Estate planning is one of those things that people forget to think about until later in their lives but is important for those wanting peace of mind and it often involves more than just having a will. The following article will outline the benefits of having the right structures in place to ensure that your assets are distributed according to your wishes.
What is estate planning?
An estate plan is essentially a record of what you want to be done with your assets after you are no longer around. There are different legal documents and structures which have different characteristics and offer a variety of benefits contingent on your personal and financial circumstances. These documents can include a Will, a testamentary trust which forms part of a Will, superannuation death benefit nominations as well as powers of attorney.
A Will is a legal document that outlines an individual’s wishes for after they pass away. This will include information such as who you want to receive your assets, who you may want to receive your specific personal and heirloom items as well as any religious or cultural arrangements for your funeral. A Will can also provide details such as who you wish to appoint as the legal guardian for any children under 18 years as well as the executor of your estate when you pass away. Anyone over the age of 18 who has ‘testamentary capacity’ can make a will, which means that an individual must understand the legal effect of a Will. However, considering the financial and legal importance of this document, it is often a good idea to get this drafted by a solicitor that has specific expertise in the area of Wills and estate planning.
Research from Finder suggests that more than 50% of Australians over the age of 18 do not currently have a Will in place. Approximately 14% of Australians said they didn’t have enough assets or wealth to justify the effort, however, a Will is a vital document irrespective of your current level of wealth as it ensures that your assets a distributed according to your wishes instead of intestacy law. These laws have a very specific way of distributing your assets which may be contrary to your personal wishes.
A testamentary trust is a type of discretionary trust which forms part of a person’s Will and enables the appointed trustee to determine which nominated beneficiaries (if any) may receive the benefit of the distributions from that trust for any given period. This trust structure does not come into effect until after the death of the Will maker. Once the principal of the Will has passed away, their assets are transferred into a trust structure, whereby the nominated trustee/s are the legal owners of the property on behalf of the beneficiaries and are responsible for managing the trust according to the trust deed.
A testamentary trust could be suitable for someone who has beneficiaries that are unable to manage or protect the Principal’s assets after they have died or may face bankruptcy, divorce or legal action. As the trustee is the legal owner of the assets within the trust, this protects the assets from any creditors that the nominated beneficiaries may have and will prevent these assets from being dissipated or misused.
Testamentary trusts are also suitable for beneficiaries that are high-income earners as the trustee can choose to distribute the assets to beneficiaries that earn little or no income including spouses and children.
Superannuation Death Benefit Nominations
A death benefit nomination instructs an individual’s superfund to pay any super and death cover you may have left over after you pass away to the nominated beneficiaries. Many Australians assume that superannuation forms part of their Will, however, this is not the case, and it is up to the individual to make a binding or non-binding nomination.
A binding nomination means that the superfund must pay your super in the suggested proportions to the nominated individuals. Conversely, a non-binding nomination will mean that the fund refers to your suggested nomination and wishes but also retains some discretion when distributing your super. These nominations can also be non-lapsing or lapsing. The former will remain effective and in place until the owner of the superannuation account passes away, however, the latter typically lasts for three years and then requires renewal.
This is an important part of estate planning as superannuation assets in Australia are currently valued at over $3 billion as of June 2022 and thus a key asset that Australians need to consider independently from their Will.
Powers of Attorney
A Power of Attorney (POA) is a legal document written up by one person, called the ‘Principal’ that enables another person to make decisions concerning the principal’s finances, bank accounts, shares, property, and other assets. A POA does not have to be a legal professional and can be anyone who is over the age of 18 who can act in this capacity such as a close friend, relative or professional adviser.
There are two types of powers of attorney; general (GPOA) and enduring (EPOA). A GPOA is an individual who is appointed to make both financial and legal decisions on the principal’s behalf which is in place while you still have the ability to make your own decisions. This kind of attorney may be used in the event of unforeseen circumstances which temporarily cause the principal to lose capacity due to an injury or illness.
An EPOA, is in place over a long-term period and continues to operate when the principal no longer has the mental capacity to make their own financial and legal decisions. Unlike a GPOA which ceases to be effective once the principal can no longer make their own decisions, an EPOA is called on to act on the principal’s behalf but must be put in place before this occurs.
The best time to have an EPOA put in place is before you need it. Once you have lost your mental capacity it is difficult to establish one as the principal must be able to fully understand what they are signing in order for the EPOA to be effective and legally binding.
An Enduring Guardian is appointed to make lifestyle and health decisions on behalf of the principal when they no longer have the capacity to make these decisions for themselves. The person who appoints the Enduring Guardian determines the functions they have an may include making decisions such as where you live, what services are provided to you at home and the medical treatment you receive.