Saving, investing, and growing wealth are all common focuses for financial planning. However, there is one area that often tends to be overlooked, and that is estate planning. It might be one of the most overlooked areas of financial management, but estate planning is arguably one of the most important.
A common misconception is that estate planning is something that only older people need to consider. Many also make the mistake of thinking it is only something the wealthy need to worry about. Actually though, it’s something that every adult should be thinking about, regardless of their age or financial situation. Without proper estate planning in place, your loved ones may face unnecessary stress and confusion trying to manage your hard-earned money and assets when you die. An estate plan ensures that your wishes are respected and that your assets are distributed to your beneficiaries (the people who you wish to inherit your assets) according to your preferences.
In this blog post, we talk about what an estate plan is and why you need one in more detail. We also talk about how you can get started creating your own estate plan today.
What is an estate plan and why do you need one?
An estate plan is essentially a collection of legal and financial documents that outline how your assets and affairs will be handled when you die. Some of the documents commonly included in an estate plan include a will, power of attorney, and advanced care directive.
There are a number of reasons why you need an estate plan. The main one is to ensure that your wishes are carried out when you die. In Australia, if you die without a will, there are laws in place that will dictate who inherits your assets. This piece of legislation is known as the Succession Act in some states, though the exact name may vary from state to state. This may mean that your assets are distributed in a way that you did not intend – for example, family members who you wished to leave out of your will receiving a portion of your assets. Having a proper estate plan ensures that your assets are distributed in the way that you want.
An estate plan can also help to protect your loved ones, and save them a lot of stress and hassle when it comes to dealing with your estate after you die. In your estate planning, you can clearly outline your wishes to reduce the likelihood of misunderstandings or conflicts. You can specify who gets what, and when, which can provide clarity and help prevent family disputes (for example, if there are family members who will be excluded or receive less). Explaining your reasoning clearly in your will and estate plan may reduce the chances of this family member challenging the will down the track, which could lead to a time-consuming and costly legal battle for your loved ones.
Estate planning can also help:
- Minimise legal and tax implications: In Australia, there is no federal estate tax or inheritance tax. However, there may still be tax implications for your loved ones depending on the size of your estate and how you have structured it – for example, capital gains tax (CGT) on superannuation or property. For this reason, proper estate planning is key to help reduce the amount of tax your loved ones may have to pay by ensuring your assets are passed on in the most tax-efficient manner possible. This can also help to simplify the probate process (that is, the legal process of sorting out your affairs when you die), which can be time-consuming and costly without the proper estate planning in place.
- Ensure your dependents are provided for: Your estate plan also plays an important role in ensuring your children or other dependants are taken care of when you die. In your estate plan, you can appoint a guardian for your child. You can also stipulate how their financial needs are to be met – for example, you may set up a trust to manage their inheritance until they are an adult, or set aside money to ensure they are looked after financially. It is essential that you include this in your estate planning, because without this plan in place, the courts will decide who will be appointed as your children’s guardian. This may not be in line with your wishes, which is why it is important that you stipulate this in your estate planning.
- Ensure you are able to appoint someone to make decisions on your behalf: In some circumstances, you may become unable to make decisions for yourself – for example, due to an illness, accident, or injury. Having a power of attorney (POA) and enduring guardianship as part of your estate plan allows you to appoint someone to make decisions on your behalf, in the event you lose the capacity to do so yourself. Usually, a POA deals with the authority to make financial and legal decisions for you, whereas enduring guardianship deals with authority to make decisions about your medical treatment and personal care. These documents ensure your affairs are managed according to your wishes.
As mentioned, there are a few different documents that should be included in an estate plan. The one that will be first to come to mind for most people is a will. This is a document that outlines how you wish for your property, assets, and personal belongings to be distributed after your death. In your will, you may also appoint a guardian for your child and specify other wishes you may have – for example, for funeral arrangements.
Whilst your will is the most basic and essential component of your estate plan, there are a few other key documents that should be part of your estate plan. One is a power of attorney. This is a legal document that gives someone the authority to manage your financial and legal affairs and make decisions on your behalf if you are no longer able to do so.
Another is enduring guardianship. This is another legal document that appoints someone to make decisions about your health, medical treatment, and personal care if you become unable to do so. Both of these documents are important ones to have in place, as they ensure your wishes are carried out if you ever become incapacitated and cannot make decisions for yourself.
Your estate plan should also include an advance care directive. This outlines the type of medical treatment you do or don’t want to receive. This is another important document to have in place, to ensure your wishes are honoured if there is ever a time that you are unable to communicate your preferences.
How do you make an estate plan?
Estate planning can be a complex process, which is why it is important that you consult a lawyer. A lawyer with experience in estate planning will be able to guide you through the process, ensure that your documents are legally valid, and assist you in documenting how you wish for your assets to be distributed after you die. Although some people attempt to make their own wills without the help of a lawyer, it is definitely advisable to consult with one to make sure your documents are legally binding – particularly if you have a significant estate to pass on, multiple beneficiaries, or complicated family dynamics.
Your lawyer will assist you to make a list of your assets, which may include things like property, savings, superannuation, and other investments. This list may also include other personal belongings that you wish to pass on to specific family members.
They will also help you to choose your beneficiaries – that is, who you wish to inherit your assets. You may choose to appoint a trustee or guardian to take care of your assets on behalf of your children if they are minors, or establish a trust that will only allow them to access them when they turn eighteen.
From there, your lawyer will draft up the different legal documents that will make up your estate plan. This will include your will, power of attorney, enduring guardianship, advance medical directive, and any other documents that may be necessary for your specific circumstances.
The important thing to remember is that an estate plan should not be a one-off “set and forget” solution. Instead, it should be something that you continue to revisit throughout your life as your circumstances change. You should regularly review and update your estate plan to reflect any changes in life circumstances – for example, new relationships, financial changes, or changes to your wishes.
An estate plan is one of the most valuable gifts you can give to your loved ones when you die. So, don’t put it off – create your estate plan now to save your loved ones a lot of unnecessary stress and hassle down the track. By planning for the future now, you can create peace of mind for both you and your loved ones, knowing that your wishes will be honoured when you die.
This article contains general information about estate planning. It does not consider an individual’s personal circumstances and therefore before relying on any content, you should ensure that you have obtained individual personal advice from a licenced Financial Adviser.
