Making a start in estate planning

An increasing number of financial planners want to take a more active role in estate planning for their clients. Here’s what they should do, writes Anna Hacker.  

Over the last few months, we have heard from a growing number of advisers that they are seeking to expand their services into providing quality estate-planning advice. 

In the past, many advisers limited their role in this area to simply checking whether clients have a Will. However increasingly the advisers that I talk with say they wish to take a more active role in estate planning for their clients. 

Various studies suggest that less than half of Australians have a Will, so there is certainly a great deal of scope for advisers to encourage clients to think about estate planning. 

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Even those clients who do have a Will can benefit from their advisers’ assistance. 

A Will on its own is not an estate plan and there may be many other areas, both financial and lifestyle, that need to be considered in order to develop a comprehensive estate plan that suits the client’s needs. 

In addition, many people may have written their Will many years ago – for example, when their children were young and their primary focus was ensuring the children would be looked after if anything happened to them. An estate plan is not a ‘set and forget’ document but one that should be reviewed on a regular basis and, if necessary, updated. 

A couple of trends make this regular review increasingly important.

Firstly, the current retiree generation is significantly better off than previous generations in retirement.

They may hold substantial assets through their home, superannuation and insurance policies, and ensuring this is properly treated after their death – and in a way that doesn’t create a major tax burden for their family – is essential. 

Secondly, we are unfortunately seeing a rise in the number of court challenges to Wills. Different States have very different rules about who can challenge a Will, but overall the trend appears to be that the legislation is allowing more and more people the right to claim part of an estate. 

For example, until quite recently, Victoria had very strict rules governing who could challenge a Will, allowing only immediate family members, such as a widow or children, to make a claim.

But following changes to the legislation, Victoria now allows the broadest range of claimants against an estate than any other state, permitting anyone who the testator had a responsibility to – which could be as broad as to include neighbours or business partners – to challenge the estate in court.   

Other State laws that need to be taken into account in estate planning include NSW’s ‘notional’ estates provisions, which allow assets to be clawed back into an estate even if they were gifted to others by the testator during their lifetime.  

It may therefore not be enough for a client to adopt a “whatever happens, happens” approach as this could lead to as much strife as attempting to thwart the provisions.    

And people are certainly taking advantage of these laws.

At Equity Trustees, we have seen a noticeable increase in the number of challenges to Wills, a process that is not only expensive to the estate but can also create lasting family rifts – the last thing any parent would wish to happen. 

The result is that estate planning is an area of great importance for clients to get right, and one of huge potential for advisers to expand their services into. Nonetheless, it is a highly complex area that requires a great deal of expertise and knowledge. 

The trick is to develop an estate plan that is not necessarily too specific, but that is still tight enough to make it clear what a person’s wishes are. 

For instance, a Will that lists every asset and how it should be distributed will very quickly be out of date, as assets may be sold.

On the other hand, a Will that simply states that everything should be divided between the children could run into problems if there are other people – family members or otherwise – who believe they have a claim on the estate and have been unfairly left out. 

One good example of where estate planning can get very complicated is in conjunction with aged care planning – itself another area advisers are increasingly aware they need to assist clients with. 

An estate plan that seems to be the most simple and straight-forward approach for a client may in fact create significant difficulties when the time comes to move into aged care. 

As an illustration, take a couple that is well into a comfortable retirement. They own their own home; they have sufficient income from their modest but adequate investment portfolio; and they have a straight-forward estate plan.

Like many couples, this estate plan is set up so that everything is jointly owned and, when one partner dies, the other inherits everything; when that person dies, the assets are divided equally amongst their children. 

This is the most common form of estate planning for a married couple, and on the face of it, it seems pretty fool-proof. 

However, problems will almost certainly arise if one person needs to go into aged care. If their partner then passes away and they automatically inherit all jointly held assets, then they may lose Centrelink benefits, and their aged care fees may increase. 

A better approach in this situation may be to divide ownership of assets so each person can direct their own share to whoever they wish, rather than bequeathing them to the surviving partner. 

This is just one example of how estate planning can be affected by the need for additional support and care as people get older.

Another example is if a Will has been written so that one child inherits the family home and another child inherits all other assets – a division that, at the time, was seen as fair and equitable. 

However, if the home is then sold to fund the accommodation bond, and the Will isn’t updated, then one child has been disadvantaged, which could lead to family disputes.   

These situations can all be managed appropriately in an estate plan, but it requires people to consider all eventualities.  

Understandably, most people don’t like to consider the possibility that they will need to move into aged care at some point in their future, but such a scenario should be included in estate planning. 

It is important that this planning is done well in advance. Trying to change an estate plan at the time that someone is moving into aged care is not only an unneeded complication at a time when people are probably already feeling emotional; making changes at such a time could prove impossible. 

Around one in five people moving into aged care are doing so because of diminished capacity, and would therefore be deemed to not have the testamentary capacity to make changes to their own estate plan and Will. 

The key to sensibly managing these issues is communication, and this is something that advisers are well-placed to encourage and assist with. 

In the first place, communication within the family is important.

Some people may be assuming that they can move in with their children when they are no longer capable of staying in their own home, and are disappointed when the time comes and they find that their children don’t feel they are able to take them in. An honest conversation about expectations will help manage this. 

Similarly, communication with their financial adviser is important. Clients who see their adviser as an advocate who can assist in ensuring their wishes are met, will be in the best position to meet whatever the future holds.

For instance, if a client does become seriously ill and unable to manage their own affairs, a well-informed adviser can assist their children or other responsible parties to manage the situation and make the right decisions. 

One very important area that needs to be considered in estate planning – one that will often be required if people need to move into aged care – is Powers of Attorney. 

Again, different States have different rules around these, so specialist legal assistance may be needed. However, generally speaking, the idea of having a Power of Attorney is that someone can be given the legal power to make decisions on another person’s behalf if that person becomes unable to do so. 

There are different kinds of powers of attorney and different arrangements can be made to look after financial, health and medical, and living and care requirements. 

While each State is different, generally speaking there is an attorney who is appointed to act on behalf a person in relation to medical treatment decisions and/or a guardian to make decisions regarding living arrangements. Often, this role is combined, but different people can be appointed.   

If the person appointed as the financial attorney and the guardian do not agree on the living arrangements, there is the potential for significant conflict.

The financial attorney ultimately pays for fees on behalf of the person lacking capacity, while the guardian makes the decision about where they live.   

Using the example described above, where assets need to be sold in order to fund the accommodation bond, if the person making that decision as financial attorney is the person who inherits the family home, they may in a position of conflict when attempting to determine the best financial outcome for the person going into aged care.

If they realise that the sale of the home may result in them inheriting nothing from the estate, they may look for any alternative means for raising those funds.   

It is important to canvass all of these potential conflicts with the person appointing the attorneys while they still have capacity so that a later disagreement does not result in the parties ending up in a guardianship tribunal.   

Aged care is just one example of an area where estate planning can become extremely complicated. Particular family circumstances – such as second marriages or divorce – can also add to the complexity of estate planning, as can specific financial situations or strategies.

Advisers will need to be aware of these complexities – even if they aren’t in a position to advise on them fully – so they can continue to advise their clients on the best possible approach for their own situation. 

Anna Hacker is senior manager – estate planning at Equity Trustees Limited.