Many of us naturally put off thinking about our own mortality. But estate planning – legally laying out what happens to your assets after you’ve gone – can free you up to get on with life.
The basic elements of estate planning are electing a Power of Attorney, finalising a Will, superannuation and, if applicable, a testamentary trust incorporated in your Will. This will enable your wealth to remain in a family and protect beneficiaries.
These are challenging ideas to contemplate but having the appropriate legal structures in place will provide peace of mind for you and your loved ones.
Step one: Powers of Attorney
According to the Australian Bureau of Statistics, 12.6 per cent of people who live to 85 or over have dementia/ Alzheimer’s disease as their main long-term health condition.
That’s a pertinent reminder that for many of us there will come a time when we have difficulty making decisions about our own health or finances. A Power of Attorney can help ensure that someone with your best interests at heart can make those decisions on your behalf.
There are different types of Power of Attorney and they vary by jurisdiction within Australia. Powers of Attorney can also ensure that someone who cares about you has the legal right to make important decisions on your behalf.
Step two: a valid Will
One of the simplest things people often overlook is writing a Will. This document is the bones to any successful estate plan and must be updated regularly to ensure any major life changes are accounted for. This can include anything from getting married or having children, to selling the family home.
A Will also sets out your wishes as to what happens to your assets when you’re gone.
A lawyer can help with drafting a Will. Don’t do it yourself. As the NSW Trustee and Guardian points out, poor drafting of a Will can tie up your estate in legal complexities and disputes.
Also involve your accountant to ensure you have a good understanding of structures, assets and liabilities including tax.
Step three: superannuation and trusts
You may be surprised to learn that your super can’t be ‘managed’ by your Will, or at least by your Will alone. That’s because it’s held in trust in your superannuation fund and in legal terms, it’s your super fund trustee who decides how it’s disposed of upon your death.
However, you can help ensure that it goes to the people you want to give it to by creating a Binding Death Benefit Nomination through your super fund and thereby directing your super fund to pay your super to a specific person, or into your estate. At that point, your Will can determine how your super is disposed of upon your death.
Similarly, a trustee cannot be managed by your Will alone.
Step four: testamentary trusts
Some people choose to pass their wealth to their intended beneficiaries via a testamentary trust rather than leave all their assets directly to them.
One of the main benefits of testamentary trusts is they enable your wealth to remain in your bloodline. They also enable wealth to pass in a manner that protects beneficiaries who may be vulnerable due to marriage or a relationship breakdown, or due to their profession or a business they operate.
In other cases, testamentary trusts can simply preserve wealth by ensuring it’s not misspent by beneficiaries on poor lifestyle choices or investment decisions.
These trusts, which are written into the Will when planning your estate affairs can have significant tax benefits. For example, if a beneficiary receives their inheritance under their personal name, they may be liable to pay additional tax on investment earnings or capital gains at their personal marginal tax rate. However, if they take the inheritance through a testamentary trust, particularly where the beneficiary has a high personal marginal tax rate, they may not be liable for as much tax.
Powers of Attorney, Wills, superannuation and testamentary trusts are just some elements of an estate plan, and once you have amassed a reasonable level of assets, you should be considering a plan (if not already).
Contemplating your own death or disability may not be fun, but ensuring your loved ones are cared for in accordance with your wishes should be addressed sooner rather than later.