Estate planning is about the legacy you leave behind and who gets what but, very important and often forgotten, it is also about creating the last memory of you.
Often families are broken apart fighting over the estates of parents and the deceased’s memory is forever tainted by the mess they left with the beneficiaries.
On the technical side, when you die you cease to exist legally and hence cannot own anything. Your will is the legal document to pass your assets to those you choose. For some this may be simple and they get it right and the process is smooth. For others, even with a simple life, they get this horribly wrong, leaving family to fight through lawyers, and sometimes the courts, to divide up a diminishing sum.
While there are a lot of technical facts with the way a will has to be drafted, witnessed and executed, what is not often understood is that the will deals only with assets you own in your own name.
In the case of complicated asset structures such as superannuation and family trusts, the legal owner of the assets is the trustee of the trust, not you personally.
Superannuation, along with the family home, is the main asset of many Australians. As the assets of the superannuation fund are legally owned by the trustee, your will cannot distribute the assets in your super fund.
On your death, unless you have made a legal Binding Death Benefit Nomination to the fund, the ultimate decision as to where the superannuation monies are paid is decided by the trustee.
This can be a good or bad thing. In most cases, trustees of large super funds tend to avoid controversy and will likely pay it to your estate for distribution. The problem is your estate is governed by your will, which can be easily challenged, and this may not be the outcome you or your loved ones want.
Likewise, if a couple owns a house jointly, the ownership can be done in several ways and the various ways are treated differently in your will. The default in NSW is Tenants in Common, which means each party owns half the property and on death this half is dealt with by the will. This may be what is desired.
However, if a couple wants to leave the house to each other and there is a challenge to the will, half the house is up for grabs.
The other common ownership method is Joint Tenancy, which passes the deceased person’s interest to the surviving party, usually the spouse, bypassing the will. The same occurs for a joint bank account, where on the death of one party their interest in the bank account passes to the surviving party, usually the spouse.
While this all sounds relatively straightforward, it often isn’t. The first mistake many people make is they never review their estate plan and it drifts from reasonably meeting their needs to being totally inadequate when life moves on. Kids come along, marriages sometimes move on, and we create assets, wealth and sometimes liabilities as well as complex family environments.
These simple strategies can go bad when circumstances change. Consider this scenario: A couple purchases a house in joint names. A few years later they divorce, but do not finalise their financials. One spouse dies. As a result, the total house transfers to the former spouse, potentially leaving nothing in the estate.
As blended families are more common, simple strategies may give you the wrong result.
For those with more complex affairs, such as self-managed super and family trusts, special care is needed because your will does not address the assets held in trust. And there are many complications that need investigation.
Often, people say they’ll leave it to the kids to squabble over. This usually happens because it all becomes too complicated and they don’t know how to manage it.
Estate planning is about determining what outcome you want, and what outcome you don’t want. Can the outcome be reasonably executed? Is there someone who can or is likely to challenge the plan? As a result of this thinking, decide if you need to revisit what you’re doing.
Remember, leaving your kids to squabble will leave a lasting memory that you left a mess. The beneficiary of a good plan is your loved ones and your legacy.