 18. Others provide for their children over time, for example, 10% at age 18, 40% at age 25 and so on, or providing for specific expenses such as university fees or a house deposit. A testamentary trust can assist with delivering to these objectives.
There are pros and cons to both the general and specific approaches. While the specific approach offers certainty, it can also create significant challenges if estate equalisation is an objective, as is common when leaving assets to adult children. How do you ensure each beneficiary receives a bequest of equal financial or emotional value? This is particularly difficult if asset valuations have changed dramatically since the will was drafted, or if other issues such as capital gains tax and sale costs have impacted the final value more than expected.
The downside of the general option is that it may require assets to be sold, with adverse tax and valuation consequences, if there are large assets that are not easily divisible. It may also create conflict if more than one beneficiary wishes to receive a particular asset. This is particularly common in rural families where the family farming property is the sole asset and only one beneficiary wishes to continue working on the land. Specialist succession planning assistance should be sought in this scenario.
Ultimately the decision to be highly specific or general in your will falls to you, however it helps to have a solicitor who is supportive of your strategy or who is willing to help you understand any limitations in your approach. A good solicitor will work through multiple scenarios, to check your wishes are met in different circumstances. These could include you pre-deceasing your spouse, you and your spouse dying simultaneously, your whole family dying simultaneously etc. While such scenarios are tough to contemplate, documenting your wishes in each event ensures that you have provided for those who are left behind.
Keep your will up-to-date
Your will should be checked and may require regular updating, either due to the passage of time, value of assets or a change in your circumstances. For example, a marriage or divorce will render your will invalid, but a marriage separation will not. If you do not update your will following a major relationship change, the entire estate may be awarded to a new spouse and children from the previous marriage may miss out. The period prior to a separation or divorce is crucial, because if you pass away unexpectedly, your previous spouse may inherit your estate against your wishes.
It’s important to take control of your estate to ensure not only that your own wishes are met, but that problems are minimised for your beneficiaries at a difficult time.
In Part 3, we look at other documentation, including powers of attorney, insurance and superannuation benefits.
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 decision.