Estate planning

The Importance of estate planning cannot be underestimated as it provides comfort to you and your family if something should go wrong. Estate planning ensures that your wishes are met if something were to go wrong or if you are unable to make decisions (both financial and medical). It will ensure that your family is taken care of in the best possible manner after your death.

Unfortunately estate planning is one of the most overlooked part of a person’s financial affairs and one element of a person’s financial affairs that is most likely to cause conflict. A lot of people don’t realise how big their inheritance will actually be (including home, super, insurance etc) and when large sums of money are involved the potential for dispute. The last thing the deceased would want to happen is a family to be split over trying to split assets. Therefore, the best way to avoid this potential dispute is to have an estate plan and to discuss this plan with all involved.

There are many documents that make up estate planning, these include:

  • Will – this will provide instruction as to how you would like your assets to be divided and given to your beneficiaries. There are many ways to get a will, including purchasing a very basic Will kit from the newsagency or post office. However, the best way to get a comprehensive will is to involve a suitably skilled solicitor.
  • Powers of attorney – a Power Of Attorney allows a nominated third-party to act on your behalf if you are unable to make decisions due to absence or ill health. When you create this document it states the events on which the person can act on your behalf, for example, if you are unable to make decisions due to mental incapacity. Part of this document can also include health directives which instruct your nominated third-party what to do in certain medical situations.
  • Testamentary trust – a Testamentary Trust is a type of trust which is established under the will and only comes into affect upon death. It provides flexibility to the trustee of the trust as to how to distribute assets and income. Some of the main advantages of a testamentary trust include:
    • Flexibility as to how beneficiaries take there inheritance
    • It offers some level of asset protection from financial or other difficulties like bankruptcy and divorce
    • It can help prevent inappropriate spending of the inheritance
    • It can be useful as a way to tax effectively distribute distributions to beneficiaries under the age of 18 or caring for a child or dependent that’s incapacitated
    • It also offers significant tax advantages in terms of income splitting as income temperature distributed to different beneficiaries.

Steps involved in forming an Estate Plan

There are many steps involved in establishing a good estate plan:

Step One: List your Assets and Liabilities

Firstly it’s important to take inventory of all the assets that you may have. It’s important to also consider if there are any specific assets that you want to go to a specific beneficiary. For example, you may want a piece of jewellery to go to your daughter. As part of this step it’s also important to include any liabilities that would need to be paid out. For example credit cards, personal loans or a mortgage.

Step Two: Decide on Beneficiaries

The next step in the process is to decide on a the beneficiaries. There are many considerations that need to be considered when you are deciding on a beneficiary. For example, what assets you would like them to receive and in what form. You may decide that rather than splitting ownership of a property to all your beneficiaries that the property is sold and the beneficiaries receive the proceeds. You may decide that you will provide one particular asset to one beneficiary and another asset to another beneficiary however it’s important to consider the underlying tax consequences of that asset. For example, if you had two investment properties and gave one to each of your beneficiaries and one had a large capital gains tax liability attached, the beneficiary that receives this property may end up with significantly less after repaying the capital gains tax.

Another important consideration when deciding on beneficiaries is how they will receive the inheritance. For example, if one of the beneficiaries is likely to use the money in a way that is not intended (for example gambling) then it may be worth considering the use of a testamentary trust. A testamentary trust will allow you to dictate how the funds are released and can be used in many different ways. For example, you may choose to dictate that some of the rules of the trust are that only a small portion of the inheritance is available each year and in this way the inheritance lasts much longer. Another use of testamentary trust could be for Grandchildren and you may provide a testamentary trust for a grandchild and dictate that the funds are used towards the child’s schooling.

Step Three: Decide on Executor and Power of Attorney

Another thing to decide upon is who will be the executors of the estate and the nominated powers of attorney. When considering the executor of the estate it is important to understand their duties and ensure that they will do the best for your beneficiaries. For example, you may choose someone that is not a beneficiary but someone that you trust as they are impartial to the inheritance and able to make decisions on the merits. As opposed, to someone having a financial interest in the decision. It is also very common to have the beneficiaries as the executors and let them have flexibility as splitting the inheritance and potentially selling of assets.

Step Four: Having a lawyer draw up the Estate Plan

Once the assets and liabilities have been listed and the beneficiaries and executors decided upon, it would be a good idea to then talk to a lawyer about drawing up a comprehensive Estate Plan. The lawyer will be able to discuss the pros and cons to how you are intending to distribute the funds and also help you with forming an overall Estate Plan.

Step Five: Discuss the Estate Plan with Family, Beneficiaries and Executor (MOST IMPORTANT STEP)

The last part of any good estate plan is to discuss the plan with the affected parties, including the executor and the beneficiaries. Discussing the estate plan with the impact of parties will ensure that if anything were to happen everyone knows what your wishes were. This is the most important part of any Estate Plan as it ensures that everyone is on the same page and everyone has an opportunity to discuss your intention. There are been numerous studies done which show that Estate Plans which have been discussed with the impacted parties have resulted in far less disputes when the time comes to execute the Estate Plan.

Get Advice

Lastly, as you can see Estate Planning is a very complex area and making sure you get it right is vitally important. It can mean the difference between a family dispute and people honouring your memory. Please ensure that you get proper advice when forming estate plan.