The Importance of an Estate Plan!

Creating an Estate Plan can be a very daunting thing to do as you are effectively planning for your death or a serious illness. A lot of people tend to avoid thinking about this and therefore never plan for the worst to happen, potentially leaving their families with all the hardship after they have gone.

With the Covid-19 Pandemic showing us that life can change at the drop of a hat, it is now more important than ever to create your estate plan so that you can make sure your family is looked after if you die or become seriously ill.

An effective estate plan can enable you to protect and support your family and secure the wealth you have built up and provide directions on how your wishes are to be carried out upon your death or time of incapacity.

Estate planning will only be effective if it is carried out in a timely manner and by appropriately qualified professionals. A solicitor can help you make decisions about what you want done with your estate and prepare your Will. There are also beneficial ways to structure your affairs under your Will so it’s important that you have a tax professional guide you through these important decisions.

What is a Will?

A Will is the first step in ensuring your estate assets reach your intended beneficiaries in a tax-effective and timely manner after your death. If you do not have a valid Will when you die, you will be “intestate”. This means that instead of you determining who will receive your estate, it will be divided up according to a formula set out in legislation. There is different legislation in each state/territory of Australia. This can lead to unexpected and unintended results. 

It is important to ensure that your Will:

• Nominates executors (and successor executors) for your estate who are likely to survive you and who clearly understand your wishes.
• Nominates beneficiaries in relation to the whole or part of your estate and nominates second choice beneficiaries, should your first choice predecease you.
• Bequeaths monetary value or a percentage of your estate rather than a specific asset, as there is the risk that an asset may not be in existence at the time of distribution of the estate.
• Nominates assets to be held in Trust for beneficiaries under 18 years of age. For example, you can provide funds for your children’s or grandchildren’s education. .
• Is reviewed (and updated) on a regular basis, particularly if you have any significant changes such as a new child, divorce or marriage or the acquisition of a new sizable asset. 

What assets are covered by your Will?
Generally, estate assets are those assets which are held personally in your name. Only these assets form your estate upon your death and the distribution of these assets is directed by your Will. Generally, estate assets consist of:

• Real property
• Cash investments
• Shares
• Personal chattels
• Loans made to the Trustee of a Trust
• Income or capital allocated to you from a Trust
• Interests in assets held as tenants in common (see below)
• Shares held in a company 

What happens to the following assets upon death?

Tenants in common assets
Tenants in common each have legal ownership of a designated portion of an asset. Upon death, each person’s share of the asset is dealt with in accordance with their Will.

Non-estate assets
Non estate assets are assets you control but do not own (or wholly own). If another party has an inherent interest or authority in the asset, it is a non-estate asset. The succession of these assets must be individually addressed by your estate plan (and can usually be allocated to your estate if you wish) to ensure smooth and prudent distribution.

• Assets held with other parties as joint tenants
• Assets held in Trust
• Unallocated assets owned by a family Trust
• Superannuation benefits
• Life Insurance proceeds
• Account-based annuities or pensions that have a reversionary beneficiary

Joint tenancy assets
Joint tenants own an asset mutually. This means that upon the death of one of the joint tenants, the other would automatically become the owner of the entire portion of the asset as if they had owned the entire asset from inception.

Superannuation assets
Superannuation is dealt with in accordance with the Superannuation Industry Supervision Act (SISA) and unless a current binding death nomination exists will be distributed at the discretion of the Trustee of the fund in accordance with the Trust deed and relevant legislation. Non-lapsing binding death nominations must be updated every 3 years to remain valid. 
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​Life Insurance proceeds
The party which receives the proceeds of a Life Insurance policy is the owner of the policy:

The role of Executors
An executor is the person or Trustee organisation you choose to carry out the terms of your Will. Your executor is responsible for the entire administration of your estate until the final distribution of the assets is made to your beneficiaries. Careful consideration is required when appointing the executor. It is recommended you discuss the appointment with that person prior to making the Will. In addition to estate beneficiaries, executors may also be your solicitor, accountant or a public Trustee.

It may also be helpful to prepare an Executors Dossier which can be kept with your Wills to make administering your estate easier for your Executors. An Executors Dossier contains important information about your assets such as purchase details, additions, capital gains, the location of title deeds and any other relevant information:

• You can choose who you wish to inherit your assets, rather than this decision being made by the laws of intestacy.
• You can choose to pass certain belongings to certain individuals.
• You can structure your Will to ensure that your family’s wealth is protected against adverse outside influences. In some cases, your family may also need protecting from themselves.
• Ensure that items of sentimental value are retained in the family.
• If you are an unmarried couple, you can ensure your partner is provided for.
• You will have peace of mind that your estate will be divided as you wish and you can ensure that the people you choose will administer your estate.
• It will also make it easier for your loved one to deal with your affairs when you are gone

The specific risks associated with this advice:

• A poorly constructed Will may not distribute your assets as per your requirements. For this reason, I recommend that a legal adviser assists in the creation of your Will.
• It relies on you to update your will should there be any significant changes to your circumstances.
• If you die without a Will, distribution of your assets will be in accordance with State-based legislation.
• Unless you appoint a legal guardian and provisions for your minor children, they may not be cared for in the manner you would like and be unduly stressed by the process.

Guardianship of Children
The appointment of a guardian is usually included in the Will as a safeguard in the event that both parents die before the children are 18 years old.

The appointment of a guardian also serves to avoid the possibility of disputes between members of the family. The Court has an overriding discretion to appoint or remove a guardian.

It is the guardian’s responsibility to make the important “life decisions” on behalf of the children. The guardian must ensure that the children are adequately housed, clothed and educated. The guardianship of minor children is a responsible task. The Will-maker should think carefully about the appointment of a guardian and attempt to appoint one or more persons who:

• Are prepared to take on the responsibility.
• Hold similar social and cultural views to the Will-maker.

Conflicts may arise between an executor and a guardian as to how a minor beneficiary’s entitlements are to be used for a beneficiary’s on-going maintenance, education advancement or benefit. To avoid such conflicts these issues can be catered for within the Will.

Binding death benefit nominations
Allows you to nominate who will receive your superannuation benefits in the event of your death and ensures that the Trustee is legally bound by your wishes.

Generally, without a binding death benefit nomination in place, the Trustee of your super fund will make a decision about who to pay your death benefit too, but it is also legally obliged to determine who your dependents are and any other relevant considerations at the time of your death. Your benefit will be paid to those considered to be financially dependent on you and, in some cases, this will not be the person or people nominated.

The decision may not always result in an equitable distribution of your superannuation benefit or one that satisfies your dependents.

Reversionary Pensions
Upon death of the super pension member, you can elect for your super pension to be continued and paid to a nominated reversionary beneficiary.

A reversionary pension is similar to a joint tenancy in the family home where the asset (or in this case the pension) automatically transfers upon death.

The provisions relating to reversionary pensions will be governed by the super fund Trust deed and the pension agreement (if any).

Limitations of reversionary pensions

• A major limitation is when death benefits are to be paid to the Legal Personal Representatives (LPRs) or adult children. This is because neither reversionary nor a death benefit pensions can be paid to the LPR or adult children.
• Only one reversionary beneficiary can be nominated to receive the reversionary pension, which does not suit multiple beneficiaries such as a number of minor children.
• A reversionary nomination must be made for each pension. A holistic nomination to cover all pensions and reversionary nominations is generally not possible as it will not cover accumulation interests.
• Any nomination of the reversionary will be lost if the pension is commuted.

Advantages of reversionary pensions

• A member can deal with multiple pension interests separately.
• Any life insurance proceeds added to a reversionary pension will retain the tax components of the pension, rather than be simply added to the taxable component. This creates a tax advantage of a reversionary pension over non-reversionary death benefits.

 
Powers of Attorney
A power of attorney is a legal document that gives another person the authority to act on your behalf.
The Power of Attorney must:

• Be over the age of 18.
• Be of sound mind at the time of the grant and capable of fully understanding the nature and purpose of the document they are signing.
• Not do anything illegal while operating under a Power of Attorney.
• Is unable to prepare a Will on your behalf or transfer the Power of Attorney to someone else unless specified.

Depending on the law prevailing in a particular state or territory, there are generally four types of powers of attorney:

General Power of Attorney
This is where you the donor give another person the authority to act on a specific transaction for a limited time. E.g. appoint another person to manage your finances while you are on a holiday overseas. In the event of you becoming mentally unable to manage your own affairs the authority given to the donor ceases immediately. Unless there is good reason for preparing a general power of attorney, you the donor should consider preparing an enduring power of attorney.

Enduring Power of Attorney (financial)
This is similar to a general power of attorney except that it can continue even if you become mentally incapacitated (lose mental capacity). An enduring power of attorney is an essential document, particularly for older people who are finding it increasingly difficult to attend to their personal affairs. It is therefore extremely important that you only grant this power to someone you can trust.

Enduring Power of Attorney (medical treatment)
This enduring power of attorney (medical treatment) is limited to medical decisions. It does not however extend to special health decisions which include; sterilisation, abortion, donation of body tissue, some psychiatric care and euthanasia.

Enduring Power of Guardianship
In certain states, e.g. Victoria, an enduring power of guardianship can be prepared. An enduring power of guardianship enables a donor to appoint an attorney to make lifestyle decisions (such as where the donor lives and works) in the event of the donor losing capacity in the future. The donor can express preferences in relation to lifestyle decisions in the document.

If you do not appoint an Enduring Power of Attorney and are no longer able to manage your financial affairs, provision is made in each Australian State where a "financial manager" can be appointed. Unfortunately, the appointee may not necessarily be who you would have chosen which may cause considerable conflict and anguish among family and friends.

Advantages of establishing a Power of Attorney include:

• Your Power of Attorney can make financial and legal decisions for you if you lose the capacity to make your own decisions.
• A relatively easy and inexpensive method of financial management.
• Provides continuity of management of your financial affairs, thereby minimising immediate financial hardship if your decision making ability is suddenly impaired.

The specific risks associated with Establishing a Power of Attorney include:

• That the person you entrust as your Power of Attorney is not trustworthy.
• Make sure you nominate people that you know are trustworthy, if possible financially astute, and likely to be around when you need them

If the donor wishes to revoke the authority given under the power of attorney, the donor must have the capacity to do so and:

1. In the instance that the donor wishes to revoke authority given under the power of attorney and the original power of attorney is destroyed, care needs to be exercised in this instance to retrieve all known copies of the document.
2. In the instance that the donor wishes to revoke the authority given under the power of attorney by preparing a formal revocation of power of attorney, then a copy of the revocation document should be registered in those states / territories where registration is applicable. All copies of the power of attorney should also be retrieved from the attorney.

Testamentary Trusts

A Testamentary Trust is a Trust established by a Will that comes into effect upon the death of the Will-maker. The most common type of Testamentary Trust is a Discretionary Will Trust. It describes a form of ownership of asset whereby a Trustee holds assets on Trust for the benefit of one or more beneficiaries. This means that the assets pass to a Trustee who holds the estate assets on Trust for the benefit of the beneficiary and a category of other discretionary beneficiaries rather than direct to a beneficiary in the situation of a Will. In order for the beneficiary to have the option of a Discretionary Will Trust, the Will must specifically provide for the establishment upon the death of the Will-maker.

The Will usually sets out who is to have ultimate control of each Discretionary Will Trust established. The Trust is managed by the “Trustee” and all decisions regarding the management of the Trust are made by the Trustee. Effective control of the Trust rests with the person or persons who have the power to remove and appoint the Trustee. This person is usually called the “appointor” or “guardian”. The power to appoint or remove a Trustee is referred to as the “power of appointment”.

Typically, one of the beneficiaries of the estate is usually the Trustee and holds the power of appointment. However, the Trustee and the beneficiary can be different people. Benefit and control of a Discretionary Will Trust may be separated where the Will-maker does not want the beneficiary to have complete control of the Trust. This is often the case where the beneficiary is suffering from a legal disability or is likely to be unable to appropriately manage the Trust.

In the absence of any specific restrictions imposed by the Will-maker on the beneficiary, a beneficiary generally has the choice of whether to invoke the Discretionary Will Trust upon the Will-makers death. The executor usually makes this decision in consultation with the relevant beneficiary. Typically, the default position is to establish this Trust. If a beneficiary elects to establish the Discretionary Will Trust, the beneficiary can subsequently end the Trust and take the assets of the Trust personally. However, careful planning and advice should be obtained prior to the vesting of a Trust that has been established. 
 
The beneficiaries of an estate who are given the “option” of taking their entitlement as beneficiaries of a Discretionary Will Trust are usually termed “primary beneficiaries”. In addition to the primary beneficiaries of the Trust, the Will provides for a class of additional discretionary beneficiaries who can receive income and capital from the Discretionary Will Trust. The decision to distribute income and capital to the discretionary beneficiaries’ rests with the Trustee who is usually the primary beneficiary or such other person or entity nominated by the primary beneficiary. To maximise flexibility, the class of discretionary beneficiaries should be drafted widely and should include immediate family and other relatives of the primary beneficiary. In addition, other potential discretionary beneficiaries such as associated Trust, charitable organisations and related companies should also be included.

Once established, a Discretionary Will Trust has a maximum life span of 80 years therefore the Will should be drafted to allow the Trustee the discretion to end the Trust any time prior to the expiration of the 80 year period.
Where the Will-maker is leaving their estate to more than one primary beneficiary, the Will should make provision for each beneficiary to take their entitlement as the Trustee and beneficiary of a separate Trust. This avoids problems that may arise where a Discretionary Will Trust is jointly controlled by siblings and enables each beneficiary to deal with their respective entitlements in different ways.

For example: one beneficiary may choose to leave the Discretionary Will Trust in place while another may terminate the Trust and take the entitlement personally, while a third primary beneficiary may elect not to invoke the Trust at all. No consultation is required between the beneficiaries.

As a Discretionary Will Trust has the capacity to run for an 80 year period, it will generally outlive the primary beneficiary. It is therefore necessary for the primary beneficiary as part of their estate planning, to provide for the succession of control the Discretionary Will Trust. This can be provided for in the primary beneficiaries’ Will or by a separate deed prepared during the lifetime of the primary beneficiary.

The advantages of Testamentary Trusts include:

• The ability to protect assets from potential creditors and unforeseen relationship breakdowns. For example, should your spouse or child form a relationship in the future which breaks down over time, and if you have left assets to them in the form of a Trust the partner cannot directly access these assets. An inheritance held within a Testamentary Trust is less likely to be the subject of a Family Court order in the case of a marriage breakup. It may be regarded as a financial resource and have some effect on the terms of a property settlement but this is a preferable outcome to the property being at the disposal of a Family Court order.
• The ability to share the assets with family members with reduced transfer costs and ease of access.
• Income tax minimisation, particularly for minor children who are taxed at adult rates. The Trustee of a non-fixed Trust is able to stream the income to beneficiaries.
• The Trust is able to earn investment and business income.
• Flexibility; crisis provisions can be included in the Will to trigger alternatives where a beneficiary becomes incapacitated, bankrupt or experiences family breakdown. 
• The ability to allow you to rule from the grave by setting guidelines, such as age, education for children and grandchildren, and income streams versus lump sums for spendthrift individuals.
• Releasing certain beneficiaries from asset management responsibilities (e.g. minors, the elderly, the incapacitated or the financially unsophisticated or gullible). The flexibility of a Testamentary Trust, especially if combined with a Memorandum of Wishes as to how the Trust should be administered, may be an appropriate arrangement.
• The Trustee has total flexibility to invest in whatever assets they wish (subject to the Trust deed) and can draw on capital or income at any time.

Below is a diagram showing an example of how a Testamentary Trust may be set up to distribute Estate assets for current and future generations:

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