Shaping your legacy - five mistakes to avoid

Who will receive your estate when you die? Will your estate pass in accordance with your wishes?
Some matter to consider and traps to avoid.

The estate planning needs of high net wealth individuals requires sophisticated and complex estate planning arrangements. Surprisingly, a high proportion of people fail to properly plan for the passing of their wealth to the next generation. Inadequate attention to proper estate planning can often result in unintended consequences and poor outcomes for beneficiaries. The following five examples illustrate this.

1. Not having a valid Will

You should have a Will which you review regularly to ensure it still accurately reflects your existing circumstances and estate planning goals. This is particularly important when your family situation changes. Both marriage and divorce revoke a Will or provisions within the Will, unless your Will has been made in contemplation of such changing circumstances.

Example: Bill failed to make a new Will following his re-marriage to Julie. Marriage has the effect of revoking an existing Will. Therefore, Bill died interstate and his estate was distributed according to the relevant laws of the jurisdictions in which he owned his wealth.

Bill was survived by his wife Julie and their child Ben. He was also survived by his three older children from his former marriage. Bill had made a property settlement with his ex-wife Marlene, and had intended by that settlement to provide for his older children. Bill’s wife Julie received a little more than one third of Bill’s estate with the remainder shared between his four children.*

*This is one possible outcome. As noted, the distribution of an intestate estate differs from jurisdiction to jurisdiction.

2. Failing to consider circumstances of intended beneficiaries

A valid Will should ensure that the intended beneficiary receives the gift at the appropriate time and in the appropriate circumstances. The use of trusts within a Will can protect assets for vulnerable beneficiaries.

Example: Jack’s Will gifted his estate equally among his three adult children. Jack’s son Mark was the director of a trading company. Mark’s company failed and Mark became bankrupt. Mark’s share of Jack’s estate passed to the Trustee in Bankruptcy. 

With proper estate planning, Jack could have created a structure where Mark’s inheritance was protected from creditors.

3. Failing to include a testamentary trust

A testamentary trust is a trust created within a Will. Where the beneficiary has children, the gift of an inheritance via a testamentary trust can provide asset protection as well as significant tax advantages.   

Example: Rob and Raelene were a professional couple with four young children. Rob passed away suddenly, and his Will gifted all his estate to Raelene. All assets were held in his name only. Included in Rob’s estate were the proceeds of a large insurance policy.

When Rob’s assets were distributed to his wife, she invested the proceeds of the insurance policy in a diversified portfolio of investment assets which generated an annual income of $90,000. Because of her other income, Raelene paid income tax on the earnings of the investment portfolio at the top marginal rate, leaving $49,500 of after-tax income, which she used to part-pay the school fees for the children. Had Rob’s Will contained provisions for the establishment of a discretionary testamentary trust, Raelene could have reduced the tax on investment earnings from $40,500 to approximately $3,000, leaving nearly $87,000 to apply for the children’s education expense.**

**These are approximate numbers assuming the taxpayer is on the highest tax rate.

4. Not talking to your family members about your decisions

Having a family discussion about the contents of your Will and wealth succession plans can be difficult. The benefit of including your family in these conversations from an early stage, however, can ensure wishes are carried through.

Example: A client had established a charitable foundation and was concerned that upon her death the legacy that she had established would be forgotten and come to an end. By having a conversation with her children, she was relieved to discover that two of her daughters shared her philanthropic passion.

Arrangements were then made to bring the children into the management of the foundation. If you want your children to be involved in the ongoing management of your philanthropic donations, it is prudent to ensure they are aware of your goals and intentions so they can carry on your legacy as intended.

5. Only looking at some of the picture

An estate plan is not limited to merely having a valid Will. Estate planning includes making appropriate arrangements for the passing of all your wealth, including non-estate wealth such as life insurance and superannuation. 

Example: Mary was a single parent who wanted her three children to benefit equally from her estate. She made a simple Will to this effect.

When Mary died suddenly, aside from the residence, her main asset was superannuation, including a policy of life held within the superannuation account. Mary did not have a death benefit nomination in place. One of her children was a financially independent adult working as an accountant, while the other two were school aged children living at home.

The trustee of the super fund decided to pay the death benefits to Mary’s deceased estate. Mary’s Will contained no provisions relating to the treatment of superannuation proceeds. This resulted in a portion of her superannuation death benefit being subject to tax, thereby reducing the value of her estate. Mary’s Will also did not address the greater financial needs of her school aged children. This increased the risk of a challenge to her Will by the guardians of her minor children. Further, the minor children would receive their full entitlement upon attaining 18 years of age, which may not have been appropriate for vulnerable children affected by the premature loss of their sole parent.

At ANZ, we can help

Estate planning can be complex, so it’s important you obtain advice from a competent professional, who practises in this area.

ANZ Private can help by referring you to experienced estate planning professionals. You can get in touch by speaking to your ANZ Private Banker directly, or you can request a callback.