Estate Planning
Planning For the Better in Case of the Worst
by Michael Sayer

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INTRODUCTION

It’s natural enough for us to avoid focusing on morbid issues such as disability and death. The statistics are real enough, however, and show that around one in four of us is going to suffer a critical illness before age 65 (during our working life). And an indisputable statistic is that 100% of us are going to die!

Despite the facts about disability and mortality, far too many of us are not facing reality and as a consequence our planning “for the better in case of the worst” is well short of desirable. A properly implemented estate plan will deal with the protection of assets whilst we are alive and ensure that, in the event of our death, the right assets go to the right people at the right time. It will deal with The Three C’s™; Certainty, Choices and Conflict.

HAVING A VISION

The first step in estate planning is essential in achieving a plan that really works for you. It is to identify your estate vision. Without this your planning will be a typical ‘black box’ or generic solution, if that’s a solution at all. If you are critically ill, what do you want your financial situation to look like? What would you want to happen to your business? If you died tonight, what legacy do you want to leave behind? Do you leave behind an estate “road map” to assist your loved ones with certainty, financial choices and to minimise potential for conflict? Or do you leave uncharted ground and a financial mess?

Take the time to move from denial (and that’s where many of us are) to establish your vision and compare it to your reality. Chances are there will be a substantial gap. As you embark on implementing your plan don’t fall into the procrastination trap. Remember that estate planning is a process not an event. You may not achieve everything you want overnight. Mapping out what you want to achieve and getting started is all important. When thinking about protecting assets whilst you are alive, look at asset ownership. Will assets be owned by your spouse, or by a family trust? What is the potential for losing assets in the event of litigation?

RISK MANAGEMENT IN LIFE

Have you made provision for continuity of income if you’re unable to work due to accident or illness? We often overlook the fact that our wealth creation and lifestyle is dependent upon our income and we fail to insure it adequately. And in the event of critical illness such as heart attack or cancer, will you be amongst the relatively few that will receive a lump sum to resolve debt and relieve anxiety (assisting the road to recovery)? Or will you be amongst those whose health and survival is threatened by financial strain and uncertainty?

Implementing a financial risk management strategy using insurance will provide a valuable foundation for financial stability and recovery. In most cases the gap between vision and reality will reveal a shortfall in estate funding in the event of death. Will there be enough money to resolve all debt or will your estate (and your loved ones) inherit debt as well as assets? Are there sufficient funds to provide for immediate cash needs and long-term income to the family? Will the surviving partner have choices as to lifestyle, work and accommodation? Or will there be turmoil and sacrifice? What provision have you made for continuity of your business and, if appropriate, the realisation of the business asset for the benefit of your dependants?

WHERE THERE’S A WILL, THERE’S A WAY

Your estate can often be funded tax effectively and economically using life insurance. It multiplies your estate and completes the plan when time has run out and the accumulation of assets to an adequate level for the needs of dependants cannot be achieved. When considering your distribution strategy, bear in mind that your Will is a planning document which should be reviewed every two to three years, and that it does not directly control assets in your superannuation fund or family trust.

A simple or ‘low cost’ Will can be an expensive estate. After losing blood sweat and tears on wealth creation over many years there is every reason to invest time and money to ensure that your distribution strategy protects assets passed to beneficiaries from creditors and predators. The proper use of testamentary trusts (trusts in a Will) assists in preserving assets in times of financial difficulty, and in keeping assets in your bloodline in the event of relationship breakdown.

Testamentary trusts also provide tax planning opportunities to your children as beneficiaries through distributing income to their minor children (your grandchildren) at adult marginal tax rates. They can also ensure that your children do not gain access to funds until they are socially and financially responsible!

Consider the appropriateness of appointments in your Will, i.e. the age and capacity of executors and guardians for children, and preferably provide for succession or substitution when those appointed are unable to act. Non estate (non-Will) assets, such as assets in your superannuation, are often overlooked in estate planning. Ensure that appropriate superannuation beneficiary nominations are in place, and use a binding nomination (which restricts a trustees’ discretion) where greater certainty is required as to who gets your superannuation money.

LEAVE A LEGACY, NOT A MESS

With family trusts, it is important to provide for succession of control of the trust and its assets through appointor and guardian succession. Without appropriate provision your children may be denied control of trust assets. As you and your adviser put the pieces of the estate plan jigsaw together, ensure that they “talk to each other” through links to your Will as the controlling mechanism. Above all, ensure that when your plan is implemented there is a road map for those you leave behind to follow. This will provide them with the confidence to focus on the emotional side of things in the knowledge that structural and funding issues have been attended to.

As you contemplate what action you need to take now, think about what you will leave behind, an organised legacy or a mess. And remember, the future has a habit of arriving unannounced!