You’ve heard of a will and maybe a power of attorney but what exactly is estate planning and why is it so important? The answer often varies but at Generations Law we see estate planning as the process of growing and protecting your family’s wealth both during and after your lifetime. Apart from your family’s health and happiness, few things in modern life are more important. So why is estate planning so poorly understood and all to often seen as something to be put off and done on the cheap, if at all?
What does estate planning involve? In general, estate planning seeks to achieve the following:
- Protecting your assets from family breakdown and financial difficulties;
- Minimising your tax bill;
- Appointing people you trust to make decisions for you when you can’t; and
- Directing what happens to your assets when you die.
Estate planning is therefore much more than just a will. The contents of your estate plan will depend on your individual circumstances and may include some or all of the above objectives. This post will take a look at each of these in more detail.
Protecting Your Assets
You work hard during your life to build up your assets. Whether you are saving for retirement, want to leave an inheritance for your kids or just simply seek the security of a mortgage-free home and a healthy savings account, why accept any more risk than necessary?
By holding assets in a trust structure, rather than in your own name, you could effectively take them out of reach of creditors in the event you find yourself in financial difficulty. While the benefits of doing this will vary depending on your own risk profile, it is worth considering. This is especially so if you are self-employed or your work otherwise comes with the risk of litigation.
Different entities are taxed at different rates and have different rules for accumulating and distributing income. A part of any good estate plan is ensuring that your business and financial affairs are structured to take advantage of the opportunities this offers (subject to anti-avoidance laws).
An example of this is a sole trader operating in their own name. They pay tax on their entire income at their marginal rate. By restructuring their business as a company or a trust, they may be able to share their income with other family members, reducing their overall tax bill.
Substitute Decision Making
What would happen if you could no longer make decisions for yourself? Maybe you’ve had an accident and end up in a coma. The law automatically appoints a person as your “statutory health attorney” but what if this isn’t the person that you want making decisions for you, or what if you want to specify or limit how certain decisions are to be made. In the worst cases an application may need to be made to the Queensland Civil and Administrative Tribunal to appoint a Guardian or an Administrator to make personal and financial decisions respectively on your behalf.
The simplest, cheapest and most effective way to avoid this is to appoint a trusted person to make decisions on your behalf under an enduring power of attorney. You can decide when your attorney’s powers commence and whether they are to be limited in any way. You may also choose different people to be your attorneys for personal and financial matters. Provided you retain capacity, you can revoke a power of attorney at any time and appoint new attorneys.
Related to an enduring power of attorney is an advance health directive. This document gives you the opportunity to make choices in advance about your future medical treatment. An advance health directive includes an enduring power of attorney for personal matters but also addresses medical decisions that an attorney does not have the power to make.
Succession, that is what happens to your property when you die, is the area most people tend to associate with estate planning. While succession is important, and a will is the cornerstone of any good estate plan, without also considering the above objectives your estate plan would remain incomplete.
The purpose of a will is to direct how your estate (what is left of your assets after your debts) should be distributed when you die. Your will should appoint one or more executors who are responsible for finalising your affairs and distributing your assets. You may also appoint guardians for your children in your will.
From an estate planning perspective, the real power of a will comes in the form of testamentary trusts. This type of trust offers the asset protection described above to your beneficiaries and, if structured correctly, may protect their inheritance from family breakdown as well as bankruptcy. Due to the different treatment of testamentary trusts under the tax law, they also offer opportunities for huge tax savings. For more on this, see our blog post: Testamentary Trust: Why you should consider one
Despite these benefits, all too often a will is seen as an unnecessary luxury, to be done avoiding solicitors wherever possible, if not completely. Don’t be tempted! Not only are cheap will kits likely to miss out on the many advantages offered by testamentary trusts, they can be confusing and often result in invalid wills. Don’t put your family through the costs of having to go to court to sort out the mess.
As a final though, in a recent case in the Western Australian Supreme Court, the judge said this about homemade wills:
“On numerous occasions when dealing with so-called homemade wills, I have observed they are a curse. Homemade wills which utilise what is sometimes known as a ‘will kit’ are not much better.”
For the vast majority of people the costs of investing in a proper estate plan will pale in significance to the financial benefits it provides you, your family and your beneficiaries, not to mention the added peace of mind from knowing you are protected should the worst happen.
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In keeping with our reconciliation commitment, Generations Law would like to acknowledge the First Nations people as the original inhabitants and traditional custodians of the lands on which we operate and pay our respects to all Elders past, present and emerging as they hold the memories, traditions and culture of these lands and thank them for their wisdom and guidance. These include the Yugarabul, Jagera and Turrbul people in and around Brisbane, the Goenpul & Jandawal people of Moreton Bay, the Kombumerri people of the Yugambeh language group of the Gold Coast and the Gubbi Gubbi people of the Sunshine Coast.