Post FIRE | Why Younger People Should Also Consider an Estate Plan
Many younger people tend to shrug their shoulders when asked if they have an estate plan. Many seem to think that they do not have sufficient assets and money accumulated to bother with writing a will. In Australia, from the day a person starts work they will be buying a car and furniture and maybe leisure items like jet skis, kite boards and drones. The people in the FIRE (Financial Independence Retire Early) community are the exception. At least one hopes so.
There is a home to think about too. Most people, young and old alike, are keen to get on to the property market so they can feel comfortable in their own home even if they do not own the home outright. The value of the property increases over time, which makes the home a key asset in an estate plan. It is these assets that make the presence of an estate plan so much more important so if anything happens to the owner the assets will go to the owner’s chosen beneficiaries. This can be more complicated for property investors such as Nathan Birch with over 200 properties.
Superannuation accumulation is not automatically a part of someone’s estate. As they are assets which grow over time, they need extra planning, too.
Your will cannot help you with the tax issues and the opportunities available to you, nor can it prevent expensive estate claims. An estate is more than a will, it contains all the legal documents and advice required to ensure your interests are protected and wealth can be transferred to your loved ones.
A Younger Person’s Estate Plan Isn’t Just About Assets
Drawing up an estate plan is not just about distributing assets when a person dies but it is also about making decisions if the person is seriously injured, such as in a car accident and no longer has the capacity to think independently any more.
There are two main types of agency documents available in Australia that can be included in estate planning. One is used to handle any legal and financial matters after death or if the person has lost control of their life due to a catastrophic accident or a debilitating illness. For those cricket fans, who could forget about that Phillip Hughes tragedy? This is called an Enduring Power of Attorney. The second is called the Advanced Care Directive which when the right form has been completed, informs the family what is preferred in terms of lifestyle, accommodation and health care if a life changing accident takes place.
There is also another one that can be included in an estate plan, which is the “binding refusal of medical treatment” if a medical condition gets so bad that the victim is unlikely to recover sufficiently to enjoy life.
Why an Estate Plan and will are Important
Making a will is part of an estate plan and it is one of the simplest documents a person is ever likely to handle. DIY wills can be found online here and just take a few minutes to complete. However, a will on it’s own only covers assets you hold in your name or property held as tenants in common. It does not automatically control your super or joint assets, many forms of life insurances and assets in trusts.
These assets will require an estate plan with their own specific and well-constructed Testamentary Documents. Failure to do so will mean you have no control over who will receive those assets on your death. Your loved ones who deserves the assets will experience delays and out of pocket expense to sort it out.
The risk present in a standard will that an unintended party ends up receiving your inheritance is known as L-Shaped Inheritance. The people whom you intend to benefit from your inheritance don’t end up receiving it because it goes “L-shaped” away into the hands of someone else. It’s been estimated that 30% of your wealth will be distributed to your grandchildren.
In summary the L-shaped Inheritance can occur but not limited to the following:
· You are survived by your spouse who amends their will at your passing and leaves assets in a different to original agreement such as an ex.
· Someone brings an estate claim at your passing and manages to get a part of it. This can be a second spouse or children in your first marriage although there are many possible claimants.
· Your loved one actually gets your inheritance but they lose it all getting taken advantaged of, in bankruptcy or divorce.
The right Testamentary Document for each asset allow the person to decide where their assets will end up if they die without notice, which is statistically more likely to happen to a younger person than an older one particularly in accidents. Family members don’t have to be beneficiaries and many people donate cash and assets to preferred charities which are named in the will. It’s not only smart to have an estate plan and strategies, it saves money and time during the period your loved ones are likely to be grieving.
Luckily, there are ways to prevent the unintended consequences. One way is to enter in an inheritance agreement with your spouse. The second is to mimimise the assets in your estate. Third is to place testamentary trusts in your will.
What most people do not want is for there to be arguments between siblings and other family members because they do not think the contents of the will are fair. Sometimes, if the division of assets is likely to be complicated it may be worth contacting a lawyer who understands the process. This would especially apply to young FIRE people that were able to start early and can build up a significant amount of wealth in a short period of time due to their laser focus on… well FIRE. This can help to avoid breaking up family relationships and causing unnecessary sibling rivalry. People who have children should name in the will which of them they would prefer to take care of them.
A testamentary discretionary trust can also be included in your will for your loved ones. This vehicle holds their inheritance offering tax concessions, income splitting and asset protection. This is a great strategy for those with significant assets as capital taxes imposed on most assets sold after you die, and large taxes paid on superannuation death benefits paid to people not financially dependent on you. This is a 17% death tax on the concessional component of your super and a massive 32% on any untaxed element. You can reduce this down to zero with the testamentary trust. Income earned from the asset can be split and minors have a significant tax break of ~$23k tax-free per child.
What Happens if There is No Will?
If someone dies without a will, sometimes referred to as dying intestate, the court makes a decision, using a set legal formula, on how the estate and its assets are distributed. The court will appoint a trustee executor to distribute the assets. Each state has different rules regarding intestacy but in NSW the Succession Act 2006 (New South Wales Consolidated Acts - the Act) decides which eligible relatives of an intestate will inherit the estate e.g. the spouse. No money is released to any relative until all liabilities of the deceased have been paid. Before the beneficiaries chosen by the trustee executor receive their share of the estate, taxes and duties will be charged. This means that the beneficiaries’ portions are less than if an estate plan and will had been in place. More incentive to create the will as we know how efficient the government uses taxpayers’ money.
There will be a potential for family disputes and costly legal battles. This will deplete your estate even more. If you die young and close relatives know of your FIRE ways, there is every chance they may contest.
If there are no eligible relatives the State takes over the estate.
Key Facts About Estate Plans in Australia
According to recent data around 50% of adult Australians have neither an estate plan nor a will. The same percentage end up contesting wills in court, usually by family members who cannot reach an amicable agreement over the division of parents’ assets. Perhaps the most famous case in Australia is the bitter one involving Gina Rinehart.
The Process for Drawing up a Will
Drawing up a will isn’t a difficult process, but it needs a bit of thought to avoid family breakdowns, sibling rivalry and even beneficiaries contesting the contents of the will because they are unhappy with their share. Depending on the relationship between the person creating an estate plan and the beneficiaries, it is a wise move to inform the beneficiaries so that bitterness isn’t created between them if and when they die. Once the decision has been made about who is going to get the assets, an executor will need to be appointed who is responsible for making sure the estate is distributed according to the contents of the will. A signature will be required by the will maker and the executor before it is valid.
In summary an estate plan includes the following:
· making a will;
· a superannuation death nomination which is who gets the super benefits when a person dies;
· a power of attorney, which is somebody else appointed to conduct a person’s affairs, including financial, if they have lost their ability to do so;
· a power of guardianship which is nominating someone to make lifestyle and personal decisions if the person has lost all mental capacity;
· an advance health directive involves appointing someone to make decisions regarding medical treatment if the person is unable to do so;
· Testamentary trust set up to hold assets overseen by a nominated trustee that will eventually distribute them to beneficiaries. This has the added benefit of minimising tax. This is one of those add-ons that are necessarily if you have significant assets and cannot reduce it.
tl; dr, a young person should have an estate plan because:
• If children are involved a guardian can be nominated to care for them;
• He or she can decide who should get specific assets;
• Without a will the young person has no choice where assets will go;
• If the young person has a serious accident s/he has control of the outcome if it is included in the estate plan;
• Reduce/prevent intended consequences that may cause inconvenience to loved ones, family divisions and unintended recipients;
• Significant tax benefits for those with large assets.