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Last week we covered the first 5 estate planning mistakes and we want to share the last 5 with you this week.

   6. Waiting until ‘later’

It is an inescapable fact that people do pass away before their time even if few of us want to contemplate it.

It is therefore vital that anyone with young children have some kind of Estate Plan in place should anything happen to them so that their children have someone to look after them and oversee any money that is left to them.

Not doing so exposes loved ones to needless stress and financial hardship as well as potentially eroding wealth through unnecessary taxes and legal fees.

Those who die intestate (i.e. without a valid Will) will have their assets distributed according to a legislative formula – a formula that might not reflect their wishes.

   7. Ignoring competency issues

Few people want to think about this area either but statistics suggest that 1 in 10 people aged over 65 are affected by dementia.

Estate planning is not just about planning for when we pass away but should also take into account what happens if someone becomes mentally incompetent.  Areas such as appointing an attorney should be included in estate planning.

   8. Not taking family feuds seriously

Regrettably, it is becoming more and more common in Australia for family members – and even other parties – to challenge a Will in court.

Each state in Australia has its own specific legislation covering who can challenge an estate. In some states, the list is very broad and can include anyone to whom an individual has an obligation or responsibility.

For example, prior to recent changes in Legislation within Victoria, a neighbour who felt they had helped take care of someone, perhaps by helping with their food shopping or walking their dog, was able to make a claim on their estate.

Whether or not such a challenge could succeed would depend on the individual circumstances of the case including the nature of the relationship and the size of the estate.

Creating a proper and detailed estate plan can obviously help minimise the chance of successful claims against the estate.

   9. Not keeping up-to-date 

An Estate Plan is not a ‘set and forget’ approach. It should be reviewed every few years at a minimum, or whenever there is a significant change to someone’s personal or financial affairs. Regular reviews make sure a Will is still current and that the beneficiaries along with assets left are still correct.

As a general rule, it is a good idea not to dictate exactly what is to happen to each specific asset. A better approach is to plan based on the value of the estate, as assets may have been sold or may be valued differently to when the plan was first created.

Another potential problem in this area is that people distribute assets via their Will that they do not actually own.

While most assets can be dealt with in a Will, there are some significant exceptions which, by Law, are not included in the estate and must be covered separately in an Estate Plan. These include:

  • Jointly-held property – i.e. property owned with another person as joint tenant. If, however, the property is held as tenants-in-common, the share in the property can be passed on to beneficiaries named in the Will.
  • Superannuation – Superannuation assets are held by the trustee of the super fund and, as such, might not be included in an estate. Many superannuation funds include the option to nominate a beneficiary and this nomination will override the Will.  If no binding nomination has been made, the death benefits will normally be paid out at the trustee’s discretion, and this again may not be as per the deceased’s wishes in their Will.
  • Proceeds of life insurance policies – If a policy is held with a nominated beneficiary, the proceeds will pass to that person upon death, regardless of the beneficiaries named in a Will.
  • Assets held in trust – These are not included in an estate but continue to be held in trust.
  • Company assets – A company is a separate legal entity and, as such, its assets themselves are not distributed by a Will (although generally the shares in the company are).

   10. Forgetting tax planning

There are a number of tax considerations that will impact on how much beneficiaries end up receiving from an estate such as income tax, capital gains tax (CGT) and land tax.

In most instances, any assets owned at the time of death can be transferred to beneficiaries without having to pay capital gains tax at that time (though it may be payable when each asset is eventually sold by the beneficiary).

There are notable exceptions such as growth assets (e.g. Australian shares) gifted to a foreign resident which may attract capital gains tax.

One of the most effective ways to minimise tax on income, particularly when leaving assets to minor beneficiaries, is to establish a Testamentary Trust.

A Testamentary Trust is simply a trust set up via a Will that can be used to protect a beneficiary’s inheritance and tax-effectively distribute income.

Please reach out to your adviser if you are seeking advice on an estate plan to protect your loved ones.