Planning through the ages

There is no denying that 2020 has brought people’s health and wellbeing to the forefront of their mind. With the COVID-19 pandemic causing hundreds of thousands of deaths worldwide, many people may now be considering their own mortality and how they can plan for their family should the worst-case scenario occur. 

Other people may be working from home and have more free time to consider personal and financial affairs. 

The first step in estate planning would be writing a will which is a legal document that sets up how you want your assets distributed upon your death. It could also include your power of attorney wishes, advanced health directives, end of life preferences and any wishes surrounding your funeral. 

There are variations on wills and succession laws between different states which need to be considered. The state law will apply in the state where the deceased’s assets were held but the tax payable is decided at a federal level. 

Failure to have a valid will can also cause significant legal fees which will reduce the volume of assets in the estate.

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While many may not think about estate planning until they are older, this article will consider what steps people can take at three different life stages. 

SINGLE AND CHILD-FREE

Experts pointed out just because someone is in their 20s, does not mean they may not have a family or property so it was more important to focus on the ‘life stage’ someone is at more so than their age. 

Nevertheless, young people are the demographic least likely to have a will or feel the need for one as they believe they do not have major assets or any dependants.

Anna Hacker, principal at Australian Unity Trustees Legal Services, said this was a misleading perception for young people to have. 

“Young people don’t think they have anything but they probably have more assets than they think, even if it’s just a car, and then you can also add on their super and insurance,” she said.

It is important for a person to specify a death beneficiary on their super who would receive their super upon death as super did not automatically form part of a person’s estate.

Anna Mirzoyan, estate planning expert at Lifespan, said: “Without a valid nomination, your will cannot deal with your superannuation and that might form a significant part of a person’s wealth especially if there is life insurance too. 

“If a person has not nominated someone then it may go to a family member and it will be at the discretion of the executor to choose who is the most appropriate person.”

David Glen, national technical manager at TAL, said: “In the infamous McIntosh case, the deceased’s assets outside superannuation were worth about $80,000, but his superannuation balance, increased by insurance claim proceeds, was $454,000.  

“Sadly, in this case, the deceased’s surviving relatives squabbled over these assets. The deceased in this case did not have a will and did not nominate any person to receive the superannuation death benefit.”

Another factor young people may be unaware of is power of attorney which would decide who could make medical or financial decisions for them if they were to become incapacitated. Without this being decided while the person is healthy and of sound mind, it could quickly become complicated and possibly require a court to decide on the outcome.

The final factor to consider is that, while a person may be single in legal terms, they may still have a partner and this could cause a dispute in the event of their death.

Currently, partners must be living together for two continuous years if they wish to benefit from the will and this can be problematic if partners have been together for many years but not cohabited. It can also cause problems with parents who may dislike or be unaware of the partner and feel they are unentitled to any of the assets. 

MARRIED WITH KIDS

It is at this stage in life that most people begin to think about creating an estate plan and what will happen to their children.

Craig Mowll, general manager at trustee company TPT Wealth, said: “Life can change very quickly but the moment you have kids, you need to think about how they will be looked after, especially if both parents died”.

This would cover factors such as the cost of the education, appointing a guardian to look after the children, how the costs of their upbringing would be covered and whether a trust would need to be set up to hold assets until the children were 18 or 21 years old. 

There may be also steps needed to prevent the appointed guardian from accessing the money unlawfully.

For joint assets held with a spouse such as property or bank accounts a will was irrelevant as these would automatically be transferred to the surviving partner. 

“A will only covers those assets of which you have sole ownership,” Hacker said.

Robin Bowerman, head of corporate affairs at Vanguard, said: “It is tempting to think that with one spouse and children from that relationship only, your family will get your assets when you die anyway so why go to the trouble of making a will? 

“One problem is the trouble and expense of administering the estate. Leaving your spouse and children with the uncertainty of having to follow fixed statutory formulas can take time and become emotionally taxing on the family.”

However, things are less simple when it came to blended families where partners may have children from previous relationships. Because joint assets are automatically transferred to the surviving spouse, there was the danger that they could then overrule the wishes of the former spouse as they would now have control of the assets and could possibly cut out the spouse’s children from a former relationship. 

For those assets which are not jointly-held, people must nominate a designated beneficiary. There is also the option to set up a testamentary trust to help distribute assets in a tax-effective way and reduce the likelihood of it being challenged. Trusts also protect beneficiaries who are prone to potential liabilities or matrimonial disputes. 

In June 2020, a new law was passed regarding testamentary trusts which aimed to prevent the practice of injecting property which is unrelated to the deceased estate into a trust and generating ‘concessional’ taxed income. The first $22,000 of income distributed to a child from a trust could be tax-free, known as a concessional tax treatment but the new law means there will now be additional tests to determine the type of property that can generate this income.

If the person is self-employed, they would want to set up business succession plan for what would happen to their company.

It is important for a will to be reviewed regularly in light of the changing circumstances with experts recommending every three to five years.

Mowll said: “Around half of Australians die with an out-of-date will that is invalid and that means it becomes contestable. People contest wills for a lot of different reasons and start punching holes in it to try and stake a claim”.

Reasons for a will requiring updates include separating from a partner, remarrying a second partner, having children or grandchildren, changing career, buying additional property or land or setting up a business. 

RETIREMENT

For people who are into their retirement, this is when a will becomes “no longer hypothetical” according to Hacker, and when clients will begin to think about their legacy and what they want to leave behind for family and friends. This meant they gave more thought to ‘chattels’ such as jewellery and artwork. 

With grown-up children and having paid off their own debts, parents may consider financial assistance for their children via early inheritance or loans. These should be documented with details of terms of payments and interest rates. 

A bigger financial problem is the possibility of needing to go to an aged care home which could cost a substantial amount and often necessitated the sale of the family home as it is required to be funded by the person rather than the state. This would then affect the will as the family home would no longer be in inheritance and the person may want to help their children in other ways. 

It is also more likely at this age that an executor or a beneficiary of the will could have died which means a will needs to be updated to reflect the change. The appointment of an executor is an important decision as they will have the final say on the distribution of assets to the beneficiaries as well as settling debts, lodging tax returns and liaising with financial institutions. Options for an executor included spouse, adult children, solicitor, trustee company or accountant.

Mowll said: “Appointing an executor can be very complicated, we joke people should appoint their worst enemy!”

“Don’t appoint an executor without asking them first especially if it is a third party or someone without an interest in the estate as they can always recuse themselves from the job. Make sure whoever you choose is someone willing, someone you trust and who you believe will be responsible with your estate,” Mirzoyan added. 

Options for estate planning

HOW TO BEGIN YOUR ESTATE PLAN

TAL’s national technical manager David Glen shares three steps people can take to begin their estate planning

1. Identify and list all assets and liabilities including all assets owned by the family such as personally-owned assets and superannuation. 
2. Determine who should receive these assets in the event of death and how any liabilities should be discharged upon your death. Remember liabilities do not die with you. 
3. Gather evidence on the location of assets and ownership documentation including insurance policies, wills, power of attorney.