Many people are under the impression that having a will and an enduring power of attorney means that their estate plan is taken care of. While it may put you ahead of many, there are still reasons to be doubly sure you’ve got all your bases covered.
2 reasons for estate planning
The 2 main reasons for considering your estate planning are, first, to ensure your hard-earned assets go exactly where you’d like them to, and second, you minimise taxes owing on the estate.
It’s pretty simple, and while there’s no doubt a will is an important part of the estate-planning process, it may not be enough on its own to prevent unfavourable outcomes for your loved ones.
It is important to consider all your options, and following are examples that might make you want to rethink your own situation.
5 essentials of estate planning
1. Have a current will
Your Will plays the most important part of your estate plan so regularly update it to ensure it reflects current goals. Family situations change and you need your legacy document up to date with your current situation. Even if you don’t feel you have a lot of assets, a will can save beneficiaries trouble, heartache and time in sorting out your affairs.
Fred had a family trust which held his assets. After divorcing Wilma, Fred didn’t amend the family trust deed and Wilma was left the controller (appointor) of the trust. When Fred died, Wilma was left in control of the family trust. She wound up the trust and quite legally, transferred all the assets to herself. Chances are, this wasn’t what Fred wished.
2. Use testamentary trusts
If your beneficiaries are minors, a testamentary tax structure can provide tax advantages.
Fred and Wilma are an executive couple with young children. Fred died without a will and all assets were held in his name only. When his assets were distributed to his young family, they had to pay tax at children’s rates. Had Fred the foresight to make a will, he could have set up a discretionary testamentary trust, enabling income to be distributed to the children at adult rates of tax, creating significant tax savings.
3. Have a wealth transfer strategy
Trust structures are popular as they give great control over how and when your assets are used to transferring wealth.
Barney made up his will following the birth of his son, BamBam. BamBam later got into bad company and developed a drug problem. When Barney died, leaving his entire estate to BamBam, he had no idea how to handle the windfall, and squandered the assets. Barney could have established a trust fund in his will and appointed a professional and independent trustee to manage the fund. Barney’s estate could have been gradually passed on to BamBam over some time, preserving the assets for the long term.
4. Look at the big picture
Be sure to consider business partnerships and buy/sell agreements when looking at wealth transfer. Also, it is important to ensure you have a professional look at the overall picture of your estate plan, including insurances and superannuation or it increases the chances your assets won’t be distributed evenly.
Betty was a single parent who wished her 3 children to benefit equally if she died and drew up and signed a simple will. When Betty died, her main asset was a superannuation fund with no death benefit nomination recorded. One child was a financially independent adult while the other 2 were school-aged children, still living at home. The trustee of the superannuation fund decided to pay the death benefits to Betty’s 2 school-aged children (to be held on trust), rather than the estate. This meant the adult child missed out on receiving any benefit from superannuation, while the 2 younger ones received a far greater share of their mother’s wealth.
5. Involve your family
For many, money is a taboo subject and there’s a very strong tendency for people to avoid talking about topics like their intended wealth transfer wishes with their beneficiaries.
Including your family in conversations about estate planning from an early stage can help ensure your wishes will be carried out.