While leaving destruction and devastation in its wake, the COVID-19 pandemic has also taught us about unpredictable loss and the importance of ensuring your loved ones and assets are protected following your death. An estate plan grants you complete control of how your assets and wealth will be distributed after your death and yet, despite its importance, many people put estate planning off for many years.
So, in that sense, the first mistake is not doing an estate plan at all! But for those ready to take action on a will or estate plan, there are a handful of common estate planning mistakes you should avoid so that your estate plan accurately reflects your wishes upon your passing..
Estate Planning Mistake 1: Thinking Testamentary Trusts are only for complex financial situations or high-net-worth individuals
Testamentary Trusts are a powerful estate planning tool that only come into existence after the wil maker’s death. Testamentary Trusts don’t release assets held by you at your time of death directly into the hands of your family members and beneficiaries – instead, your assets are passed on to one or more discretionary trusts controlled by the Trustees outlined in your will. Testamentary Trusts allow for your assets to be managed by your Trustees (the ‘trusted people’ in your world) and are important both for when your beneficiary is to have control over the inheritance (for example your surviving spouse or adult children) or if they need assistance until they can manage their inheritance on their own (for example your young children).
As such, they are not only suitable for those in complex financial situations, or high-net-worth individuals. Testamentary Trusts are a useful tool for everyone.
Example 1: Testamentary Trusts for Blended Families
In blended families, tension and frustration can commonly arise when a spouse dies and:
- Provides the spouse and children of the current relationship with all of the estate, leaving the children of the previous relationship with nothing or a significantly smaller amount of assets
- Provides the children of the previous relationship with all of the estate, leaving the surviving spouse and children with nothing or a significantly smaller amount of assets.
As outlined in our article on the advantages of Testamentary Trusts, a Testamentary Trust is beneficial to a blended family as it allows for the tailored distribution of assets amongst beneficiaries, ensuring that all of the intended loved ones are looked after should something happen.
Example 2: Testamentary Trusts for Young Families
A couple may establish a Testamentary Trust for each of their children in their wills and nominate a chosen trusted person or people to act as the trustees of the Testamentary Trusts should the couple die before the children are at an age where they are able to manage their inheritance independently.
When creating a Testamentary Trust for young children, parents must highlight what age the children must reach before the Trustee can retire from the role and leave the children in complete control of their inheritance. Parents can also leave the decision up to the Trustee to decide if the children are ready to take on the responsibility of managing their own inheritance when they reach the age chosen by the parents.
Estate Planning Mistake 2: Forgetting to develop a tailored strategy for your family home
When buying a home, business owners, c-suite executives and company directors may choose to have the family home under the name of the spouse with significantly decreased exposure to outside creditors and litigation.
The Right To Occupy refers to clauses within a will that protect the family home, while enabling the surviving spouse to maintain control over the property for the existing family members. A Right To Occupy provides the surviving spouse with the right to live in the family home, without the home having to be in their name. However, in this situation, there are limitations. Note that the surviving spouse can’t lease the property out, must maintain the property, and must continue paying expenses.
- When the Right To Occupy period ends, the property may then be transferred to established trusts (as outlined in the will), or sold – with the proceeds of the property paid to the remaining beneficiaries outlined in the will
- The surviving spouse is entitled to sell the property to buy one that is more suitable to their specific lifestyle and needs (such as the bond for a nursing home).
The Right To Occupy grants the deceased’s surviving spouse with the benefit of being able to continue living in the family home during their lifetime, while maintaining and preserving the condition of the property for another beneficiary, such as their children.
Estate Planning Mistake 3: Assuming your will can gift assets held within a company or trust
When reviewing the assets within your will, it is important to understand that your assets fall under the following categories:
- Estate Assets
These refer to any assets that are owned in an individual’s own name (either outright, or as tenants in common with another person/entity) that can be distributed via a valid will. Property owned as joint tenants is not considered an estate asset. This is because ownership of the property passes to the surviving tenant.
Common estate assets include:
- Property (family home and investment properties)
- Life insurance paid to the deceased’s estate
- Superannuation paid to the deceased’s estate
- Rights held under contract
- Debts and loans owed to the deceased
- Shares in partnership assets and proprietary companies
- Investments (including shares in listed companies)
- Money held in a bank account
- Non-Estate Assets
It’s important to identify your non-estate assets, as these can’t be gifted within your will. These assets can’t be gifted for a number of reasons:
- The assets could be owned under joint tenants
- The deceased may not be the legal owner of the assets
- The asset may be passed to a beneficiary instead and bypass the deceased’s estate.
Common non-estate assets include:
- Assets held by the deceased as a joint tenant
- Assets that are held in a unit or discretionary trust
- Partnership assets
- Assets that are owned by a company of which the deceased was a director
- Life insurance benefits that are paid directly to the beneficiaries
- Superannuation benefits that are paid directly to the beneficiaries.
Gaining an understanding of what category your assets fall under is crucial for making more informed decisions when creating your will.
Estate Planning Mistake 4: Not considering if your beneficiaries should share their inheritance or have individual Testamentary Trusts established
Testamentary Trusts are a powerful tool that can be tailored to your family’s unique situation and circumstances. They provide your chosen beneficiaries with the freedom to decide if they want to receive their inheritance directly into their own names. When you establish individual Testamentary Trusts for your beneficiaries, the assets that are passed to them will be held within the trust and are protected from any creditors – this is because assets held within Testamentary Trusts are not considered personal assets of the beneficiaries.
When reviewing your estate plan, it’s important you consider if your beneficiaries should share their inheritance or have individual testamentary trusts established under their own names. This might be a more favourable option if your assets are being passed to a beneficiary who has faced financial difficulties or hardships in the past.
Estate Planning Mistake 5: Failing to nominate sufficient successors or 'back ups' to key roles within your estate plan
Arguably, one of the most important factors in estate planning is nominating suitable successors and individuals to assume key roles within your estate plan. These people should be individuals that you trust to step into positions of care and control, in the event that something happens to either you or your spouse. The appointed successors can assume the roles of executors, trustees, powers of attorney and guardians of your children.
It’s important to carefully consider which trusted people in your life are suitable for the key roles within your estate plan, as there may be individuals within your life who are better suited to some roles than others. Failing to appoint the correct individuals into the available roles may mean that your wishes aren’t being honoured or carried out as you may have seen fit.
Estate Planning Mistake 6: Forgetting about Powers of Attorney
When organising your estate plan, it’s crucial that you consider appointing a Power of Attorney. A Power of Attorney enables you to select a chosen person, or people, to make decisions regarding your own matters (such as personal, financial and medical matters) in the event that you’re unable to. You should consider someone you believe will act honestly, practise care, keep accurate and up-to-date records, and who will not abuse their position for profit. When appointing a Power of Attorney, you can decide whether you would like their role to take effect immediately, or at a later date of your choosing.
Understanding the key differences between a financial, personal and medical Power of Attorney will ensure that you’re appointing the right people into the roles. Below are some of the functions for each:
Financial Power of Attorney
Personal Power of Attorney
Medical Power of Attorney
- Manages your bank account/s and finances
- Pays bills/debts you owe on your behalf
- Making payments to your dependents
- Dictates where you live (i.e. nursing home, at your family home etc.)
- Organising gifts for your family members on your behalf
- Makes healthcare decisions on your behalf
- Decides on medical treatments you receive
- Responsible for hiring a personal care assistant (if required)
If you appoint more than one person to act as your financial, personal and medical Power of Attorneys, it’s important that you outline how you envision them to make the decisions. You should specify if you would like your attorneys to act jointly (together), severally (separately), or if you would prefer that the decisions are made on a majority-rules basis.
Conditions of a Power of Attorney
To be appointed as a Power of Attorney, an individual:
- Must 18 years or over
- Cannot be insolvent
- Must not be an individual who provides healthcare or accommodation services to you
- Needs to disclose if they have been found guilty of an offence relating to dishonesty
What happens when you don’t appoint a Power of Attorney?
- You run the risk of not being able to choose who can make decisions on your behalf
- Family conflict may arise over who thinks they are most eligible to make decisions on your behalf when you’re left unable to do so
Estate Planning Mistake 7: Not appropriately considering the succession mechanisms for superannuation
Your superannuation death benefits comprise of the investments you have accumulated throughout the course of your working life, along with any insurance proceeds that are paid out upon your death. As mentioned in Estate Planning Mistake 3, depending on how your fund is structured, your superannuation benefits can either be classified as an estate asset, or a non-estate asset.
To ensure your surviving spouse gets to keep as much of the proceeds of your superannuation death benefits as possible, you can nominate them as the beneficiary of your superannuation fund. This means that as well as being able to utilise the funds as needed, they’re also entitled to take advantage of the reversionary pension.
Superannuation death benefit nominations provide the Trustee of your superannuation fund with legal directives that outline how you would like your superannuation death benefits to be paid out upon your death – provided that the nominated beneficiary is eligible to receive your benefits under superannuation legislation. When considering who will receive your superannuation nominations, make sure that they are made to the correct entity to avoid any tax implications as a result of the benefits being paid to a non-dependent (such as a non-financially dependent child or adult).
To provide you with a greater understanding and to streamline the decision-making process when preparing your estate plan, it is important that you understand the current nomination in your superannuation fund.
Binding vs non-binding superannuation nominations
Your superannuation death benefit nominations can be binding or non-binding. Binding funds mean that the Trustee must pay the beneficiaries in accordance with your wishes. If the funds are non-binding, the Trustee will only consider your superannuation death benefit nomination as they hold an overriding discretion to pay the death benefit in a way they see as fit.
Lapsing vs non-lapsing superannuation nominations
A lapsing superannuation nomination is valid for three years, while a non-lapsing nomination doesn’t expire. For example, your superannuation nominations can be:
- Binding and lapsing
- Non-binding and non-lapsing
- Binding and non-lapsing
- Non-binding and lapsing
Estate Planning Mistake 8: Forgetting to provide direction in the event something was to happen to your whole family
A strong estate plan will provide direction on what you want to happen to your assets in the event that something were to happen to you and your entire family (awful to consider, we know). Appointing a trusted friend or extended family member as the executor of your will and estate will ensure that your wishes are being honoured and carried out, and your remaining assets paid out and distributed accordingly.
If something were to happen to you and your entire family and you had failed to appoint an executor, the court will make the decision on your behalf and appoint someone for you. Because the decision is usually made based upon what beneficiary owns the largest portion of your estate upon your death, it doesn’t necessarily mean that the chosen person is someone who will honour your wishes in the way you may have wanted. As such, it’s important you consider outlining a person of your choosing to be the executor of your will (should something happen to your whole family).
Estate Planning Mistake 9: Waiting to complete a comprehensive estate planning process until a marriage or divorce is finalised
Getting married or divorced can have an impact on your estate plan, potentially causing it to be invalid given the major change to your personal circumstances. Many Australians make the mistake of waiting for these often time consuming processes to finalise before updating their estate plan, when in reality your documents can be prepared in anticipation of these events if drafted correctly.
Whether you are in the process of getting married or divorced you should take the opportunity to review your will to ensure your wishes are met should something happen.
Estate Planning Mistake 10: Failing to equalise assets between children
Estate equalisation involves the process of one asset (for example, the family business) being passed to one child, while an asset of an equivalent value is passed on to the other child or children. In order to equalise assets between children, while one child may receive the family business, another may receive the deceased’s life insurance payout (if they are of a similar value).
It is important to equalise assets between children as it ensures that the deceased parent can facilitate an equitable transfer of assets in a fair manner among all beneficiaries.
Benefits of estate equalisation for the beneficiaries:
- Provides financial security for those who are interested in the family business, as well as those who are not interested in taking responsibility for the family business
- Helps to maintain trust and foster confidence in the beneficiaries relationship with one another by preventing family disputes over inheritance
Benefits of estate equalisation for the family business:
- The value of the estate is protected
- Protects the continuity of the family business even after the death of the deceased parent
- Promotes long-term value creation through the minimisation of disruption to the business
Estate Planning Mistake 11: Ignoring assets held overseas
A common mistake many Australians make when preparing their estate plan is forgetting about their assets held in other countries. If you’re someone who holds assets overseas, make sure your will takes into account all of your assets – not just those within Australia. To ensure your assets are distributed in a way of your choosing after your death, you can choose to make a separate will for each country in which your assets are held, or, with the help of your lawyer, you can implement an International Will.
Because of the intricacies involved in this process, we strongly recommend seeking professional legal advice to ensure that all of your assets are properly disposed of.
Estate Planning Mistake 12: Assuming an estate plan can be 'set and forget'
Unfortunately, an estate plan is not a ‘set and forget’ document. As you continue to acquire more assets and circumstances change, you should review your estate plan annually to ensure it remains current. To make sure your estate plan still appropriately reflects your wishes and correctly outlines your circumstances and relationships, it is best practice to revisit and revise your estate plan every few years.
One of the many benefits of reviewing your estate plan every few years is that you will only need to amend your will in the event of a significant change in your personal circumstances.
At BlueRock, we’re proud to offer a multidisciplinary approach to estate planning that brings together the expertise of our Superannuation, Private Wealth and Law teams. For further support in preparing, reviewing and planning an estate plan that accurately reflects your wishes, get in touch with one of our Melbourne-based lawyers and financial planners.
This article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. The information in this article has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information in regards to these factors before acting, or seek advice before making any financial decisions.