An estate plan involves more than just preparing and signing a Will. Estate planning requires a holistic approach in considering a person’s present circumstances and foreseeable future.
A plan needs to consider who matters, what you have now, what you may have in years to come, and what your final wishes will be. Your lawyer’s role is to document these wishes to ensure they are legally enforceable and can be carried out when you pass.
This article considers what an effective estate plan entails and explores the thought processes involved in preparing an estate plan.
What is effective estate planning?
An ideal estate plan will:
- Appoint a trusted person or persons (attorney / guardian) to manage your affairs both financially and personally if you are incapacitated; and a legal personal representative (executor / trustee) to administer your estate (and associated trusts) after you pass.
- Nominate your intended beneficiaries with certainty or provide for a class of beneficiaries to ensure that your assets pass only to those you intend to benefit.
- Prevent uncertainty, undue stress and expense by reducing the likelihood of a family provision claim, which can undermine your wishes.
- Safeguard your assets from unintentional distribution to estranged partners or creditors of insolvent / bankrupt beneficiaries and protect vulnerable beneficiaries such as those with a disability, drug, alcohol or gambling problem.
- Provide flexibility in distributing assets in anticipation of the present and future needs of beneficiaries.
- Maximise the value of your estate through effective tax planning to minimise capital gains, and income tax payable by beneficiaries on their inheritance.
- If relevant, provide for effective business succession or the winding up of a business.
Steps in estate planning
Every family is different and there is no one-fit solution for all. You should start with an overview of your family circumstances and a list of all family members whether or not you would like them to benefit from your estate.
Acknowledging where there is conflict between family members and identifying any eligible persons who might claim on your estate will assist in devising strategies to reduce the potential for future claims.
Blended families are common and require special attention as there may be competing interests between past and present partners, and biological children and step-children.
Choosing your executor and trustee
The executor and trustee will be your personal legal representative who will administer your wishes when you have passed on so the person filling this role should be chosen with care. For simple estates, a spouse or child / children (or combination) are usually appropriate choices to oversee the administration and finalisation of the estate.
For more complex estates, with business interests or which will have ongoing trusts, it may be preferable to appoint a professional with expertise in this area.
Similarly, if there is conflict within the family a neutral executor may be more appropriate to ensure that the role is carried out with impartiality.
Powers of attorney, guardianship and advance care directives
New South Wales allows for the appointment of an attorney, guardian or decision-maker to manage your financial, legal and / or personal affairs for a defined or ongoing period and to make health-related decisions if you are incapacitated. A power of attorney relates to financial decisions and a guardianship relates to health and lifestyle decisions.
These documents provide for flexibility in choosing the type of functions to be carried out, and the duration for which the authority is given. Powers of attorney can be made enduring so that a person can manage your affairs indefinitely if you lack decision-making capacity.
These documents form an important part of your overall estate plan by ensuring the ongoing management of your affairs by a trusted person if you are incapable.
A detailed list of assets and liabilities will assist in determining the overall value of the estate, how and when assets should be distributed, the appropriate structure of the Will and whether a testamentary trust would be beneficial (see below).
You will need a precise description of the assets, their location, whether they are held individually or jointly and their value. Whether certain assets are encumbered will also be a relevant consideration.
If you are including specific gifts, such as items of sentimental value, antiques or artworks, these should be clearly identifiable and described in the Will.
Remember, your assets are likely to change over time and this needs to be factored into your estate plan. A gift of a specific asset of considerable value which is later disposed of will fail and may cause an unintentionally unequal distribution amongst beneficiaries.
Using a testamentary trust
In many cases, it will be advantageous for a Will to establish a testamentary discretionary trust. This is a trust that comes into effect after the Will-maker passes. Administration of the trust is carried on by a trustee pre-appointed by the Will-maker. The trustee determines how and when estate assets are managed and distributed.
If properly managed, the flexibility of a discretionary trust allows beneficiaries to access favourable taxation treatment with respect to their inheritance and provides protection for at-risk or vulnerable beneficiaries from claims by creditors or ex-partners. With careful planning, the timing of transferring estate assets can postpone or minimise capital gains tax liabilities.
Even modest estates may benefit from having a testamentary trust, particularly where the Will-maker is part of a blended family. The trust can allow the Will-maker to provide immediate benefits for a current partner (such as a right of residence and income), whilst preserving assets for residual beneficiaries, such as the children.
Trusts can also include separate suites of provisions to apply depending on whether the current partner survives or pre-deceases the Will-maker.
Superannuation does not automatically form part of your estate assets. Death benefits, comprising the superannuation account balance and any life insurance payments, are paid to a ‘dependant’ determined by the fund trustee, or in accordance with a Binding Death Benefit Nomination (BDBN).
Most funds allow members to nominate their intended beneficiaries through a BDBN. This process forms an important part of estate planning – without a valid BDBN, the beneficiaries are decided by the trustee in accordance with the terms of the trust deed and the relevant legislation. This decision may not reflect what the Will-maker intended. A BDBN does not last and needs to be updated every few years to remain valid.
Consideration of the way death benefits are taxed in the hands of the recipients is also an important issue. Essentially, a spouse or partner will be considered a tax-dependant under taxation law and accordingly will receive death benefits tax free. Alternatively, whilst adult children are considered dependants under superannuation legislation, they are not ‘tax-dependants’ and will need to pay tax on any death benefits.
If you are carrying on a business, whether as a sole trader, partnership or through a company, you will need to think about how you would like these interests dealt with after you pass.
If you are a sole trader, you may include terms in the Will for the continuation of the business by your partner, children, friend or trustee.
If you conduct the business as a sole director through a corporate entity, you will need to consider who will take your place as shareholder and managing director. Alternatively, you may wish for the business to be wound up.
Some partnerships will have buy-sell insurance in place. This is a policy allowing a surviving partner to acquire the deceased partner’s share so the business can continue. Generally, the surviving partner or partners receive lump sum funding to purchase the deceased partner’s share from the estate.
Business succession planning requires consideration of the intended beneficiaries and whether they have the desire, skill and competence to continue managing the business.
Effective estate planning takes time and careful contemplation. Your estate plan will usually comprise various documents to ensure the effective management and finalisation of your affairs so that your life’s efforts reward those you intend to benefit.