Estate planning pitfalls and how to avoid them

Estate planning is more than just writing a Will and certainly isn’t something that should be left until the last minute, writes Anna Hacker.

The role of the financial planner is becoming more and more integral to ensuring clients have taken appropriate steps to plan for their estate, both after their own death and, in some instances, if they become incapable of making financial decisions for themselves.

The three main stages of developing an estate plan are investigation; risk assessment; and implementation, and financial advisers can play an important role in each of these stages.

In addition, there may be an ongoing responsibility for them in the management and administration of the estate.

For instance, advisers are often the key driver encouraging clients to think about estate planning in the first place.

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Many people make the mistake of thinking that estate planning is a relatively simple process, and something that they can leave until another time.

They are almost certainly wrong. Estate planning is always more than just writing a Will, and it definitely isn’t something that should be left until “some day”.

Each of the three stages listed above require thought and planning if the aims of the client are to be achieved.

Many people discover that developing an estate plan is more complicated than they realised.

In particular:

• if they had been married before (and particularly if they have children from a first marriage)
• if they have children who are still financially dependent; if they run their own business; or
• if they have a high asset base; the chances are their estate plan will need a great deal of thought.

Some of the more common mistakes made by clients when thinking about estate planning include:

Under-estimating estate size

An estate is rarely too small to justify some kind of planning. 

For example, most if not all working Australians have superannuation which can include significant life insurance.

This alone can be enough to warrant an estate plan. It may be as simple as ensuring that someone has been nominated as the beneficiary of the super fund, but even this is worth doing properly.

Keep in mind that a divorce does not nullify the nominated beneficiary. 

Waiting until ‘later’

Few people want to think about it, but the sad truth is that people do die before their time. Indeed, people in their 30s or 40s with young children are probably those who most need an estate plan.

Every parent should make sure they have a plan in place in case anything should happen to them, so that their children have someone to look after them and any money that can be left.

Not doing so exposes loved ones to needless stress and financial hardship, as well as potentially eroding wealth through unnecessary taxes and legal fees.

Those who die intestate (ie, without a valid Will) will have their assets distributed according to a legislative formula – a formula that might not reflect their wishes.

Anyone aged over 18 and earning an income or owning any assets (including superannuation) should have a thorough estate plan in place, regardless of whether or not they have children or own their own home. 

Ignoring competency issues

This is another area that few people – understandably – want to think about, but the statistics suggest that 1 in 10 people aged over 65 are affected by dementia. 

Estate planning is not just about planning for death; it should also take into account what happens if someone becomes mentally incompetent.

Areas such as appointing a power of attorney should be included in estate planning. 

Dismissing family feuds

Sadly, it is becoming increasingly common for family members – and even other parties – to challenge a Will in court.

Each state in Australia has its own specific legislation covering who can challenge an estate. In some states, the list is very broad and can include anyone to whom an individual has an obligation or responsibility. 

For example, in Victoria, a neighbour who believes that they have helped take care of someone, perhaps by helping with their food shopping or walking their dog, can make a claim on their estate.

Another example is where someone is in a relationship with, but doesn’t live with, another person. Whether or not such a challenge is successful will depend on the individual circumstances of the case including the nature of the relationship and the size of the estate. 

Therefore, creating a proper and detailed estate plan can help minimise the chance of successful claims against the estate.

This can include specifying why one child has been left certain assets and another child other assets – for instance, if the parents have already helped one child financially.

Not keeping up-to-date

An estate plan is not a ‘set and forget’ approach. It should be reviewed every few years to make sure it is still current and that the beneficiaries, and the assets left, are still correct.

As a general rule, it’s a good idea not to dictate exactly what is to happen to each specific asset. A better approach is to plan based on the value of the estate, as assets may have been sold, or may be valued differently to when the plan was first created.

Another potential problem in this area is that people leave assets in their Will that they don’t actually own. 

While most assets can be dealt with in a Will, there are some significant exceptions which, by law, are not included in the estate and must be covered separately in an estate plan. These include: 

• Jointly held property – ie, property owned with another person as joint tenant. If, however, the property is held as tenants in common, the share in the property can be passed on to beneficiaries named in the Will. 
• Superannuation – super assets are held by the trustee of the super fund and, as such, might not be included in an estate. Many superannuation funds include the option to nominate a beneficiary and this nomination will over-ride the Will. 
• Proceeds of life insurance policies – if a policy is held with a nominated beneficiary, the proceeds will pass to that person upon death, regardless of the beneficiaries named in a Will. 
• Assets held in trust – these are not included in an estate but continue to be held in trust. 
• Company assets – a company is a separate legal entity and, as such, its assets are not included in an estate. 

As mentioned above, superannuation needs to be treated separately to the will. Most people today have assets in superannuation – and in some cases this could be an individual’s largest asset. Yet many people are unaware that super may not necessarily be dealt with in a will. 

Legally, super assets are controlled by the trustee of the fund and, on the death of a member, death benefits (accumulated super investments as well as the proceeds from any associated life insurance policy) are normally paid out at the trustee’s discretion – not necessarily according to the member’s will.

People should make a nomination to say how they would like their death benefit to be paid, but the trustee is not legally obliged to follow these instructions unless it is a binding nomination.

Using Will kits

Any document that is properly witnessed can act as a Will, and the DIY kits available at the newsagent or over the internet may be enough to fulfil some people’s needs.

But proper estate planning requires understanding of the whole picture of finances and personal goals, and the ability to identify the best legal structure to accomplish objectives. 

Careful consideration needs to be made of all aspects of asset ownership and family relationships to ensure that the estate plan includes a Will and powers of attorney, as well as an understanding of how assets outside of your estate will pass to prospective beneficiaries. 

Trying to save money now can cost significantly more later and cause angst and frustration amongst those left behind, at a time when they are least capable of dealing with these problems.

Forgetting tax planning

There are a number of tax considerations that will impact on how much beneficiaries end up receiving from an estate, such as income tax, capital gains tax (CGT) and land tax.

In most instances, any assets owned at the time of death can be transferred to beneficiaries without having to pay capital gains tax at that time.

But there are notable exceptions, such as growth assets (e.g. Australian shares) gifted to a foreign resident, which may attract capital gains tax. 

One of the most effective ways to minimise tax on income, particularly when leaving assets to minor beneficiaries, is to establish a testamentary trust. 

A testamentary trust is simply a trust set up via a will, that can be used to protect a beneficiary’s inheritance and tax-effectively distribute income. 

They work by separating the beneficiary’s inheritance into a separate trust (whose terms and conditions are listed in the will) that is controlled by a trustee.

The trustee then has the power to distribute income (and capital if allowed) to nominated beneficiaries. In many cases, distributing income rather than capital is a more tax-effective option.

This approach also separates the capital in the trust from the rest of the estate, providing greater protection against an inheritance being carved up in a family law dispute or spent by a spendthrift beneficiary.

Will vs estate plan

A Will is not an estate plan. There are a number of other areas that need to be considered, not least of which is appointing an appropriate person to act as ‘attorney’ (through a power of attorney), and choosing the right executor. 

Many people choose a family member or trusted friend to be their executor. This can be problematic for a number of reasons: 

• If there is family conflict then the executor, if a family member or friend, is unfortunately less likely to take an objective view if the conflict arises as part of the estate administration process.
• If the executor is the same age as the Will-maker they may die before the Will-maker, leaving no executor at the time of the Will-maker’s death, or be too frail to handle the role. 
• If the executor is elderly and there are ongoing testamentary trusts, the trustee will have to be replaced and continuity may be an issue. 
• If the executor obtains probate of the Will-maker’s Will and then dies shortly after, the executor of the executor’s estate will then be responsible for administering the estate, this may be a person the original will maker never knew. 
• Finally, not all people appointed in an executorial role have the knowledge or ability to properly administer the estate. 

Powers of attorney (including financial, medical and guardianship) is another area that needs careful consideration.

While much of an estate plan concerns what happens after a person’s death, it is also important to ensure affairs will be looked after according to their wishes should they become incapacitated due to age, disability accident or illness. 

A financial power of attorney, for example, is a legal document that gives a nominated individual or trustee company the power to make financial and legal decisions on a person’s behalf, while someone nominated through a medical power of attorney specifically looks after health and medical needs.

Other areas, such as an enduring power of attorney or guardianships for minors, also need to be considered.

Financial advisers who wish to offer clients assistance in their estate planning needs are well-placed to help identify their requirements and the assets that will form their estate, thanks to their existing relationship with clients and their knowledge of their financial situation. 

Advisers can also bring in specialist advice for those who require assistance with some of the more technical aspects of estate planning, while still retaining their role as primary adviser to the client. 

As more and more people enter retirement with sizeable estates, the importance of providing accurate and comprehensive advice will only become more essential.

Anna Hacker is the senior manager for estate planning at Equity Trustees Limited.