An estate plan involves more than signing a Will and storing it in a ‘safe place’. Estate planning requires a holistic approach in consideration of 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 die.
This article considers what an effective estate plan may entail and explores the thought processes involved in preparing an estate plan. The information is for general purposes only and we recommend obtaining legal advice specific to your circumstances when planning your estate.
What is effective estate planning?
An ideal estate plan will:
- Appoint a trusted person or persons to manage your affairs (attorney / guardian) if you are incapacitated; and a legal personal representative (executor / trustee) to administer your estate (and any associated trusts) after you die.
- 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 undue stress and expense by minimising uncertainty and potential family provision claims.
- 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
Your family
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, biological children and step-children.
Choosing your executor and trustee
The executor and trustee will be your personal legal representative and 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
Each jurisdiction in Australia allows for the appointment of an attorney, guardian and / 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.
These documents provide for flexibility in choosing the type of functions to be carried out, and the duration for which the authority is given.
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 lawyer will explain the relevant documents in your circumstances and jurisdiction.
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.
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 may 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 may fail and cause an unintentionally unequal distribution amongst beneficiaries.
Using a testamentary trust
In some cases, it will be beneficial for a Will to establish a testamentary discretionary trust. This is a trust that comes into effect after the will-maker dies. Administration of the trust is carried out by a trustee pre-appointed by the will-maker. The trustee determines how and when estate assets are managed and distributed.
If managed properly, the flexibility of a discretionary trust can allow beneficiaries to access the most advantageous taxation treatment with respect to their inheritance and can provide protection for at-risk or vulnerable beneficiaries from claims by creditors or ex-partners.
Even modest estates may benefit from having a testamentary trust, particularly where the will-maker is part of a blended family.
Your superannuation
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 may be decided by the trustee in accordance with the terms of the trust deed and the relevant legislation. This determination may not reflect what the will-maker intended.
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 die.
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.
Business succession planning also requires consideration of the intended beneficiaries and whether they have the desire, skill and competence to continue managing the business.
Conclusion
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) 9818 2888 or email [email protected].