The Final Plan

Estate planning is often overlooked because people can feel dissuaded from planning their financial legacy beyond their own life. However, doing so can have a lasting effect on the family you leave behind by making things simple during their time of grief.

Having a financial adviser involved in the process can eliminate potential complications to give everyone involved peace of mind. 

Director of Estate Planning DNA, Mike Sayer, said financial planners are in a good position to contribute with estate planning because they often build long-term relationships with clients.

“Because we have that relationship, we can explore it before handing over information to a lawyer to actually put the legal documentation in place,” Sayer said.

“We explore values, we have a thing called the ‘three C’s of succession’, which are certainty, choices and conflict.

“We find what people are most keen to do is to avoid conflict or to ensure they leave harmony behind them rather than mess and conflict.”
Sayer said distribution of assets is an important factor people need to consider as those choices can have lasting implications.

“It’s making sure it doesn’t produce something they would regret if they were alive to see the result,” Sayer said.

Perpetual partner, Anthony Lam, who works within the firm’s private clients division, said getting good specialist advice means the deceased’s wealth can be distributed efficiently and taxed effectively. This means it will significantly reduce the likelihood of delays, disputes or litigation amongst family.

“An estate plan is more than just a will, it’s taking control of the future, it’s important clients have backup plans in place whilst they are still alive in the event they may not be able to act for themselves,” Lam said.

National manager of estate planning at Australian Unity Trustees Legal Services, Anna Hacker, said people often think when they get a will prepared, it’s just a document and they’re only focused on the end of the process. However, the will is more than just the final document, as the advice component is crucial.

“If you don’t have the right advice, the document won’t actually meet your objectives,” Hacker said. “What they need to do is understand what they actually want to achieve and that’s really the most important thing to think about when you’re getting a will prepared.”

PICKING THE RIGHT EXECUTOR

Picking an executor of the will is another under-appreciated factor as it’s important to make the choice appropriate for your situation, not what may seem the most convenient.

“A lot of people just assume this is something that if I asked my friend or my family member, this is an honour, this is something they’re going to be really grateful to do,” Hacker said.

“The reality is, what they need to look for is someone who is up to the task, someone who can act impartially, especially if there’s beneficiaries that don’t agree with each other.”

If this isn’t considered, there can be tax consequences when administering an estate: “If it’s not taken into account, it can negatively affect beneficiaries, the estate or the executor,” Hacker said.

“There is actually a personal liability in a lot of cases if someone does the wrong thing even if it’s done in good faith.

“They need to choose someone who understands how complex this can be and is happy to understand what the legal implications of different things are.”

SUPER AND ESTATES

According to the principal of Townsend Business and Corporate Lawyers, Peter Townsend, superannuation can’t be dealt with by a will because it is held by the trustee of a super fund.

“Because you have to deal with both your superannuation assets, which are a dealt with through death benefit nomination, and your non-superannuation assets, which are dealt with through a will, you have to plan the two documents,” Townsend said.

“Obviously, people want to live comfortably in their retirement, but the big problem is when people say to me ‘I don’t really need an estate plan, I’m going to spend it all’ that’s very interesting.

“And when is it that you’re going to die precisely? Because nobody knows that, you can’t make any real decisions about planning and how much money you’re going to leave.”

However, given that superannuation is meant for retirement and not expected to exceed the lifetime of its contributors, it isn’t treated as an easily transferable asset.

It’s important to consider this with an adviser when estate planning, because if there are leftover funds, the tax liability varies depending on the beneficiary.

“It’s important to understand that superannuation is there to fund your own retirement, if not, then the focus has to be on supporting your dependents,” Hacker said.

“People often look at the balance they’re going to have at the end and they think about their beneficiaries. But there can be tax consequences of that superannuation going to people who are non-tax dependents.

“It’s important to check the tax implication of any beneficiaries as non-tax dependents are different to people that can benefit from superannuation.”

Hacker pointed to an example of a client who was getting an inheritance, but didn’t realise it was through her mother’s super fund.

“When I told her about it, I explained what she’s going to receive is going to be taxed and she was just horrified,” Hacker said.

“She said she had to pay for a funeral with this amount and it’s actually not going to be enough.

“People don’t actually understand it’s meant to be there to fund dependents and if people are not technically tax dependents, then there will be tax consequences.

“There are ways that you can avoid the tax payment to non-tax dependents from superannuation, but it has to be carefully done.”

Craig Day, head of technical services at Colonial First State, said if someone wants their super paid directly to a beneficiary they need to consider putting in place a valid death benefit nomination.

“This nomination can provide certainty and allow the payment of a death benefit to a member’s dependants quickly,” Day said.

“It also avoids a member’s benefit being subject to a family provision claim if it is paid to their estate.”

Lam said there had been several instances where clients had worked hard to build wealth but did not use up all their super. 

“In order to be well prepared for super passing to beneficiaries such as the next generation, the need for good advice and a deep understanding of the family dynamics and desired outcomes is crucial,” Lam said.

“For example, with the recent $1.6 million balance transfer cap being applied to superannuation savings, it’s very important to consider the super balance of a surviving spouse.

“You don’t want to get caught out by this change and find the transfer balance cap is exceeded, a great estate plan is designed to manage such challenges.”

PASSING IT ON

There are other assets people will need to pass on, which all have various tax implications that an adviser can help with.

Inherited shares can be the trickiest, as dealing with capital gains tax (CGT) can vary depending on the situation of the beneficiary.

“Normally in deceased estates if you inherit shares, you have CGT rollover relief or you have an exemption where you don’t have to pay it at the time that you inherit that asset, it’s deferred until you sell it,” Hacker said.

“That means it’s good for those beneficiaries, but it means when they sell it there’s CGT paid at that time, rather than when they inherited it.”

However, there can be issues with these exemptions in certain circumstances, such as if one of those inheriting it are no longer an Australian resident for tax purposes.

“If you have a beneficiary who is not an Australian resident for tax purposes then they don’t get that rollover relief and they don’t get the exemption at that time, the capital gains is paid at the time they inherit that asset,” Hacker said.

POWER OF ATTORNEY

Sayer said an estate plan is not just a will, as people need to look at power of attorney, succession of attorney, living wills, enduring guardianship and testamentary trusts.

“[Enduring guardianship], that’s making sure if they’re on life support they can take the power now to make a decision as to whether it be switched off or not,” Sayer said.

“As opposed to leaving it to their children, which could create conflict because one child might disagree with another.

“Testamentary trusts are a key issue because under the bankruptcy act they can protect against creditors, very often they’re missed out and they can have tax advantages as well.”

Just as choosing an executor and enduring guardian are important decisions needed to be taken seriously, power of attorney needs to be considered likewise.

“It’s really easy to know which types of clients need a power of attorney – and that’s all of them, you never know when you’re going to lose capacity,” Hacker said.

By waiting until retirement to select a power of attorney, there is a risk of complicated financial matters turning into a worst-case scenario.

“If you don’t have it in place and someone needs to act as your power of attorney and you don’t have one in place, then they need to go to the local guardianship tribunal and be appointed as your administrator,” Hacker said.

“That may well be all good and it might end up being the same person, but it’s obviously a process and potentially not a quick one.

“There could be fighting over who it is, so that’s why I always say everyone should have one.”