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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

It Pays To Be Prepared

When motor racing legend Peter Brock died during a rally in September 2006, he left an enduring legacy to his legion of fans and a legal and financial mess to his family. Brock's girlfriend, his former partner of 28 years and their three children were left with competing claims to his estate, set out in three different wills.

Last October, the Victorian Supreme Court ruled that Brock's latest will, prepared by his personal assistant in 2006, was invalid because it wasn't signed. This will divided his estate between his girlfriend and his children. Instead, the court ruled that the second will, prepared by Brock and his ex-partner with the help of a will kit in 2003, was valid. This will left everything to the children but failed to state how the assets would be distributed.

The court heard that Brock was a "big-picture man" with a cavalier attitude to financial and legal documents. As a consequence, the legal wrangling is likely to continue for some time, reducing the value of his estate and causing continuing distress for the people he loved.

No one likes to acknowledge their mortality or spend time and money with lawyers and financial planners, sorting out what will happen to their assets after they die. But as the confusion over Brock's estate shows, doing nothing is more costly in the long run than taking simple preventive measures when you are fit and able.

In his new book Bulletproof Your Life (Fairfax Media Publications, $29.95), Melbourne lawyer and The Age columnist Geoffrey Winn argues that estate planning is a question of values. "It is sold as a legal and financial issue but I think it's a values issue," Winn says. "The primary value is not to inflict chaos on loved ones, especially at a time when their anxieties most need to be alleviated."

An estate plan involves making appropriate financial and legal arrangements to pass on everything you own when you die - this may include the family home, super, investments, a business and personal items - through a will, powers of attorney and testamentary trusts.

Peter Townsend, of Townsends Business and Corporate Lawyers, says a good estate plan is not only about the legal transfer of assets but also structuring the transfer of assets to minimise tax, not just for the estate but for your beneficiaries in the future.

Winn believes the very term "estate planning" is a turn-off for many people, who assume it's for rich people with grand estates. Townsend agrees. "Many people don't realise they can benefit from estate planning - they think you have to be wealthy but that's not correct," he says.

Age is also a barrier. Financial planner Laura Menschik of WLM Financial Services broaches the subject of estate planning with all her clients but reports that younger clients tend to think it's for old, crotchety people. These attitudes are reflected in the fact that almost half of all Australian adults do not have a will and it is estimated that more than half of those who do have a will have one that is out of date due to changes in their circumstances or not appropriate for their needs.

Yet Australians have never been wealthier, thanks to successive stock market and property market booms and the introduction of compulsory super 16 years ago. Super is beginning to rival the family home as the most significant asset for many people, yet super entitlements don't pass on through the will.

Menschik says young, single professionals might have a reasonable sum in super and not realise that it will pass to a de facto partner in preference to their parents or siblings, even if they have a will stating they want their parents or siblings to inherit their estate.

Super death benefits are distributed at the discretion of the super trustees and must be made to an appropriate beneficiary, usually a spouse, de facto, children or dependants. You can safeguard your preferred beneficiaries by making a binding death benefit nomination in favour of your personal legal representative. Your super death benefits will then form part of your estate and be distributed according to your will. As with super, Townsend says, the assets of a small business linked to a discretionary trust are not covered by a will.

Townsend says the growing importance of super is just one of many changes with the potential for influencing estate planning outcomes. The massive growth in the uptake of financial products, increased litigation among family members challenging wills, high divorce rates leading to second spouses contesting children's inheritances and the increasing complexity of tax laws all add to the mix.

"None of us knows when we are going to die or how much we will have left at the end of the day. You also don't know the circumstances of the people you intend to receive your estate," Menschik says. She also believes one remedy for this uncertainty is a testamentary trust.

A decade ago, testamentary trusts were seen as a sophisticated tool for the wealthy few. However, Winn says a lot of people could benefit from a testamentary trust and reports that parents are increasingly worried that assets left to their children may be threatened if their adult children later divorce. A testamentary trust can be used to sequester an inheritance from the spouse or partner of your child, or to control the flow of income to a spendthrift.

Winn says powers of attorney are another powerful tool in an estate plan and can be free, simply by downloading forms from the Office of the Public Advocate or its equivalent in your state (in Victoria, http://www.publicadvocate.vic.gov.au or in NSW, http://www.lawlink.nsw.gov.au/opg).

"Every single adult should have an enduring financial power of attorney and an enduring power of guardianship. If you don't, there is the potential for decisions to be made by someone you would not have chosen. It is a very simple preventative measure to take," Winn says. "Buddha got it right: life is unpredictable. It's all very well to put things off but tomorrow could be the day you suffer an injury or the proverbial bus comes along that takes away the ability to make decisions for ourselves."

A good estate plan involves more than a will kit from the local newsagent, although that is better than nothing. In order to make their wishes crystal clear, Menschik advises clients to go to a professional to have a will drawn up and to cross-reference assets that may fall outside the will's jurisdiction, such as super.

It also makes sense to update all documents relating to your estate at the same time, so that they form a coherent estate plan. Even for modest estates, Townsend says, there is value in protecting your family and loved ones.

If you use a solicitor, the cost can range from as little as $200, for a simple will and enduring power of attorney, to upwards of $5000 for complex arrangements.

"Some baby boomers say 'I'm not leaving it to the kids, I'm going to spend it all before I die.' And I say, 'When will that be exactly?"' Townsend says.

When that day comes, it will pay to be prepared.

THE ESSENTIAL TOOL KIT

Melbourne accountant Peter Liakopoulos had a simple will and thought he was covered. Married, with three young children and a business to run, he was too busy to ponder his mortality. It wasn't until he started researching estate planning for his clients that he realised he needed to put his own house in order.

"I'm in the process of arranging a new will, powers of attorney and a testamentary trust - the whole box and dice. I wouldn't want my kids to have to go through the courts or to pay [unnecessary] tax, because I hadn't planned ahead," he says.

Two years ago he attended a seminar on estate planning and became aware of the importance of tax efficiency and asset protection. This spurred him into action, attending first to his mother's estate.

"I could inherit the family home and I didn't want that to happen. My brother is a consulting engineer, so we are both in professions at risk [of legal action]," Liakopoulos says. The solution was to put the family home and some shares into a testamentary trust to protect them from potential creditors. Then, in the 2007 financial year, I started looking at clients and how their finances were structured. There were a couple of clients where detailed estate planning would have been worthwhile," he says.

One client had an $8 million estate but only a basic will and no powers of attorney. She had a family home and a holiday house in Noosa of roughly equal value, plus a substantial share portfolio and super. "She had divvied up the estate so that one house went to each of her adult children and the share portfolio went to the grandkids," Liakopoulos says.

On the surface, this looks like a fair distribution but it ignores the impact of tax. If the son inheriting the family home sold within two years it would be tax free, whereas the son inheriting the negatively geared holiday home would have to pay capital gains tax. And without a testamentary trust the grandchildren, all of whom were under 18, would pay punitive levels of tax on income from the share portfolio.

Liakopoulos suggested his client seek legal advice to arrange a more equitable, and tax efficient, estate plan.

THE IMPORTANCE OF A POWER OF ATTORNEY

A will transfers assets straight to your beneficiaries, whereas a testamentary trust passes assets to a trustee who holds them in trust for the beneficiary and decides how, or if, the beneficiary will receive income and capital from the trust. A testamentary trust is similar to a discretionary family trust but it is only activated after you die, through your will.

Testamentary trusts can be used to maintain social security benefits for your beneficiaries, ensure assets pass to your children or to provide for children with disabilities. They also have capital gains and income tax advantages, and protect assets where a beneficiary becomes bankrupt.

There are four types of powers of attorney which become a legal document once signed. Not all are available in all states and territories.

* A general power of attorney authorises a person to make financial and legal decisions for you. Most use this for short-term needs - for example, if you want someone to buy property on your behalf or sign documents for you while you are away.

You can cancel a power of attorney at any time. Otherwise, it will last until its expiry date has passed, your attorney becomes bankrupt, you die or you no longer have the capacity to make your own decisions.

* An enduring power of attorney authorises your attorney to make any legal and financial decisions that you can make, even if you become mentally incompetent. This power of attorney will last until you cancel it (provided you are mentally competent to do so), you die, your attorney becomes bankrupt or it is cancelled by a court or tribunal.

* A medical enduring power of attorney authorises a person to make health-care decisions for you if you no longer have the capacity to do so. In some states they can also refuse medical treatment on your behalf. It will last until you cancel it, you sign a new one, you die or it is cancelled by the appropriate court or tribunal.

* An enduring power of guardianship authorises a person to make personal and lifestyle decisions for you, such as where you live and the type of care you receive, if you become mentally incompetent. If you don't have an enduring power of guardianship and you lose capacity to make decisions, a tribunal may appoint an independent guardian from the NSW Office of the Public Guardian or the Public Advocate in Victoria, even if family members are willing and able to act. This is especially likely if there is conflict in the family.

Source: Bulletproof Your Life by Geoffrey Winn

Barbara Drury
The Sydney Morning Herald
June 11, 2008

 


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