July 16, 2018

How to navigate the common estate planning pitfalls

By Anna Hacker – (AUT Legal Services Pty Ltd), Accredited Specialist – Wills & Estates, National Manager, Estate Planning, Australian Unity Trustees Ltd.

People often think they have a very clear idea of what they want to achieve with their estate plan and they usually think it will be straight-forward.

For example, a common approach is to say they want to leave some money to a favoured charity or two and then have the rest of their estate divided equally amongst their children.

While this may sound simple, a few probing questions may uncover potential issues.

For instance, how old are their children? Is it appropriate for them to receive a large sum of money? If any children are still minors, will they need a guardian? Are there any children from a previous marriage? Is the ex-partner still a beneficiary of, for example, superannuation? Who actually owns the assets in the estate plan – are any owned by a trust or a business?

If people want to leave money to charity, should they consider setting up a charitable foundation while they are still alive that can continue the good work after their death?

It’s all too easy for something to be over-looked in an estate plan, which means that after their death their estate does not end up going to the people that they want it to go to.

One case in the courts recently revolved around the simple fact that a young man had not got around to signing his new Will. His estranged spouse is, therefore, the beneficiary of his entire estate while his parents and his partner at the time he died, who he intended to benefit, will receive nothing.

Such small, simple mistakes are not uncommon.

Some other pitfalls in estate planning include:

– Will kits

Will kits may seem like an easy and cost-effective way for people to sort out their estate planning needs although I usually tell people to use them at their own peril.

Just because a document is in the format of a Will doesn’t mean that it actually covers everything that a Will needs to cover. This is especially true when the person who fills out the Will form has no knowledge about structuring financial affairs or sorting out ownership of assets.

A good example is choosing an Executor. Choosing the correct Executor is vital to making sure the estate is properly distributed as the Executor is the one that has the power in the estate. Choosing the wrong person for the job may cost the estate time and money and, in some cases, leave the beneficiaries with a long period of vexation and anxiety while they wait for their inheritance.

– Under-estimating estate size

An estate is rarely too small to justify some kind of planning. The classic example is superannuation – 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 generally does not nullify the nominated superannuation death benefit beneficiary.

– Waiting until ‘later’

It is an inescapable fact that people do die before their time even if few of us want to contemplate it.

It is therefore vital that anyone with young children have some kind of Estate Plan in place should anything happen to them so that their children have someone to look after them and oversee any money that is left to them.

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 (i.e. without a valid Will) will have their assets distributed according to a legislative formula – a formula that might not reflect their wishes.

– Ignoring competency issues

Few people want to think about this area either but statistics suggest that 1 in 10 people aged over 65 are affected by dementia.

Estate planning is not just about planning for death but should also take into account what happens if someone becomes mentally incompetent. Areas such as appointing an attorney should be included in estate planning.

– Not taking family feuds seriously

Regrettably, it is becoming more and more common in Australia 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, prior to recent changes in Legislation within Victoria, a neighbour who felt they had helped take care of someone, perhaps by helping with their food shopping or walking their dog, was able to make a claim on their estate.

Whether or not such a challenge could succeed would depend on the individual circumstances of the case including the nature of the relationship and the size of the estate.

Creating a proper and detailed estate plan can obviously help minimise the chance of successful claims against the estate.

– Not keeping up-to-date

An Estate Plan is not a ‘set and forget’ approach. It should be reviewed every few years at a minimum, or whenever there is a significant change to someone’s personal or financial affairs. Regular reviews make sure a Will is still current and that the beneficiaries along with assets left are still correct.

As a general rule, it is 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 distribute assets via their Will that they do not 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 – i.e. 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 – Superannuation 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 override the Will. If no binding nomination has been made, the death benefits will normally be paid out at the trustee’s discretion, and this again may not be as per the deceased’s wishes in their 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 themselves are not distributed by a Will (although generally the shares in the company are).

– 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 (though it may be payable when each asset is eventually sold by the beneficiary).

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.

– Demystifying common estate planning myths

As well as the pitfalls mentioned above, there are a number of myths about estate planning that can result in people making the wrong decisions in their Estate Plan.

The most common include:

· Appointing a family member or a friend as Executor makes it less likely they will charge a commission.

My recent experience is that family members (especially where there might be conflict) are requesting commission to be paid to them for acting as Executor. This is usually because they see all the work they have to do and that their siblings are benefiting from their work. They feel it is unfair to not be rewarded for that work.

· If you give a beneficiary a nominal bequest, they cannot challenge your will.

This is completely false and one of the most concerning myths about estate planning. You cannot contract out of a challenge nor can you give someone a small bequest and prevent them from challenging.

· Put in reasons for omission in the Will

It is better to put this is a separate letter so that it can be used as necessary. The biggest issue that arises here is that the circumstances might change in the Will maker’s life that make the “reasons” void. For example, if a person said that they have left one family member out because they never visited and then in the last year before they died, there were regular visits, does that mean that they should receive something from the estate? Reasons for omission are usually much more complex than a few lines that can be added to a Will. For this reason, a separate, detailed document explaining why a person is not a beneficiary can be much more useful.

· If you don’t have a Will, everything goes to the Government.

This might be an effective scare tactic to get people to make a Will but it isn’t true. An estate has to go through all levels of relatives including those that are distant before the Government gets any estate proceeds.

· If you challenge an estate, the estate will always cover the costs.

This is not true – courts are increasingly ordering parties who fail in their challenge to a Will to pay costs for the estate as well as their own costs.

A common question I hear is, “how do you create an Estate Plan that can’t be challenged?”. The simple answer is, you can’t.The only way to truly prevent a challenge is to have nothing in your estate when you pass away.

Nevertheless, even in the event that a person has no estate when they pass away, a claw-back period may apply if assets were divested before death specifically to thwart a challenge to the Will.

The best thing to do is develop a plan that seeks to cover all contingencies without becoming too prescriptive.

The most important question a person can ask themself is, “what if?” – over and over again.

Disclaimer: This article is not legal or personal financial advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every reasonable care has been taken in distributing this article, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information contained within it. Any views expressed are those of the author(s) and do not represent the views of Australian Unity Personal Financial Services Ltd. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is a registered tax (financial) adviser. If you intend to rely on any tax advice in this document you should seek advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in December 2017. © Copyright 2017