Estate Planning: What is an Estate Plan?

Estate Planning: What is an Estate Plan?

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 involves and explores some key considerations you should contemplate when 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.

What are some considerations in estate planning?

Family structure

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.

Your assets

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.

Your superannuation

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.

Business succession

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.

Get legal advice

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.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form.

 

Accessing Digital Assets – Estate Planning Essentials

Accessing Digital Assets – Estate Planning Essentials

The recent death of Gerald Cotten, former Chief Executive Officer of Canadian cryptocurrency exchange company, Quadriga CX, emphasises the importance of planning your electronic after-life.

Mr Cotton’s death in India at the age of 30, has not only raised suspicion as to its authenticity (and allegations of an exit scam), but reiterated the chaos that can be created if digital assets have not been considered in an Estate plan.

Mr Cotton was the sole custodian of encrypted passwords protecting over $200 million (USD?) worth of cryptocurrency (virtual currency created and stored electronically such as Bitcoin, Litecoin and Ethereum). His untimely death has left numerous Quadriga customers unable to access their assets. Mr Cotton’s widow states that she played no role in the running of Quadriga and, despite her efforts, has been unable to unlock the laptop used by Mr Cotton nor access any of his accounts.

Regardless of how the Quadriga saga unfolds, it is a timely reminder of how important it is to consider what should happen to our digital assets when we die.

What are digital assets?

A person’s digital affairs may encompass a range of online transactions, activities and accounts such as:

  • cryptocurrency;
  • financial assets including online bank accounts and shares;
  • intellectual property attached to domain names or online literary works;
  • online sporting and gaming accounts;
  • loyalty programs such as Flybuys Rewards and Frequent Flyers;
  • online shopping accounts such as eBay and Amazon;
  • Personal/business social media accounts such as email, Facebook, Linked-In.

All should be considered, and included, in an effective estate plan.

Issues unique to certain digital assets

Traditional cash-based assets such as money deposited in a bank, shares or other paper-based investments are held by title to the owner and can be transferred to the beneficiary with the relevant documentation. Ownership of digital assets like Bitcoin, however, is anonymous with owners accessing their cryptocurrency with private keys which are used to unlock and deal with the assets. This information may be held on a computer device (via a digital wallet), on a USB, or printed separately. These assets can easily be overlooked or ‘keys’ misplaced, representing unique challenges when it comes to administering an estate.

Many digital assets are also held globally and may therefore raise jurisdictional issues from an Estate planning perspective. In most instances, there is no uniform legislation governing access to a deceased person’s online accounts, so it is imperative that these matters are dealt with specifically in an Estate plan.

There are some simple steps you can take to ensure your online life is appropriately dealt with when you are gone.

1. Identify your digital assets

You should start by making a list of your digital assets (including online accounts) and determining what you would like to happen to them when you die.

Keep records of your online accounts and subscriptions including user names and passwords and store this information in a secure place.

Remember your online accounts and login details are likely to change frequently and your list should be maintained accordingly.

2. Understand your online accounts

Understanding how various accounts are dealt with by service providers will help to determine the type of action you would like taken when you die.

For example, Facebook account holders can advise in advance whether their account is to be deleted or memorialised. A memorialised account can provide a place for family and friends to share memories after a person dies on the deceased’s profile, and any content shared by the deceased person remains visible to those with whom it was shared. Nobody can log into a memorialised account.

Some loyalty programs such as Frequent Flyers may not be transferrable or redeemable after a person dies, so it may be wise to keep tabs on these types of accounts to utilise benefits regularly.

3. Include digital assets in your Will and appoint a technology custodian

Your Will should define and identify important digital assets and provide executors and trustees with appropriate directions and powers to deal with them.

Assign your executor, or other trusted person who is familiar with technology, the role of managing your online life after you die and ensure this direction is included in your Will.

Record your after-life technology instructions with respect to each account separately and ensure these instructions are secure, but accessible to your technology custodian. Never disclose passwords in your Will.

4. Online maintenance

Online accounts contain personal information which should be protected. Technology presents a real risk of identity fraud and unmonitored accounts can be particularly vulnerable. Regular monitoring and unsubscribing or deleting unused accounts can help minimise risk and keep your technology life tidy.

Regularly downloading photos and videos from your mobile to a storage device can ensure that memories are accessible to your family when you die.

5. Consider incapacity

It is also important to consider what happens to your online life in the event that you are incapacitated. Appointing a trusted person to manage your online affairs and including specific instructions in an enduring power of attorney is a logical step to ensure the appropriate management of your digital wealth if you are incapacitated.

The instrument making the appointment should be specific to the jurisdiction in which the assets are held, and in this respect, more than one document may be required.

6. Consider trusts

It may also be beneficial to hold substantial digital assets through a trust structure, if possible, for greater protection and better taxation outcomes. In doing so, the trust must be considered and dealt with under the Will, which should nominate beneficiaries of the trust or shares in the trustee company and include provisions to ensure the trust can achieve the desired objectives.

Conclusion

It has become increasingly difficult for executors, lawyers and family members to ascertain and access online assets after a person dies, with many financial and other institutions operating in a ‘paperless’ environment. Certain digital assets such as cryptocurrency can present additional problems for a deceased’s family.

Inaccessible online accounts make it difficult to identify assets, and leaving online accounts open indefinitely raises concerns of potential identity theft.

Good online management and ensuring your digital assets are included in your estate plan will help your executors and family manage your online life after you are gone.

If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form.