While an estate plan is arguably one of the most important financial plans an individual will make in their lifetime, a lot of people don’t make them.
As our population both ages and as longevity grows, they are only becoming more important.
An arsenal of tools are available to planners to ensure effective estate planning, depending on clients’ needs.
Talking about estate planning
Although talking about estate planning can be difficult, it is important that advisers in that space persevere to ensure clients are adequately protected, national manager of estate planning at Australian Unity Trustee Services, Anna Hacker, says.
To start, people find it difficult to plan as it’s intimidating to think about your own mortality.
“It’s a challenge for people to think about when [they’re] not around,” Hacker said.
“I still want to protect my kids or my grandkids or a partner, but I’m not going to be here … and I don’t know what they’re going to have as a need in the future, so that’s always a realistic challenge and something that is difficult for people to even get their heads around.”
At least with effective estate planning, it is easier to ensure that money both goes to the beneficiaries intended and does so in a timely manner.
“The stress of managing estate planning can be enormous … if an estate is contested and it drags on for years and years, the only people who win are the lawyers.” head of Centuria Life, Michael Blake, said.
“Financial planners want the estate to go the way their client intended – clients don’t want their wishes to be altered or beneficiaries to have to wait or fight.”
It’s also easy to presume that estate planning relates just to leaving wealth rather than people too.
Hacker says that this just isn’t true, and is a common trap that people fall into.
“The financial side is really important, but if you go to guardianship tribunals across Australia, sure there’s the fight about people’s wealth … but there’s even bigger fights often about who gets to control where mum and dad might live or who gets control of the guardian role.”
Hacker warns that without effective estate planning, the ability to make those decisions may be taken out of your hands.
“It’s something that if you put off, you might not be left with any options. Someone else will make that decision for you,” she said.
This problem will only be exacerbated by increasing longevity.
The last census showed that the proportion of those over 64 who were aged over 74 increased from 2011 to 2016.
“You see those worse case scenarios playing out more, because people are living longer and they’re staying in their homes longer ... and we need to plan for that,” Hacker said.
Part of that plan, for example, should now be including a power of attorney in your estate planning, according to Hacker.
Even ignoring the fact we’re all ageing, estate planning is important because the future is unknown.
People generally only look to make estate plans when something goes wrong or they are entering a home, by which point they often don’t have the capacity to put things into place.
“But you might walk out your door and be hit by a car. There’s not a timeline where people can say, I know when I’m going to pass away, or be impacted in a way that will limit my ability to handle my own finances and my own life,” Hacker said.
Is super really that super?
Once a favourite tool in advisers’ estate planning arsenal, superannuation is increasingly difficult to use as a means of passing on wealth.
This is largely because of the Federal Government’s continual tightening of superannuation contributions in recent years.
Director of business advisory services at RSM Australia, Brad Eppingstall, says that both the tightening of contribution limits and the introduction of a $1.6 million transfer balance cap (TBC) has made it more difficult to get the level of money into super that clients would want to pass on through that means.
“Before July last year [when the reforms came into play], most of the time the benefits had gone as a reversionary pension regardless of the amount in the fund, so you’d see funds with $5, 10, 20 million, where all those benefits remain in a tax-free environment,” Eppingstall said.
“Now where each person has a limit of $1.6 million on their pension account, if one member passes away, for example a husband or wife, that member’s superannuation will actually need to come out of the fund rather than stay in it.
“Purely from a taxation point of view, any earnings on those assets are certainly going to be taxed at a higher rate coming out of the superannuation environment than sitting in superannuation,” lessening their appeal as a means of estate planning.
This would especially affect “fairly vanilla setups where there’s a couple and they have kids and there’s no major issues in terms of risk with the estate”.
In these situations, Eppingstall said that all the superannuation benefits of the deceased would usually stay in the fund, to be paid to the survivor and then distributed to the kids on the latter’s death.
The reforms impact the tax efficiency of doing this.
Michael Hutton, a partner in wealth management at HLB Mann Judd, warns that super isn’t really intended to be a tool for intergenerational wealth transfer.
“Super is designed to be worn down during retirement. You’re not meant to be using super to build up wealth,” he said.
As such, if you plan to use super as a primary means of wealth transfer and then pass away after you’ve been retired for a while, there simply might not be much money left to pass on.
Transferring super to anyone other than a spouse is problematic.
Hutton says that even before the limits imposed by the TBC, superannuation would generally eventually have to be paid out in a lump sum at some point along the estate distribution line, after the surviving spouse died.
Put your trust in a trust
There are alternatives for advisers seeking to maintain the security and guarantee that superannuation once left their clients’ estates.
Hutton said that testamentary trusts can suit clients who want to ‘rule from the grave’ to an extent.
As the deceased can specify a trustee before their death, they can make that decision with consideration of who will best see their wishes through.
Should they have a disabled child for instance, an independent trustee can be appointed to make sure finances are distributed in a way that supports that child throughout their life.
Additionally, testamentary trusts could help overcome the issues with leaving superannuation behind as outlined above.
Hutton says where contribution limits make leaving super make less financial sense, clients may leave superannuation to their kid to then put into their super using testamentary trusts.
They could nominate that their super be paid into their estate, from which it could be rolled into a testamentary trust.
Testamentary trusts can help blended families avoid estate planning messes too.
With the nuclear family model growing less common, planners increasingly need to grapple with blended families – with combinations of different partners across generations and step children – in estate planning.
Hacker says that she has observed very high numbers of challenges of adults against their parents from blended families, especially regarding women’s wills, showing that it is an issue.
With women living longer, by the time they die they have often been part of various family structures.
Hutton said the testamentary trusts could help avoid this by establishing from the start where money was intended to go and protecting those wishes.
Marital assets could be kept separate from parental ones so that division post-death is clearer.
While a different breakdown of these could be determined by the court upon a challenge, it still mitigates some risk there.
It can also protect inheritance from creditors. The assets are more protected than through some other structures as they are ring-fenced by the trust.
Advisers need to bear in mind that clients need to look into this option while still alive though. If a testamentary trust isn’t considered in a will, it can’t be set up.
With such trusts only officially forming upon death, taxation is easier as no compliance is required prior to that point.
Beyond testamentary trusts Hutton said that family trusts can also be a useful estate planning tool, while “we are also seeing more use of investment companies now”.
He warned that the deceased would have less control of such mechanisms after their death than with their testamentary counterparts.
With family trusts, for example, it’s up to the trustee to make decisions, and the deceased is usually replaced as trustee by their partner or children.
As with most things, setting up a trust is a balancing act.
“The main challenge [for estate planners] is people need to look at whether they want flexibility in their estate planning or if they want to rule from the grave, as you kind of can’t have both,” Hacker says.
“The flexibility often limits the protectiveness of those trusts in a lot of cases.”
Bonding beneficiaries with bonds
Having experienced a loss in popularity following the deregulation of superannuation, investment bonds are “coming back into vogue” for planners in the wake of the super reforms, according to Blake.
He says that a key reason for this is their simplicity and tax efficiency.
To set up an investment bond, you only need to fill out a form, either yourself or with a financial planner. This is both easier and cheaper (no legal fees!) than many other estate planning structures.
In terms of tax, investment bonds are not as efficient as, say, superannuation.
While higher than tax on super, at a tax rate of 30 per cent they are still more effective than keeping assets at the marginal tax rate.
Super is also taxed when paid out to non-dependants, such as children over the age of 18, whereas bonds are not.
Furthermore, if a beneficiary pulls the money out after the investors’ death, no tax is imposed.
Pay-outs are also simpler.
As investment bonds are covered by the Life Insurance Act 1995, investors can nominate a beneficiary to get the bond when they pass away.
And, unlike other means of passing wealth on to future generations, Blake says that beneficiaries of investment bonds aren’t made to endure the lengthy delays that are otherwise common to distributing estate proceeds.
“Once a person has passed away and we receive the death certificate, we make the payment straight away,” he said.
Because an investment bond bypasses the estate, it can give the owner peace of mind that “your money will go to the beneficiaries that you choose and intend”, thereby accommodating blended or more complex family structures.
It can also suit high wealth individuals who know exactly where they want their money to end up.
While many sophisticated investors will have complex investment strategies, Blake says they and others may want simplicity from the investments themselves
In his experience, this is particularly true with grandparents. They may know exactly how much they want to leave each grandchild and setting up an investment bond in each beneficiary’s name provides them with an easy way of ensuring that each receive that amount.
These benefits are not just limited to high wealth investors.
A Centuria investment bond has a minimum investment of $500, meaning that they can be an estate planning solution for grandparents across the board [in terms of wealth levels] wishing to leave money to their grandchildren.
Furthermore, as with testamentary trusts, investment bonds can be used to protect inheritance from the deceased’s creditors, this time as they do not form part of the estate.
There are other limitations; not all assets can be put in a bond, for example.
This means that investors need to have a lump sum available for investment.
Thus, Blake says that investment bonds are “not a stand-alone solution to estate planning; but they are a great tool for wealth transfer as part of a wider estate plan”.
Other structures are needed to ensure all assets are properly protected and distributed.
But variety in estate planning is by no means a bad thing.
“I don’t believe in putting all your eggs in one basket for anything,” Blake said.