Estate Planning
Warning
This webpage covers a very complex topic in a simplified way, which means that it only covers the main points and it does not cover every rule. So be aware that sometimes the simplified explanation on this page will not cover your particular financial situation. Please read our disclaimer before you use any information on this website.
Estate Planning
At its simplest, estate planning means making a will. Your estate means all of your assets (less any debts) and the making of your will is the planning of how your assets (less any debts) are to be distributed, if you pass away. This is the origin of the term estate planning.
However, estate planning covers not only your estate assets, but also your non-estate assets (more on these later). Furthermore, it does not mean just planning for a scenario in which you pass away. Estate planning also means planning for a scenario in which you lose the capacity to make your own decisions (e.g. due to brain injuries in a car accident).
Non-estate Assets
We all have a fair idea of what is in our estate. For example, many of us have a car and personal belongings-and it is not uncommon for someone to own their home as well as other assets such as some Telstra shares. But many people are surprised to find out just how many assets are non-estate assets. Below are some common examples:
Joint Assets
If you own your home or any other asset as joint tenants, this is a non-estate asset. Usually a husband and wife will own their home as joint tenants. This means that if one dies, ownership will automatically pass to the surviving spouse. In contrast, if two people bought a business together, they would usually buy it as tenants in common (not joint tenants), which means that if one dies, then the deceased business partner's share will go into his or her estate.
Superannuation
Any superannuation you have is a non-estate asset. This usually comes as a surprise to people. However, if your super fund allows you to make a binding nomination (more on these later), then this will tell your superannuation fund to pay your superannuation into your estate, in effect, making your superannuation an estate asset.
Family Trusts
If you setup a family trust and put money into it, this is a non-estate asset. Even though you may think of it as your trust, the family trust assets will not necessarily go to your estate. Family trusts can be setup in various ways so we will not try and explain all of the possibilities here. Just be aware that family trusts are non-estate assets.
Superannuation
Even though your superannuation is a non-estate asset, there are various options which you can choose as part of the estate planning process. These are listed below:
Binding Nominations
Most superannuation funds (including self-managed superannuation funds) allow you to make a binding nomination. This allows you to nominate where your super goes, if you pass away, in a way that is binding on your super fund (i.e. the super fund must follow your instructions). Sometimes, this type of nomination is called a binding death benefit nomination, or something very similar.
- You can make a binding nomination to your estate. In this case, your super fund pays your super into your estate so, in effect, your super becomes an estate asset.
- You can also nominate your spouse or your children using a binding nomination. In fact, you can nominate a combination of your estate, spouse and children (each with a different percentage), if you wish to do so.
Non-binding Nominations
This is the same as a binding nomination except that your super fund is not forced to follow your instructions. In other words, it is not binding on your super fund.
You might ask why anyone would ever make a non-binding nomination? Well, suppose a woman was divorced from her husband and the two of them had reached a settlement, split all their assets and moved on with their lives. Now suppose that for the last two years, the woman has been living with her new partner and then suddenly dies in a car accident. If she had forgotten to update her binding nomination and it still listed her ex-husband as the beneficiary, the super fund would have no choice but to pay her super to her ex-husband and her new partner would get nothing. However, if the nomination was non-binding, her new partner could apply to the super fund, asking that he receive her super, rather than her ex-husband. In this case, the super fund would look at the specific circumstances of the case and decide who should get the super. In some real life examples, super funds have paid the new partner, even though there was a non-binding nomination to pay the former spouse.
Reversionary Pension
This is a pension that will automatically revert to someone else upon death, usually the person's spouse. For example, suppose a man has nominated his wife as the reversionary pensioner. If he were to die, then the pension would continue on as normal, except that, the account would change from being in his name to being in his wife's name.
The main advantage of a reversionary pension is that the money stays in the superannuation system, thereby enjoying the tax and Centrelink advantages of money held in super. In the case of a binding or non-binding nomination, the money is paid as cash to the beneficiary. If the man's wife was over 65 and did not work, she would not be able to put the money back into super. This could mean that she pays more tax and gets a lower Centrelink age pension (compared to what would have happened if she was a reversionary pensioner and the money stayed in super).
One point to note is that a reversionary pension is only available on pension accounts. If you have an accumulation account (i.e. not paying a pension), then you only have the choice of a binding or non-binding nomination.
Estate Assets
Now that we have clarified what is not an estate asset and explained the estate planning options in super, we move on to estate planning for your estate.
Many people die without a will (sometimes referred to as a last will and testament). Such people are intestate and their estate is distributed by the laws of intestacy (which vary from state to state). Usually this means the estate goes to immediate family members, or if there are none, more distant relatives-and if all possible avenues are exhausted, the estate goes to the relevant state government. So a will is important because the laws of intestacy may distribute your estate contrary to your wishes.
If you have a will, it should be valid and up-to-date. First of all, your will needs to be done properly. If it is incorrectly done or if the will is unclear, having more than one possible interpretation, the matter could end up in court, costing a lot of money. But your will also needs to be up-to-date. For instance, does your will bequeath assets or money to people who are no longer alive, or does it bequeath assets that you no longer own?
A lot of us know that we need a new will but just never get around to it. Part of the problem is that it does not matter if you do not have a valid up-to-date will, except until, it is too late. Sometimes we need to hear a terrible story about someone else who died without a valid, up-to-date will before we are motivated to act. So the point is, do it today! Contact us if you would like a referral to a solicitor specialising in wills and other estate planning areas.
Is it Will or will?
Interestingly, in the phrase "someone signed a will" (i.e. the noun or thing), this has the same spelling as in the phrase "someone will read the newspaper" (i.e. the verb or action). When we talk about a will (e.g. "John updated his will"), it does not need to have a capitalised w (e.g. "John updated his Will"), but some people capitalise it so the two different words are not confused.
It would seem like good common sense to think that the noun will comes from the verb will, in the sense that the document became known as a will because it was a written record of what will happen to your assets if you pass away. However, it is simply a coincidence that the two words have the same spelling in modern English. Historically, the noun (e.g. "she has signed a will") comes from the Old English word willa (which itself came from the Old German word willo). In contrast, the verb (e.g. "he will cook the sausages on the BBQ") comes from the Old English word wyllan (which itself came from the Old German word wellen).
Living Wills
As we mentioned before, estate planning is not just about making a will. Estate planning also covers non-estate assets (such as jointly held assets, superannuation and family trusts). Estate planning is not just about death either. Estate planning also means planning for a situation in which you lose the capacity to make your own decisions (e.g. due to brain injuries in a car accident, or the onset of dementia in old age).
There are certain documents which allow you to nominate someone to look after your affairs if you are no longer able to do so. These documents are also referred to as living wills.
In Victoria, because the laws came about at different times, there are actually three documents which you might want to complete:
Enduring Power of Attorney (Financial)
This document allows you to appoint someone such as a family member or close friend (referred to as your attorney) to make financial and legal decisions on your behalf. For instance, if you no longer have the capacity to manage your finances, your attorney might cash in some of your superannuation to pay your living expenses and sell your car because you can no longer drive.
Enduring Power of Attorney (Medical Treatment)
This document allows you to appoint someone such as a family member or close friend (referred to as your attorney) to make medical decisions on your behalf. For example, if you are seriously ill and do not have the capacity to make your own medical decisions, this document empowers your attorney to make these decisions for you. This could involve telling hospital staff to not perform any more surgery but, instead, provide palliative care.
Enduring Power of Guardianship
This document allows you to appoint someone such as a family member or close friend (known as your guardian) to make lifestyle decisions for you. For example, if you developed advanced dementia and needed someone to make decisions about your health care and where you live, this document empowers your guardian to make these decisions for you.
The Meaning of Enduring
You might have noticed that the name of each of these documents begins with the word enduring. First of all, these documents can only be made while you have capacity. For example, you cannot sign one of these documents if you already have advanced dementia. Secondly, if the documents were not enduring this would mean that they became invalid the moment you lost capacity. So for legal reasons, the documents are enduring to make sure that they endure beyond the point at which you (or someone else) loses capacity. Please also note that when a solicitor prepares these documents, they can be worded so that they only come into effect when the person loses capacity (and not a moment before).