Legal Issues

Why gamble with your estate?
Terry Purcell of RetireLaw tells us about the importance of Estate Planning.

Estate or succession planning has been described by one Australian authority, Melbourne lawyer Daniel Butler, as involving the transfer of family resources from one generation to another in a manner that optimises the family’s overall financial position.

However, for this to be achieved the starting point is to have a will in place. This is not the case with many Australians, who seem to be either oblivious to the need for one, or averse to taking this step. For many people this seems to come from a reluctance to face their own mortality.

We have spoken to a number of people who tell us their parents don’t have wills and refuse to make one – in one instance the person in question said it was likely to lead to bad luck and bring his death on prematurely!
Some married couples with uncomplicated assets such as their home, some superannuation and bank accounts which are held in joint names, might get away without having a will, as on the death of one, their assets will pass (almost) automatically to the surviving spouse. But in today’s world fewer and fewer people’s circumstances are so simple.

A Will is vital if they want to ensure their assets are distributed the way they want, and not in accordance with a rigid formula, supervised by government agencies, for those dying intestate (without a will).
The traditional ‘simple will’ is really no longer a sensible option for the majority of people no matter how seemingly straightforward their circumstances – tax, superannuation, bankruptcy, and social security laws, as well as Family Law and the Family Provisions Act – all may impact on the transfer of their estate.

In an era when life is grows more complex by the year, why would you expect to be able to transfer assets worth hundreds of thousands of dollars smoothly using a Will form costing a few dollars from a newsagent or the Post Office, or even a ‘free’ or low cost Will (typically less than $100) from a local solicitor?

It’s a very big gamble –

However, a word of warning as it is important to understand that estate planning is not done well by the great majority of solicitors who, through lack of experience or knowledge, make a number of common mistakes such as:
• Preparing low fee wills for the wrong reasons, such as a “loss leader”, hoping to get the more remunerative probate and estate administration work in due course.

• Devoting little time to understanding the circumstances of the client or what they own, or more importantly what they think they own – assets held in superannuation, companies and trusts are not transferred by the Will.

• Accepting without question a client’s request for a ‘Simple Will’ – making few inquiries and overlooking issues such as asset protection, taxation and social security implications for the beneficiaries.

• Relying on very old Will precedents which ignore needs of clients in the 21st century, where affairs are dominated by modern taxation, superannuation, social security and trust laws. Clients come away with little understanding of the effect on their Will often because the lawyers don’t understand it themselves.

The pathway to effective estate planning starts with a modern effective will which should offer clients advantages such as:

• Acknowledging what is not transferred by the Will and taking into account when allocating inheritances the Will maker’s interests in property jointly owned, family trusts/family companies and superannuation.

• Including detailed provisions regarding guardianship of children and also for their housing, education and welfare.

• Containing equalisation provisions which take into account provisions for beneficiaries already made via loans, family trusts, superannuation - this avoids situations where some beneficiaries end up with all of the super and then share with the rest of the beneficiaries what’s transferred by the Will.

Providing for optional, discretionary testamentary trusts.

Such trusts are the cornerstone of effective estate planning as they offer beneficiaries the following advantages in respect to assets held in discretionary testamentary trusts:
• Potential for significant income tax savings for beneficiaries – income to minors left via a testamentary trust does not attract penalty rates.
• Splitting of income generated by trust assets among the potential discretionary beneficiaries of the trust.
• Potential for significant capital gains tax savings for beneficiaries.
• Protection from bankruptcy – assets are not owned personally by the beneficiary and therefore do not form part of the beneficiary’s personal estate.
• Family Law protection – a testamentary trust can
provide protection for a beneficiary who is experiencing Family Law difficulties – your bequest does not end up in the wrong hands.

Another advantage of a modern will is the ability to confidently provide for vulnerable beneficiaries - someone who has special needs through disability, health problems, addictions or simply an inability to properly manage their own affairs or those of their family. Special provision can be made for such beneficiaries so that they enjoy the benefit of an inheritance but without the same level of direct control other beneficiaries will enjoy over their inheritances.

However, to be effective, modern estate planning is a team effort, usually involving the will maker’s accountant for those with more complex estates, their financial adviser (a role most accountants will be barred from following reforms to operate from March 2004), and a lawyer with extensive experience in documenting estate plans through the type of modern Will described in this article.

Too many lawyers have yet to learn how to develop a good working relationship with their client’s other advisers and often ignore recommendations. This echoes the various common mistakes referred to earlier, which can lead to bad results for the client, the financial adviser and for the lawyer.

While a ‘simple will’ may work for some, in most cases it will almost certainly result in more costly and time consuming outcomes with potentially unhappy and frustrated beneficiaries, particularly those who realise too late how differently the process might have been managed.
In a future where healthcare, housing and education are all likely to become increasingly expensive for future generations, intergenerational wealth transfer will become very important for those lucky enough to be the beneficiaries of well thought out estate plans.

So unless you all have kids who are highly successful financially, they and their kids will find it difficult to afford these fundamental necessities.
For this reason, properly tailored inheritances will be very important to your children and, more particularly, your grandchildren. Ensuring that what your wealth is effectively passed down to the next generation or two will mean that most of your heirs may have less of a struggle.
So to ensure that your hard work in creating something that is worth leaving to your heirs is protected, work closely with your advisers to structure an effective estate plan that removes any risk that your estate will end up in the wrong hands.

Terry Purcell, LLB, Solicitor/Director, and Dawn Wong, BA(AS) Hons LLB, Executive Director, operate RetireLaw Retirement and Estate Lawyers from Warriewood Shopping Centre, Warriewood, NSW. They can be contacted by telephone on(02) 9970 0800.