You have worked so hard to build the wealth you have and nurture the relationships around you. Good estate planning considers how to best transfer the wealth between generations, protect it from future loss or future claims, maximise tax efficiencies, and, most importantly, ensure as little risk as possible to the strength of the relationships of the people left behind.
There is no such thing as a watertight Will. But there are varying degrees of strength, from being hopeless at one end (the homemade Will templates sourced online or bought from the newsagent) to the practically bulletproof, carefully crafted Will and accompanying suite of other control materials. The stronger a Will is, the better placed it is to resist Will challenges, because it is drafted in contemplation of where the risk points are, and those risk points are woven into the fabric of the estate planning.
The risks become an essential foundation point to leverage the strength. By analysing the risks and weighing them up, we can work out where the estate planning needs particular reinforcement, strategies around it, and walls built up to insulate against the challenges and weaknesses. Sometimes this reinforcement is within the Will itself, but often outside of the Will as well.
This requires open and frank conversations that we are well-placed to guide. Sometimes these conversations are quite confronting, and sometimes they need to be. Often, having your trusted financial advisors and accountants in the room adds enormously to the strategy formation, especially if there are properties, businesses, share portfolios, Superannuation, and Trusts in the mix.
Our top tips when it comes to solid estate planning
Avoid DIY Wills
Make sure you appreciate the folly of a do-it-yourself Will, as these usually end in tears. Strangely, people seem to try to emulate lawyers’ language and use odd Latin phrases and quasi-legal language that is not just confusing, but often plain nonsense, or even interpreted to mean the very opposite of what the Will-maker intended. The homemade Will is about the greatest example of the false economy we know of, causing untold costs later on.
Superannuation needs special attention
Superannuation is a world of its own and does not automatically fall into your Will – Super needs to be carefully dealt with to make sure it ends up in the right hands. Binding Death Benefit Nominations must be crafted carefully, or else they are likely to fail, not just landing Super in the wrong hands, but coming with adverse and expensive tax consequences. Considered properly, Super can be a brilliant tool for steering wealth to certain beneficiaries in a totally challenge-proof way.
With self-managed Super funds, careful consideration must be had as to who ends up the new Trustee of the fund and if they can exercise their discretionary powers or not. Super comes with a raft of laws and rules attached to it. Clients are often surprised they cannot leave their Super to just anyone, but only to a SIS dependent (spouse, child under 25, or someone in an interdependency relationship, which is quite a complex definition but essentially means financially dependent) or to the Legal Personal Representative (the Executor of the Will). It’s only if it goes to the Will that it can then be carved up to someone who is not a SIS dependent, such as a brother, sister, charity, or grandchild. Careful consideration here is needed, or else there are negative tax consequences.
Choose beneficiaries wisely
Choosing beneficiaries and the age at which they can benefit, and how much they are to benefit, is something to be very carefully considered. We have some perfect case studies and examples to share with you to help guide the right decisions here.
All too often, we see beneficiaries far too young being destroyed by their instant wealth, and we see it disappear faster than a rat up a drainpipe. On the other hand, we see beneficiaries who inherit far too late to be able to leverage the wealth they are left.
Each beneficiary must be considered in their own right, regarding their own needs, expectations, and where they fit in the hierarchy of the family. A common mistake is to treat all beneficiaries as a class, such as all children being treated equally, when they are far from equal.
Make proper provisions to prevent contests
Making proper provision for the right people is so important to reduce the likelihood of contesting, and this is one of the most important points we try to drill home. Don’t make mere assumptions. Having those deep conversations usually uncovers vital information that determines where the dangers are.
No Will should be set in stone, instead, it should be seen as a living document that is able to be updated and tweaked as the world changes. Burying the Will in the depths of a filing cabinet for 15 years is likely to result in a Will so out of date it’s practically irrelevant.
Choose the right Executor
Choosing the right Executor is a critical – and something that is often treated as an afterthought by Will-makers. Choosing someone who you trust and who you know is honest is key. You also want to preferably consider someone who is able to be dispassionate and independent, as often Wills require the exercise of discretion by the Executor.
Considerations include their age, independence, abilities, understanding of the law and finance, ability to moderate disputes and make hard decisions, and balance this work along with their other personal commitments. Ensuring they have the time to fulfill their duties properly is important, as it can be a very arduous task.
Appoint suitable guardians
Choosing the right legal guardians for under-age children. The importance of this point is rarely lost on anyone with children, and often one of the hardest decisions parents have to make in their Wills.
Our key pointer here would be preferably not to make the guardians (who make decisions such as where the children live, how they are brought up, what schools they go to, what religion they follow) the same people as those who handle the money. The Trustees of the Trust for the children may be best placed to not be the same people as those making the decisions on lifestyle that require spending.
For example, a guardian who is also the Trustee may decide the children need to be driven to school every day in a fancy and vastly overpriced, rarely seen brand of exotic European car. An independent Trustee may decide on a much more utilitarian vehicle, preserving the wealth of the Trust to generate income for school fees, groceries, or holidays, and leaving a much larger inheritance for when the children reach adulthood.
When it comes to choosing the Trustees, our points would be similar to those above when it comes to choosing your Executor.
Review your estate plan regularly
Estate plans should always be reviewed every few years, but especially on the back of significant life changes. The days of burying it in the bottom drawer for decades are long gone. The rapid pace of our lives and the rapid changes that take place in society at large requires regular reanalysis of estate planning documents.
Succession law is one of the most complex and ever-changing areas of law, with new precedents and landmark cases setting new benchmarks all the time. Clever advisors are on top of this need and inform their clients to routinely revisit their materials.
Use tax-efficient strategies regularly
Be aware that there are strategies to employ within estate planning to help achieve possible tax benefits, such as a Testamentary Trust for young children. It is also important to understand how stamp duty and capital gains tax may come into play depending on the structure of the Will.
Don’t fall for estate planning myths
Beware of the many myths surrounding estate planning – such as “if I die without a Will my spouse gets it all anyway,” and the belief that a Will may be set in stone without the ability to be challenged.
Start estate planning early
Get an estate plan in place sooner rather than later – even if it’s only to ease the burden on those around you when it comes to your Superannuation and your digital assets. Even if you don’t think you have masses of wealth, you’ll be surprised just what there is that needs protection.
Be cautious when gifting to children
The Bank of Mum and Dad is incredibly useful (and more necessary to get on the property ladder than ever), but caution should be taken.
Ideally, any large gifts to children during life are treated as loans and secured, to prevent divorces and bankruptcies from siphoning the gift away. Without the loan arrangements (which can be cleverly structured), there is little chance of preventing the equity from being lost.
Leverage the power of Testamentary Trusts
Testamentary Trusts are amazing things. Use them as often as you can for wealth protection, building challenge-resistant environments, tax planning, and for high-risk beneficiaries such as gamblers, spendthrifts, and beneficiaries struggling with addiction issues.
Even more special Testamentary Trusts such as Protective Trusts and Special Disability Trusts can be employed for beneficiaries with special needs such as mental illness or reduced capacity, and can be brilliantly woven in to ensure a disabled beneficiary gets an inheritance that won’t affect their pension and disability entitlements.
Inheritance tax and CGT
We have no death duties or inheritance tax in Australia – at the moment anyway. There may be such a thing in the future, depending on the ability of the tax-paying generations to underpin the increasing needs of an ageing population reliant on the pension. Time will tell as to whether we end up with a wealth tax or inheritance tax type structure similar to the UK, where monetary thresholds apply once an estate goes to beneficiaries beyond a spouse.
Some argue that our Capital Gains Tax is a de facto type of death tax, as passing assets such as shares and property (other than the family home) carry CGT event possibilities. Clever succession planning contemplates CGT, especially when giving specific assets. For example, if I have a bank account with $1 million cash in it, and I have a beach house worth $1 million, they are actually not the same value. If I leave the cash to my son and the beach house to my daughter, my daughter will have a CGT component, so her beach house is worth quite a bit less. Arguments in families often ensue on this sort of thing.
It all starts with a conversation
Estate planning is far more than just writing a Will. It’s a comprehensive, strategic, and evolving process. By regularly reviewing your estate plan ensures that your legacy is protected, your intentions are honoured, and your family is spared unnecessary grief and conflict.
Get in touch with our experienced estate planning team today to start the conversation.
