There are 10 key factors to consider when preparing an estate plan, to help guard against this.
1. Easy essentials
Essential estate planning documents include a 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. Assets held as joint tenants such as jointly owned real estate, joint bank accounts and joint share portfolios, cannot be distributed through a will. It is important to take these factors into account.
2. Stock take
What is yours to bequest? Jointly held assets will automatically pass to the surviving owner. Assets held jointly with your spouse, for instance, pass directly to them. A key exclusion is superannuation, often the second largest asset after the family home. You can nominate to the trustee of your super where you want your death benefit to go.
3. Beware of newsagent will kits
Newsagent wills are a lawyer’s best friend and 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.
4. Establish a power of attorney
An enduring power of attorney enables someone to make financial and legal decisions for you. 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 an SMSF.
5. Ensure enduring guardianship is in place
This confers the authority to 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.
6. Superannuation beneficiary nomination
Your will does not automatically cover your superannuation fund assets. 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. A binding death benefit nomination can help ensure that super benefits, including life insurance, are paid to the intended person.
In the absence of a valid nomination, the trustee can decide where to direct the superannuation benefit, typically your estate.
7. Consider testamentary trusts
A testamentary trust is a discretionary trust that is incorporated into a Will and forms upon your death. It offers taxation advantages in terms of income splitting as well as helping to protect the assets from any later financial difficulties of the beneficiaries.
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. Ideally a Will would accommodate the establishment of a separate testamentary trust for each beneficiary.
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.
9. Protect against a challenge
A challenge to a will is not simple to initiate. In Australia, a will can generally only be challenged by a spouse (or former spouse), children or anyone who has at any time been a dependent of the deceased or is a grandchild or a member of the same household.
Although challenges can be made to a will, it does not mean that the challenger will be successful. However, there are usually legal costs involved and if the challenge has merit, costs are paid by the estate.
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. Many donate to charities while they are still alive – rather than leaving a bequest – which means they see the benefit of what the money is used for while also receiving a personal tax deduction.
Michael Hutton, head of wealth management, HLB Mann Judd Sydney