25 February 2016
By Gemma Dale, Cuffelinks.
Benjamin Franklin’s statement that nothing in life is certain but death and taxes remains relevant after 200 years. As a result of an ageing population and increasing household wealth for older generations, Australia faces the largest intergenerational wealth transfer in history in the coming decades. This has significant policy implications, but at a personal level, raises many challenges also. How do we prepare for the inevitable, and do the best for our loved ones?
Facing one’s mortality is rarely an enjoyable or engaging experience. Many would prefer to believe they will live forever, or at least long enough to justify putting off consideration of the implications of their death. Others feel uncomfortable discussing or even thinking about wealth and its implications for their estate. The consequences of a head-in-the-sand approach, however, are often dramatically less benign than the deceased may have presumed. Instead of leaving a secure or empowering legacy, they may bequeath angst, conflict and considerable expense. Feuding families and disappointed potential beneficiaries are a lawyer’s best friend; even those who can amicably settle an estate may still struggle with the cost and administrative burden of a non-existent or ineffective will.
Motivation to address the issue
This is not just thinking or talking about money. It is your legacy to the world and the potential contribution to other people (or the community or the planet) in the future. A vision of the future you would like to create can help to frame a positive outcome from a potentially depressing process. Alternatively, consider that you are simply reducing the future burden on loved ones. If you have a spouse who is refusing to engage, you may need to go it alone and hope that your persistence will motivate them to act. Set a deadline to have your affairs in order, not too far in the future, and stick to it. Make an appointment with an estate planning professional if necessary.
In addressing your estate planning needs, consider both your objectives (what you want to achieve) and your strategy (how you plan to achieve it). While the most perfectly-designed estate plan has little value if it has not been documented, similarly, a perfectly drafted but ill-considered will may not support those who will ultimately rely on it. This article provides a framework for determining your estate planning objectives. Part 2 will consider strategy alternatives, including the structures, professionals and documentation required to ensure your wishes are met.
Estate planning checklist
The amount of time and thinking needed for this process is not the same for everyone: a 40-year-old with young children and a mortgage will plan differently from a 65-year-old who owns their own home and has several million dollars in investments. Similarly, those with complex personal lives, particularly blended families, will have more challenging decisions to make than those with simple affairs.
Here’s a useful framework for your estate planning objectives.
1. Consider all potential eventualities. These include your death (sadly this one’s a certainty), and physical or mental incapacity (such as dementia, long term illness or permanent injury). Many people prepare thoroughly for what will happen on their death, but do not consider a lengthy period of declining mental and physical capacity that may erode capital otherwise intended for their estate, or expose them to unscrupulous individuals. For younger people, injury or illness could have devastating financial consequences. Consider a protection plan for ensuring your needs are met if you no longer have capacity to make your own decisions, and insurance to ensure your dependants are financially secure in the event that you are no longer able to earn an income or due to substantial medical costs. Some of these decisions can be made independently (such as preparing Enduring Powers of Attorney so someone you trust will make decisions if you can’t); others should be considered together (life insurance should form part of your overall estate plan).
2. Ensure your needs are met. Many older people care greatly about providing for their children and grandchildren, and yet may not have considered their own needs for retirement and aged care. This can result in tragic circumstances where the elderly are financially dependent on the age pension and receive little recognition from the children (or others) who have benefitted from an early inheritance. Once an asset has been given away, it is generally the property of the recipient and the giver has renounced their rights to compensation, even if their circumstances change and they now require support. In addition, Centrelink and the Department of Veterans Affairs have specific rules for assessing gifts and other forms of ‘deprivation’ which can result in a reduced social security entitlement for the giver. Have a clear view of what you need to live a comfortable lifestyle, and determine what you can give only once these needs have been met. This doesn’t mean you can’t help others, it simply means taking care to do it prudently, as we will discuss in more detail in Part 2.
3. Consider the legacy you would like to leave. This should speak to your personal values most of all. Your beneficiaries will likely to be top of mind, so identify every person you wish to provide for, as well as those causes that are dear to you. Bill and Melinda Gates, for example, have invested their wealth in charitable programmes and innovations in healthcare and education for developing countries, while leaving a (proportionately) small inheritance for their children. Contrast this with the poor outcomes of ‘trust fund babies’, where children inherit vast fortunes which they are often ill-equipped to manage. For some, a legacy will be as simple as ensuring their grandchildren have a private school education while others may have grander objectives, such as preserving land for environmental causes.
4. Prioritise your objectives. Planning for the ideal scenario on your death may require compromises. Can you achieve all of your objectives with the available resources? If you are eroding your capital during your retirement, you may need to adjust your arrangements over time. It can be challenging providing for your dependants equally when they clearly have different needs. Providing for young children or a child with a disability, for example, is very different to providing for financially secure adult children. Blended families can create significant challenges. Adult children from a first marriage may have lesser needs than young children of a second marriage, but desire an equal share of the estate. They can also resent large bequests to very recent new spouses or partners. Similarly, family businesses can create disparities where one or more children or family members have made different contributions to the business without being adequately compensated or with expectations of receiving a disproportionate share of the business on your death. Finally, one or more children may make a disproportionate contribution to your care if you become physically or mentally incapacitated.
Seek professional advice if you are concerned or your scenario is particularly complex. Succession planners and estate planning experts can give you guidance and assist with counselling and conflict resolution once you choose to engage with potential beneficiaries.
5. Review. While your estate plan is ultimately a reflection of your wishes, the most positive outcomes are likely to occur when all beneficiaries are informed and prepared for what’s to come. Your spouse will preferably be assisting with the process; ideally you will reach a mutually beneficial agreement as to how you’ll look after each other and your children or others. If there are areas of contention, however, it is best to discuss these openly and engage a professional if you’re having trouble reaching agreement (if nothing else, to avoid costly litigation at a later date).
While you are under no obligation to change your plans as a result of other’s concerns or wishes, they may raise legitimate concerns and have alternatives or strategies you hadn’t considered. An informed conversation will also help to keep relationships intact in the future.
Once you have considered your objectives and your legacy, the process of preparing and documenting your estate plan becomes easier.
— Fitzpatricks Private (@FitzWealth) March 1, 2016