Estate Planning and Why It’s Crucial To Get It Right
Where There’s A Will, There’s A Way
Dealing with the loss of a loved one is never easy. The trauma of their passing, bereavement, facing the world without your loved one and possible family disputes are some of the most difficult emotional journeys we face.
Another often painful but unavoidable aspect of losing a loved one is distributing their assets. Not only can this be a daunting administrative burden, it can often result in stressful and expensive family conflict.
We’ve all seen it in dramas and heard about the quarrels between family members when a person of wealth dies. The remaining members of a family fight for their share in what’s left over after that person passes away. It doesn’t just happen in Downton Abbey. This is a scenario that happens frequently amongst everyday people.
What starts as family members bickering among themselves for more money and a greater share of assets soon turn into unnecessary court hearings where the number of disputes over wills and mediations about who should control aging parents’ assets continues to rise.
According to Anna Hacker, national manager of estate planning with Australian Unity Trustees, family disputes about wills and estates have jumped by more than 80 per cent in the past decade as the number of blended families rise and adult children are demanding a greater share of their parents’ estates.
So what can we do to help our loved ones through this process as easy as possible and reduce the chance of painful family conflict?
Estate planning is the process of documenting what you would like to happen in the event that you lose mental capacity or pass away. It is an integral part of financial planning and should be done sooner rather than later.
The five steps to estate planning:
There are five phases of Estate Planning to protect your legacy and it is very important to get it right to reduce the complications and ramifications of missing the steps outlined below.
Consider your asset pool and the needs of your loved ones.
The first step is to consider what assets you have and what your family members will need when you pass. This includes considering issues like who has a legal right to a share of your assets, where will your family members live and how will they fund their living expenses?
You then need to consider what assets you have, is this sufficient to meet your family’s needs or do you need life insurance to top up your assets.
Preparing Your will
Your Will is a legal document that allows you to determine how and to whom your assets are distributed when you have passed away.
In your will, you will nominate an executor, whose job it is to administer the will in accordance with your wishes. You can also nominate a guardian for any children under the age of 18.
It is important to consider who may have a legitimate claim on your assets (spouse, children, financial dependents) and how you can meet those needs and avoid unnecessary conflict.
Another consideration is avoiding unnecessary taxes where possible.
Not all assets which you control pass through your will, including assets owned jointly, assets owned by a company or trust and your superannuation. So careful consideration needs to be given to how you pass “control” of these assets and the implications for future decision making regarding these assets.
If you do not have a will, then your loved ones will have no guidance on how to distribute your assets and will need to apply to the relevant authority in your jurisdiction to administer your assets. Dying without a will materially increases the time, costs and complexity of administering your estate and the chances of family conflict.
Keep in mind, a Will is not a valid legal document in Australia unless it’s signed by the Will-maker in the presence of two witnesses.
Letter of wishes, asset and password register
Being an executor of a will is a complex and burdensome task. In order to help your executor administer your will with as little difficulty as possible, it is a good idea to write them a letter, called a Letter of Wishes. A letter of wishes is not a legally binding document but can help your executor locate all of your assets and provide more subjective guidance on issues they may face and how you would like those issues handled. It can explain some of the reasons behind the decisions in your will which can help avoid disputes or provide guidance to a court if there is a dispute.
The letter wishes should include a register of all of your assets, insurance policies, apps, social media and cryptocurrency account passwords. This is immensely helpful to the executor in finding and dealing with all of your assets in accordance with your instructions in the will.
An increasingly common complexity in administering estates is the loss of cryptocurrency passwords leading to the loss of millions of dollars of crypto assets.
Maintaining an up-to-date letter of wishes is often an overlooked aspect of estate planning but can be one of the most useful tools in the effective administration of your estate and avoiding disputes.
Administering a will.
This is the process after your death when your executor implements the instructions in your Will.
In this stage, the executor will need to
Get your will certified as the final will and testament
Identify and take control of all of your assets
Maintain and or sell your estate assets until they are distributed
Distribute your assets in accordance with your instructions.
The executor will also need to deal with any legal conflicts between parties who challenge the will. Legal challenges can be funded by the estate assets, materially reducing the pool of assets left after the dispute.
Assets Are Distributed to Beneficiaries
In the final stage, your beneficiaries will take ownership of the assets gifted to them.
Careful planning should go into the drafting of your will to minimise taxes incurred in passing assets to your beneficiaries.
Your beneficiaries will then need to decide what they will do with the assets.
Decision making can be more complex when assets are left in the control of multiple parties, e.g. a house left to multiple children, assets left in a trust with multiple trustees and
beneficiaries. Careful consideration should be given to how you can help your beneficiaries avoid disputes when managing jointly controlled assets after your death. This can be dealt with legally in the will or more subjectively in the Letter of Wishes.
If you want to protect your assets and your loved ones when you are no longer around, you must have an estate plan. Without one your heirs could face big financial and tax burdens, not to mention court hearings that could designate how your assets are divided—and even who gets to raise your children.
@Paul Barrett of Absolute Wealth Advisers is one of Australia's most experienced Private Wealth Managers. He is a financial expert in high net wealth divorce, estate management and inheritance. Contact him here