Rather than protecting your loved ones in the event of your death, incorrect estate planning can set into motion a chain of events that can lead to grief and ill will among your beneficiaries, and may pave the way to a legal challenge, warns Michael Hutton, HLB Mann Judd Sydney’s head of wealth management.
There are 10 key factors to consider when preparing an estate plan that will help guard against this, Mr Hutton says.
1. The basics
Estate planning documents to consider include your will, a power of attorney, enduring guardianship, superannuation death benefits nomination and testamentary trusts.
“A will is a person’s statement of intention for distribution of their assets after they die.
Assets upon death include your overall property – but don’t include money held in trust for you, such as family discretionary trusts and superannuation. It also doesn’t include assets held as joint tenants such as jointly owned real estate, joint bank accounts and joint share portfolios, so it is important to take this into account when planning your estate,” Mr Hutton says.
2. What is not covered?
“Jointly held assets will automatically pass to the surviving owner. In some circumstances this is a positive outcome as upon death assets held jointly with your spouse, for instance, pass directly to them so there is no interruption in them being able to access investments and bank accounts.
“A key exclusion is superannuation. This is often the second largest asset that a person “owns”. But you don’t own your super, it is held in trust for you. You can nominate to the trustee of your super where you want your death benefit to go, and this nomination may be binding or non binding on that trustee, depending on how you nominate,” Mr Hutton says.
3. Newsagent wills can be dangerous
“Newsagent wills are a lawyer’s best friend, and are a great source of litigation. They can be challenged more easily than a will that is drafted by an expert and tailored specifically for your circumstances,” Mr Hutton says.
4. Power of attorney – enduring
A power of attorney is a document that confers the authority for another person to act on your behalf. An enduring power of attorney enables someone to make financial and legal decisions for you until it is revoked or until death or bankruptcy.
“An enduring power of attorney is not revoked if you lose mental capacity, although you are able to specify limitations in the document. An enduring power of attorney can act as trustee or director of trustee company for you in a SMSF.”
5. Enduring guardianship
This document confers the authority on another person to decide medical treatment you will receive, and lifestyle factors such as where you will live.
“An enduring guardianship only comes into effect upon you losing capacity to manage your own affairs,” Mr Hutton says.
6. Superannuation beneficiary nomination
Beneficiaries named in your will are not necessarily the ones that your superannuation fund assets will go to. Superannuation fund trustees make the decision regarding where to direct super fund benefits, so it is important to ensure your beneficiary nomination form is current.
“To ensure that super benefits, including life insurance, are paid to the intended person, people need to consider making a binding death benefit nomination,” Mr Hutton says.
“In the absence of a valid binding nomination, the trustee will use its discretion to decide to whom the superannuation benefit is paid. In making this decision the trustee may consider who has been nominated in the deceased’s will, non binding nominations or pay the benefit to the deceased’s estate.”
7. Testamentary trusts
A testamentary trust is generally a discretionary trust that is incorporated into the will to be formed upon your death. A testamentary trust offers significant taxation advantages in terms of income splitting and offers some protection of the assets from financial difficulties the beneficiaries may suffer.
“Income and capital gains derived by children under the age of 18 years from assets received as a result of a will are not subject to penalty tax rates. There is no legal limit to how many testamentary trusts a will can establish. Ideally a will would accommodate the establishment of a separate testamentary trust for each beneficiary,” Mr Hutton says.
Life insurance can be used to pay off debt or equalise the benefits paid when there are a number of beneficiaries to consider, and is particularly useful in the case of blended families, or second marriages.
“Insurance can be particularly important in the case of small business ownership. The insurance payment can ensure the death of the proprietor does not mean the death of the business as well,” Mr Hutton says.
9. Who can challenge a will?
A challenge to a will is not simple to initiate and is usually raised by a disgruntled family member who feels hard done by. In Australia a will can generally only be challenged by:
“Although challenges can be made to a will, this does not necessarily mean that the challenger will be successful. However, there are usually legal costs involved, and many challenges if found to have merit have the costs paid by the estate.
“Many challenges to wills centre around the validity of the will and also whether the deceased had capacity at the time of signing,” Mr Hutton says.
10. Charitable giving
While most people are aware of the option to leave a bequest in their will, and actively do so, it is not the only philanthropic option.
“In some ways, it is best to consider giving donations to your charities of choice while you are still alive, rather than leave a bequest in your will. This way you receive the joy of seeing your money being put to work. You also receive a personal tax deduction, whereas a bequest in your will is generally not tax deductible to your estate.
“The next 20 years will see the biggest transfer of wealth in Australian history. More than a simple will, a comprehensive estate plan will help protect your assets for your lineal descendants and provide a tax effective way to hold the wealth that you leave behind,” Mr Hutton says.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Michael Hutton – Phone: 02 9020 4193
7 November 2013