Most financial planners are now fully aware of the importance of estate planning when it comes to developing a comprehensive financial plan for their clients.
Advisers also recognise that it can be a complicated area and it’s impossible to create a one-size-fits-all approach. However, there are a few basic rules and tips that can help advisers best serve their clients. Following are my top do’s and don’ts for estate planning.
Do have an up-to-date will; don’t leave it at that
Most financial planners know that a will is just one part of a comprehensive estate plan – and in some cases, a relatively small part.
A will deals only with estate assets –assets owned directly by the will-maker. It doesn’t deal with non-estate assets; that is, the assets that may be controlled by the will-maker but not owned.
This may sound quite straightforward but it isn’t always. In fact, it’s not always easy to know which assets are owned and which are just controlled.
Take the example of the Flynn family. David is aged 58 and Donna is 56; they have three children, all in their 20s. Their wealth position is:
|Home owned as joint tenants||$2,500,000|
|Investor property owned as joint tenants||$1,000,000|
|David’s super in SMSF||$1,000,000|
|Donna’s super in SMSF||$500,000|
|Life insurance in super||$2,000,000|
|Family trust investments||$1,000,000|
|Mortgage debt on home||$500,000|
|Mortgage debt on investment property||$750,000|
So, in the event of the death of either David or Donna, which of these assets pass via the will?
The answer is, none of them. When Donna or David die, none of these assets will come into their estate and therefore cannot be directed by a will.
The reasons are:
- The real estate is owned as joint tenants, so the survivor automatically inherits. Joint tenants cannot pass their interest via a will
- Superannuation is held in a trust environment and the trustee of the super fund decides to whom and how a super death benefit is paid. To ensure the death benefit passes to a preferred beneficiary, they would need to have in place a binding death benefit nomination
- The same rules apply to any life insurance held in super
- Assets held in a family trust are owned by the trustee of the trust. Therefore, it is important to agree upon and document who will control the trust following the death of either David or Donna, as the ultimate power lays with the control.
Do have a comprehensive estate plan
The essential documents in an estate plan include:
- An up-to-date will
- An up-to-date enduring power of attorney
- An up-to-date enduring guardianship
- An up-to-date SMSF deed
- An up-to-date death benefit nomination (if applicable)
- A review of control issues of any investment trust
- A review of the ownership state of all types of wealth
It’s worth noting that while for most clients, it will be best to have a binding death benefit nomination for superannuation, in some cases it’s preferable not to, so the money doesn’t come into the estate. For example, a death benefit pension to a spouse can be paid by a super fund. Therefore David and Donna may prefer the super death benefit to remain in the super fund in order to pay the survivor a pension.
This is a good example of how it is impossible to have a ‘one size fits all’ approach to estate planning.
Do document the things that are important
An estate plan must be able to stand on its own and therefore needs to deal with any contingencies or concerns. Once the will-maker is dead, it’s impossible to make any further changes or adjustments! So they need to get it right now, and this is where professional advice can be worth its weight in gold.
For instance, any unwritten understandings between couples could be included. As an example, Donna and David both agree that after they have both died, they want their remaining wealth to go to their children to enjoy, and also to any future generations. And they don’t want their children to squabble over their will.
Rather than take it for granted their children also know this and agree with it, it’s a good idea for Donna and David to put it in writing.
In addition, they can’t assume anything – that their children will behave in the way that they want them to, or that their children will automatically know or understand why Donna and David made the decisions that they did. If anything needs explaining, it’s best to do it in person, and reinforce it by leaving a document in the estate plan to account for the choices made.
Don’t try to rule from the grave
The over-riding aim of most estate plans should be to protect loved ones, not rule from the grave. This is why it’s important to document any understandings or agreements.
If necessary, also put in place strategies to protect children from themselves, and also from the financial effects of failed relationships.
One approach we have started using is an Inheritance Protection Agreement (IPA).
The way an IPA works is that firstly, Donna and David agree that if, after the death of the first of them, the surviving spouse was to begin a new relationship, then the survivor will have a financial agreement (commonly known as a ‘pre-nup’) with the new partner to prevent any claim.
Secondly, Donna and David make it clear their wish is for each child to have a long and happy relationship; however as a matter of principle they believe that any inheritance should not be carved up if there is a relationship breakdown. They therefore direct that after their deaths, their children should enter into an IPA with any partner to exclude any claims on inheritances and, if the child does not have the benefit of an IPA, other protection provisions are incorporated in the wills.
Do help children if possible
It’s becoming increasingly common for parents to help their children financially during their lifetime – for instance, helping them buy their first home, or get a business off the ground.
While it is a good idea to help children if there is capacity to do so, it’s best not to gift the money but rather to lend it. This should be carefully documented so that the loan can be recalled if the parents need the money later in life, or if the child goes through a relationship breakdown.
It’s important that other children aren’t left feeling disadvantaged as a result of assistance given to one child, as this could lead to bad feeling in the family, and potentially to challenges on the estate. Provisions can be placed in the Will to take into account any gifts or loans in the ultimate distribution to the children.
Don’t put it in the ‘too hard’ basket
Understandably, no-one likes to think of their own death or incapacity.
But when clients are refusing to think about their estate plan because they say they aren’t planning on dying any time soon, I only need to remind them of Princess Diana, Heath Ledger or even James Dean or Buddy Holly, who all died before age 40.
It’s never too soon to have an estate plan, and anyone who has superannuation, children or owns their own home, has enough assets to make it worthwhile.
Likewise, an estate plan is not a ‘set and forget’ approach. It needs regular reviewing and updating to ensure it is still up to date. The birth of a grandchild, the purchase of a new asset, or a relationship breakdown, could all make the existing estate plan incorrect.
Robert Monahan is a director of HLB Estate Services, a division of accountants and business and financial advisers HLB Mann Judd Sydney.