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Retirement

Deadly estate planning mistakes and how to overcome them

  • December 07 2020
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Retirement

Deadly estate planning mistakes and how to overcome them

By Zarah Mae Torrazo
December 07 2020

Estate planning can be a complex process. Here are some of the mistakes you should avoid when getting your affairs in order.

estate planning mistakes

Deadly estate planning mistakes and how to overcome them

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  • December 07 2020
  • Share

Estate planning can be a complex process. Here are some of the mistakes you should avoid when getting your affairs in order.

estate planning mistakes

Estate planning is a critical task for anyone. However, it can be a complicated process and mistakes can be made very easily, which can end up being costly. Here are some of the most common estate planning mistakes and how you can overcome them. 

1. Not updating or reviewing your estate plan 
Your estate plan should change as you go through various life events. Initially, your estate plan is created based on assumptions regarding finances, asset growth and composition of the family. These are plans that are written today to prepare for the situation of the near future. Many people have a misconception that once your estate plan (or at the very least, your will) is drawn up, things will just “fall into place”. 

Instead of giving your loved ones the guidance they need after your death, an outdated estate plan will just cause confusion or disruption. Many people underestimate the impact of big life events. 

Legal experts recommend reviewing your estate plan according to your circumstances every 3-5 years or as soon as any of the following occurs:

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  • Change in your personal circumstances (mental or physical health)
  • Change in your financial situation (receiving a big inheritance, bankruptcy, acquisition of new property) 
  • Change in your family structure (divorce, birth of another child, death of a family member); and
  • Change in estate planning or taxation laws. 

2. Failing to account the impact of debts 

Before your assets can be distributed, executors are required to pay the deceased’s debts. Debts can generally be paid directly from the estate account. The most common type of debt in this situation is a mortgage, and this usually takes a significant part of the estate away once it is paid off. This will impact on how much beneficiaries end up receiving from an estate.

Failing to understand how certain debts need to be paid or are incurred upon your death may cause problems for your beneficiaries. They may receive less than you intended to have. In some cases, your beneficiaries might be made unintentionally liable for your debt. Thus, a clear understanding of your debt and how it will be paid after your death is important as you may think that you have distributed assets fairly by only taking into consideration the face value of your assets.

3. Forgetting tax planning

Similar to not accounting for debts, several tax considerations can impact how much your beneficiaries end up receiving from your estate. Don't assume that all your assets can be transferred to beneficiaries without being subjected to capital gains tax. 

It’s true that most assets owned at the time of death can generally be transferred to beneficiaries without the need to pay capital gains tax. But there are notable exceptions. For example, capital gains tax becomes payable in the sale of certain types of properties. This means you need to take a closer look at income tax, capital gains tax and land tax. Although the beneficiary will need to account for this when they eventually sell the asset, giving them a heads-up about these tax considerations will be highly useful. 

4. Poor or wrong choice of executor 

Nominating the wrong person to execute your estate (executor) can be a disaster waiting to happen. An executor is an important role because they are responsible for taking ownership of the estate after your death. They are also tasked with distributing assets to the beneficiaries. Additionally, they will also be responsible for paying for your funeral arrangements and other administrative expenses. So, you should avoid choosing someone who is incompetent, unorganised, dishonest or biased to carry out your estate administration.

A spouse, close family member, friend or trusted adviser will generally be named as an executor. Keep in mind that naming an executor is not a favour or privilege you bestow on someone, but a very important responsibility which can be very demanding and sometimes frustrating. Here are some important points to consider when choosing someone as an executor:

  • Will they be driven by your wishes or by their emotions?
  • Can they carry out their responsibilities during their time of grief?
  • Do they have the skills to deal with the complexities of the process?

Choosing the right executor is necessary to ensuring that your estate will be distributed according to your wishes. Additionally, you should make sure that your appointed executor will be given adequate powers to carry out your wishes. If they are not granted sufficient powers (e.g. power to sell and dispose of assets, make investment decisions etc), the executor may be forced to make costly court applications to get approvals for what may seem like trivial and logical matters. 

5. Not including superannuation in estate planning 

Many Australians fail to realise that their superannuation is an asset class that can be bequeathed upon death if properly planned for. The distribution of your super fund will depend on the terms of the fund provider, the terms of the fund, laws or the trustee of the fund. 

To avoid encountering issues regarding your super fund, it’s necessary to prepare a binding death benefit nomination to ensure that your wishes in relation to your super fund are achieved. 

This is particularly important if you are part of a self-managed super fund (SMSF). It’s important to know the risks associated with how your superannuation death benefit is paid. There is an increased level of risk when it is paid directly to your estate rather than a payment directly from the SMSF to a dependent. When you are doing your planning, remember that superannuation is an important part of the process. Your financial, estate and superannuation planning should be integrated with each other and should not be done separately.  

6. Bequeathing assets you aren’t allowed to

Oftentimes, people fail to understand the impact of passing on assets that they are not allowed to. Assets that are either held jointly with rights of survivorship, under a family trust, by a company or a partnership are not fully owned by you, so they can be automatically transferred to someone else under that title even if that transfer was against your expressed wishes in a will. 

Below are some assets that can’t be passed on: 

  • Jointly owned property or assets cannot be part of your estate. How they will be distributed will not be decided by the terms of your will. In this case, the surviving joint tenant will automatically acquire ownership of your share of the asset upon your death, known as the ‘right of survivorship’. Similarly, company assets themselves cannot be distributed based on terms of a will; however, shares in the company generally can be;
  • Majority of superannuation funds include the option to nominate a beneficiary. As superannuation assets are held by the trustee of the super fund, this nomination will override any instructions or designations in the will;
  • Any beneficiary nominated in a life insurance policy will be the one to receive your death benefits. This is regardless if you named anyone in your will to receive those benefits.  
    Assets listed under a trust account are also not included in an estate, but continue to be held in trust.

When making a list of your assets, make sure to take note of the assets that you have full control of and those you don’t have.  

7. Ignoring dementia and other competency issues


While it’s something that most of us avoid thinking about, mental disorder is one of the top reasons Australians make claims against their life insurance. This includes dementia, schizoprenia and other disorders that can make you mentally incapacitated to make important financial and life decisions. 

When creating an estate plan (particularly your will) you need to be of sound mind. There are numerous disputes over estates where there is an allegation that the person who died lacked full capacity when they drew it up. In these cases, the will’s validity can be challenged in court. 

The best advice to overcome this would be draw up your estate plan as early as you can, when you are in the pink of health. However, if you are particularly ‘advanced in years’ or you have been diagnosed with a condition that may affect your mental capacity, you may get a letter from your doctor affirming that you are of ‘sane mind’ when you are making your will. This will prevent the possibility of a disgruntled relative challenging your state of mind later on. 

8. Underestimating willingness to contest your wishes 

People make the mistake of believing their dependents and beneficiaries will not dispute their wishes after their death and fully accept the terms of their will. 

But in recent years, contesting the terms of a will in court is becoming more common in Australia, as well as other countries. You’d be surprised to learn who among your beneficiaries assume they will receive an inheritance (or believe they should get a bigger share of it) after you pass. 

Many also make the mistake of assuming that as long as a person is given something in the will, no matter the size, that beneficiary cannot contest the will any further. This is far from the truth. For example, if you were financially responsible for your ex-spouse, he/she may still have a right to claim a portion of your estate. 

Legislation regarding whether you can challenge a will differs between state and territory. Whether or not such a dispute can get court approval depends on the circumstances, the relationship of the challenger and the deceased and the size of the involved estate. Creating a detailed estate plan can help lower the chance of such claims against your estate being successful. 

9. Forgetting to include all assets

Similar to passing on assets that you can’t legally bequeath, failing to take proper inventory of your estate is another pitfall. Most people only remember tangible assets such as cars, real estate, jewelry and other valuables, but often forget financial assets. 

Be sure to include all your bank accounts, bonds, shares and other potential funds you have. Keeping a proper list of your intangible and tangible assets will ensure you’re not leaving anything important out of your estate planning. 

10. Never having a real plan

An estate plan is like a fire extinguisher. You hope you never use it, but it still helps us feel secured to have it in place. However, many people fail to see how important to even have a “real plan”. We say real plan because everyone has some type of plan set up, but it is usually poorly designed for your situation and there is little thought behind its creation. 

The grieving period after losing someone can also be a difficult time. If you don’t leave behind a concrete estate plan, it will lead to more stress for those you left behind. With this, do you really want your estate and your end-of-life care to be up in the air for courts to decide? 

By Australian law, the existing and surviving relative who is the highest on the list takes priority. This order of distribution is as follows:

  • Spouse or de facto partner and children from the relationship
  • Spouse and children from a previous relations​​hip
  • Grandchildren (if the spouse has already died)
  • Surviving parents
  • Siblings (full and half blood)
  • Grandparents
  • Uncles and aunts
  • First cousins
  • The state government

If you have not drawn up a will and if there are no other relatives that are eligible to receive your assets, then the state government is entitled to the whole of the estate. Remember that every family relationship is different, and those that are on the top of this list may not be the most ideal for your situation. This is why having a will is important to ensure that your wishes will be fulfilled after your death. No matter how old you are, having an estate plan in place will make this difficult time a little easier for your loved ones.

Deadly estate planning mistakes and how to overcome them
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