The Top Estate Planning Mistakes to Avoid in your 30s and 40s

Introduction

As the old adage goes, there are only two things that are certain in this world: Death and taxes. We are somehow coerced to think about taxes on a regular basis – certainly at least once a year. In the case of death, however, most people would rather not think about it at all especially when your young and healthy. Such reticence, although understandable, can have far-reaching consequences regarding the division of your estate after your death. It is, therefore, recommended that you spend some time (preferably in the company of a professional Financial Adviser and Estate Planning Lawyer) to put things in their proper perspective as far as your estate is concerned. Don’t put this off until your later years since no one can be certain when your time will be up.

By implementing a bit of responsible estate planning, you can spare yourself from committing the serious mistakes discussed in this article.

Mistake #1 – Not Appointing Legal Guardians for Your Children

It isn’t pleasant to think about death and what will transpire when we’re gone, but this is one of those dreadful things that you just have to deal with for the sake of your children. This is of utmost importance when it comes to the future of underage children. Your top priority here must be to appoint legal guardians who will oversee the welfare of your children should you die prematurely.

You must appoint someone, and obtain their agreement, to look after your children. If you fail to do this, a Judge may have the discretion to determine who will care for your children. Unfortunately, a Judge may appoint someone who you regard as unfit. In a worst-case scenario, your children could even end up in foster care. This is, therefore, a very important issue that you should address immediately if you still have children living at home.

Here are some questions that you should ask when considering who to appoint as guardians:

Will they agree to take on this responsibility?
Do they have a good bond and relationship with your children?
Do they share the personal and religious values that you impart to your children?
Are they emotionally, financially, and physically (both in terms of their health and their living arrangements) up to the task?
Are they able to accept this responsibility?

Mistake #2 – Not Having a Professionally Drafted Will in Your 30s and 40s

Unlike some of the other mistakes that will be profiled in this article, most people are already aware of the risks of not having a Will. Unfortunately, however, this does not prompt many to take definitive action. It is therefore worth highlighting some of the perils of failing to correctly draw up a legally binding Will:

It’s likely that your assets will not be distributed in accordance to your wishes. Sadly, this can also lead to serious family conflict, which is the last thing that most people would want their death to be associated with.
You will be declared ‘intestate’ if you die without a Will. This means that your assets will be disposed of according to stringent regulations drawn up by the government. It is also possible, under certain circumstances, that a portion of your estate could end up in government coffers.
Winding up an estate where the deceased passed away intestate often takes considerably longer than when a legitimate Will is in place (particularly in cases where the applications of the intestacy formulas are disputed). This fact can potentially lead to significant hardship to your loved ones.
The formal procedure to apply for division of your estate according to the rules of intestacy requires an application to the Supreme Court for Letters of Administration. This is quite likely to result in unnecessary legal and administrative expenses.

Considering the above, it must be clear that drawing up a legally enforceable will must be moved up your priority list, and preferably flagged with ‘Urgent Priority’ status.

Mistake #3 – Not Making Use of the Benefits of Testamentary Trusts

A Testamentary Trust may be included in a Will as a way of ensuring a greater level of control over the manner in which assets are distributed to beneficiaries. Using a Testamentary Trust may also result in substantial tax and asset protection benefits especially if you have children under the age of 18. There are two types of Testamentary Trusts:

Discretionary Testamentary Trust: This is where the Trustee has the option to distribute income and capital in the same or varying proportions among a group of beneficiaries named in your Will (such as your partner and children). The Executor gives the beneficiary the option to take all or a portion of the inheritance as part of the Testamentary Trust. The primary beneficiary has the power to remove and appoint the Trustee. They can also nominate themselves as the Trustee and thus manage their inheritance inside the trust.
Testamentary Trust: Here the beneficiary has no choice not to take his/her inheritance as part of the trust. In addition, the beneficiary does not have the option to appoint or remove the Trustee. This is, therefore, a more restrictive scenario, and this type of trust is frequently used in cases where the beneficiary is not deemed to be in a position to effectively manage their inheritance due to age (i.e young children), disability, or poor spending tendencies.

The main advantages of these types of trusts are the opportunities they provide regarding the protection of assets, and the reduction of taxes incurred by beneficiaries on income arising from your estate.

If the beneficiary takes it in their own name, they will have to pay tax on such income at their marginal tax rate. However, if a Testamentary Trust is in place, the impact of taxation can be offset considerably. Hence it is highly recommended that drawing up a trust must be investigated in cases where the beneficiary has:

A high personal marginal tax rate
A partner on a lower income
Minor children and grandchildren

We strongly recommend that you discuss setting up such a trust with a competent and qualified financial adviser to ensure that the inheritance of your beneficiaries can be protected and preserved.

Mistake #4 – Not Understanding the Place of Superannuation in Your Estate

Many people have the notion that their estate planning is, more or less, done and dusted once they have a Will in place. What they fail to realise is that their Will does not cover a significant part of their assets (e.g. superannuation).

You do not technically hold your superannuation fund in your own name, and it does not formally form part of your estate. It is held by a super fund on your behalf, and if a super fund is holding assets for you when you die, the trustees of the super fund will decide what happens to the super. One advantage of such an arrangement is that it ensures that super funds are protected from bankruptcy or legal action. Hence, the funds remain ‘safe’ and nobody can make a claim against your super, except for a former spouse.

To ensure that your super funds are distributed according to your wishes, you need to have a Binding Death Nomination in place. It is essentially an instruction to the trustees of your super fund to distribute assets according to your precise orders. If you do not have a Binding Death Nomination in place, the situation can get a bit messy and complicated because the trustee(s) of the fund will have discretion on how to distribute the assets. This is a risky scenario to be in because the assets may be distributed in a manner that is not according to your wishes. Moreover, legal action can be taken against the fund with the attendant costs and potential for conflict among loved ones.

The drafting of a Binding Death Nomination is a perfect time to reconsider the overall position of your superannuation fund and it would be wise to engage the services of a competent financial adviser at this stage. Two things that you may need to consider are:

Whether the assets in the fund are optimally distributed, and
Whether it would be a good option to, for example, roll over part of the assets to a Self-Managed Super Fund

A further important consideration is the possibility of your beneficiaries having to pay taxes depending on how your fund is organised. Getting expert advice on taxation minimization is highly recommended.

Mistake #5 – Not Optimising Your Personal Insurance Position

Much of what was discussed about superannuation in the preceding section is also applicable to Life Insurance. Many people have such insurance policies in place, but they have yet to consider how payments from these policies will be distributed. The reason behind this is that they believe that such payments (particularly when in Superannuation) will simply be treated under the provisions of their Wills. This may not be the case because specific beneficiaries will have to be nominated with insurers.

Thinking about estate planning is an excellent opportunity to assess your insurance needs and to ensure that you are insured in the most cost-effective way possible. One way to do this is to include a substantial amount of your Death and Disability Insurance in your super fund. Again, it is highly recommended to have a competent financial adviser who can help you make sound decisions in this regard.

Mistake #6 – Not Granting Enduring Power of Attorney to a Trusted Person

The granting of Enduring Power Attorney can ensure that your financial affairs will still be kept balanced and stable, even if you are rendered unable to manage them yourself i.e. due to an accident or degenerative condition like Alzheimer’s.

Enduring Power of Attorney is called “enduring” because it remains in place even after you lose mental capacity, whereas an Ordinary Power of Attorney will cease to have effect at this point.

The person to whom you grant the Enduring Power of Attorney to will be able to make legal and business decisions on your behalf should you become mentally incapacitated. You should therefore select a person whom you implicitly trust.

You can also safeguard your interests by entrusting the Enduring Power of Attorney to more than one person. This means that consultation will be necessary before binding decisions can be made. You can also specify certain guidelines that those granted such authority will have to strictly adhere to. This will make them easier to remove if it becomes necessary.

The primary risk of not granting Enduring Power of Attorney is that family conflict and uncertainty may ensue should you cease to be of sound mind. Needless to say, this must be an essential part of your estate planning, and one in which expert advice and assistance will be crucial.

Mistake #7 – Not Taking the Specific Makeup of Self-Managed Super Funds into Consideration

More and more people are investing their retirement assets in Self-Managed Super Funds (SMSFs). SMSFs are under the control of Trustees who will, in most cases, also be responsible for distributing benefits to beneficiaries following the death of a member. In cases where SMSFs have multiple members, and therefore multiple trustees, this can bestow a great deal of power to surviving Trustees.

In fact, there have been cases where surviving Trustees have disregarded the wishes of deceased members and awarded the benefits to themselves!

You can avoid this by making a Binding Death Benefit Nomination (BDBN), also known as an SMSF Will. This is a legally binding nomination that will allow you to instruct the Trustee who is to receive your superannuation benefit in the event of your death. Having a BDBN will remove discretion from surviving Trustees, and will instruct them to distribute your share of the assets of the SMSF according to your wishes.

SMSF estate planning is another area where it is highly recommended to seek expert advice to ensure that your wishes are complied with after your death.

Mistake #8 – Not Exercising Due Diligence in Selecting Executors

Making sure that you select the right Executor is very important and the decision should not be made on the fly. Your chosen Executor will have the responsibility of interpreting the instructions in your Will, and administering and distributing your estate. Therefore, you need to look for someone with enough time, administrative skills, and the ability to make sense of complexity.

Anyone over 18 can act as an Executor (a person under 18 can be appointed but cannot act in the role until they turn 18). When contemplating on whom to appoint, bear in mind that whoever you choose must be available to assume a role that can demand a great deal of time and effort. It is, therefore, prudent not to appoint a person who is too old or who is geographically distant.

Some other questions that you need to ask before selecting the ideal candidate include the following:

Will the prospective candidates have ample time to take on the responsibility of acting as Executors?
How complex are your financial affairs and/or family makeup?
What skills do the candidates bring to the table?
Is there a possibility of disputes arising over the estate, and how well will the candidates be able to deal with this?
What likelihood is there of a conflict of interest arising because the prospective Executor is a beneficiary of the estate?

It is advisable to appoint more than one Executor and/or to have a ‘backup’ in place in case one of the Executors dies or is unable to act. You may also appoint a Trustee company or a firm of lawyers. In this case it is imperative to do your homework as far as fees are concerned.

Mistake #9 – Not Fully Taking Tax Implications into Consideration

The issue of taxation and estate planning is a complex one but there are specifically two areas where mistakes are often committed. They are:

Not factoring in the impact of benefits on beneficiary tax positions:

Coming into an inheritance can have a positive impact on the financial health of the beneficiaries. However, the scope of this impact can be limited in cases where possible tax implications have not been carefully considered. It is, therefore, highly recommended that you ‘crunch the numbers’ as you draw up your will, and investigate tax minimization strategies to ease the burden that your beneficiaries may be landed with along with their inheritance.

Not factoring in the impact of Capital Gains Tax:

When a deceased estate is wound up, part or all of the assets may have to be disposed of. When such assets are sold, the normal rules relating to capital gains are applied and Capital Gains Tax (CGT) may be imposed.

This can have a negative impact on the benefits received by the beneficiaries of the estate. Numerous factors will need to be considered, including:

When the asset was acquired
How much it costs
Expenses incurred in managing the asset

Special rules will also apply when a dwelling is inherited (in many cases it is possible to avoid CGT). Obviously, the tax position of estates in which CGT is a factor can be very complex, so is highly recommended that expert advice is obtained in cases where this is likely to be a factor.

Mistake #10 – Not Keeping Your Will Up to Date

The final serious mistake associated with estate planning is failing to ensure that your Will is regularly updated to reflects your most current circumstances and wishes. The fact is that circumstances and priorities change over time, so your Will must evolve with you. Here are some of the serious repercussions that can result from not having an up-to-date Will in place:

Assets in your estate could be distributed to people whom you do not want to benefit from the estate. It is also possible that people named in your outdated will have predeceased you. This will considerably complicate the winding up of your estate.
It is, likewise, possible that you named certain assets (e.g. a specific apartment at a specific address) that you have since exchanged for other assets (e.g. another apartment). In such a case, if the original apartment named in your instructions is meant to go to a specific person, confusion and complications will again arise since it is no longer part of your estate. The second apartment will simply become part of the balance of your estate, instead of going to the person that you have intended it for.
It is particularly important to update your will if you have separated from your wife/husband but a formal divorce order is not yet in place. If your Will is not up-to-date, your (former) spouse will still receive a benefit from the estate, even if your assets have already been divided up.
Your Will is automatically revoked when you marry. Therefore, when getting married, it is important to update your Will to ensure that your wishes are accurately stated.
In case of a divorce, your Will may be revoked as far as it applies to your former spouse. Differences apply from state to state, but nonetheless this is another excellent time to update or rewrite your Will to ensure that it accurately reflects your wishes.
Many people tend to overlook the fact that their relationship with the Executors of their Will can change over time. The Executor’s primary responsibility is to ensure that your wishes are properly implemented. If, however, the Executor is incapacitated for whatever reason, or your relationship with this person changes significantly, then your Will must be updated with the names of the new Executors whom you trust to carry out their role.
Sometimes you feel the need to exclude someone from your Will. If such person is closely related to you, a specific exclusion will have to be included in your Will to avoid any challenge.

If this article interested you and you would like to speak to Pat Casey on the phone, select a time to speak Pat – Financial Planner Sydney.

At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.

Author: Pat Casey – Managing Director & Financial Planner Sydney – Assure Wealth

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