By Gemma Dale
Benjamin Franklin’s statement that nothing in life is certain but death and taxes remains relevant over two hundred years since its first publication. As a result of an ageing population and increasing household wealth, particularly 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 make putting off consideration of the implications of their death irrelevant; others feel uncomfortable discussing or even thinking about wealth and its implications for their loved ones. 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 for their loved ones or the community, 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.
So how does one motivate oneself to address this challenging topic? Consider first that you are not just thinking or talking about money; you are thinking about your legacy to the world, and the potential contribution you can make to others (or the planet) in the future. A vision of the future you would like to create for your loved ones, community or the wider environment can help to frame a positive outcome from a potentially depressing process. Alternatively, consider that you are simply reducing the burden on your loved ones when you pass. 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.
Having made the decision to address 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 no value if it has not been documented, similarly, a perfectly drafted but ill-considered Will will not support those who will ultimately rely on it. This article provides a framework for determining your estate planning objectives; Part 2 will consider the strategy alternatives, including the structures, professionals and documentation required to ensure your wishes are met.
The amount of time and thinking needed for this process is not the same for everyone. Clearly, your stage in life will dramatically impact your needs and those of your loved ones: a 40 year old with young children and a mortgage will plan very differently to a 65 year old who owns their own home and has several million dollars in investments. Similarly, those with complex situations, particularly blended families, will have more challenging decisions to make than those with simple affairs. Irrespective of the particulars of your situation, however, the following can provide a useful framework for outlining your estate planning objectives.
- 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 any capital for their loved ones, or expose them to unscrupulous individuals who try to change the planned distribution of the eventual estate. For younger individuals, injury or illness could have devastating financial consequences; ensure you have explored all the insurance options available to assist with securing your financial future against such events. Each scenario should be prepared for separately: while this article deals primarily with an estate plan to distribute your assets on your death, also 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 that you and your loved ones are financially secure in the event that you are no longer able to earn an income or have substantial medical costs to bear. 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).
- 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 have changed and they now require support. In addition to a general warning against giving away more than you can afford, it is critical to be aware of the social security implications of ‘gifting’; 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. (For more information on this, click here: http://www.humanservices.gov.au/customer/enablers/assets/gifting). 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 your loved ones or others, it simply means taking care to do it prudently; there are several avenues for helping others which can also provide protection for the giver which will be addressed in Part 2.
- Consider the legacy you would like to leave. Once you have considered your own needs and likely scenarios you need to plan for, consider the best case scenario – in the event you were no longer around or had no need for the money, who would you like to provide for, and how? This can be a complex process, but should speak to your personal values most of all. Your loved ones will likely to be top of mind; be sure to identify every person you wish to provide for, as well as those causes that are dear to you. Some high profile examples show what a powerful difference you can choose to make: Bill and Melinda Gates, for example, have been vocal about their decision to invest the vast bulk of 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; for others, it may be a contribution to a local community charity. Others may have far grander objectives, such as preserving land for environmental causes; if you have the means to achieve them, why not?
- Prioritise your objectives. As with so many things in life, planning for the ideal scenario on your death may require compromises. Can you achieve all of your objectives with the resources that are likely to be available on your death? If you are eroding your capital during your retirement, you may need to adjust your arrangements over time. If you have several loved ones or dependants to provide for, consider whether you would like to provide for them equally, or to provide them with different bequests. This can be challenging where your dependants and loved ones have clearly different needs; providing for young children or a child with a disability for example, is very different to providing for adult children or grandchildren who are otherwise financially secure. 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; think how you wish to address this. 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 your loved ones and potential beneficiaries.
- Review. While your estate plan is ultimately a reflection of your wishes, the most positive outcomes are likely to occur when all your loved ones and potential 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 loved ones. 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). The same should be said of your children and other beneficiaries, particularly in the case of a family business or scenario where there are mutual responsibilities. While you are under no obligation to change your plans as a result of other’s concerns or wishes, and you may not wish to, 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 are clear on what legacy you would like to leave, the process of preparing and documenting your estate plan becomes considerably more straightforward. Part 2 will help you understand the various strategies for achieving your goals and avoiding the pitfalls that can create emotional and financial stress for those you care about.
By Gemma Dale