The top 10 estate planning mistakes

By Anna Hacker - Australian Unity Trustees Legal Services, Accredited Specialist – Wills & Estates, National Manager, Estate Planning.

People often think they have a very clear idea of what they want to achieve with their estate plan and they usually think it will be straight-forward.  But that's not always the case.  Consider these examples of mistakes which can be unintentionally costly for beneficiaries.

1. Not providing for dependants

If you want to leave someone out of your Will, you should always seek professional advice in this regard. They may suggest preparing supplementary material to explain why you are not providing for them or to include a reference to that particular beneficiary being left out and confirming you are aware they can challenge but chose to still exclude them. This will not preclude that person from lodging a claim, but it means that they cannot argue that they have simply been forgotten. Many people also mistakenly assume that as long as a person is bequeathed something in the Will, no matter how small, that person cannot contest the Will because it is obvious they were not forgotten. This is not true, and can add insult to injury. Note that on divorce, your ex-spouse is not automatically disinherited (although they are generally removed from your Will as a beneficiary via legislation), especially if your ex-spouse is financially dependent on you. They may still have a right to claim on your estate. Once again, professional advice is required here.

2. Not specifying debts to be paid

If you do not specify that debts are to be paid out before distribution of your assets, certain beneficiaries might be unintentionally lumbered with the debt. Consider the case of the father who left one child life insurance proceeds of $400,000 and the other an investment portfolio, also worth $400,000. On the surface, it was an equal distribution but the investment portfolio had borrowings of $100,000 - thus the second child actually received only $300,000.

3. Not signing the Will

One case in the courts recently revolved around the simple fact that a young man had not finalised the signing of his new Will. His estranged spouse is, therefore, the beneficiary of his entire estate while his parents, who he intended to benefit, will receive nothing.

4. Using Will kits incorrectly

Will kits may seem like an easy and cost-effective way for people to sort out their estate planning needs although I usually tell people to use them at their own peril.

Just because a document is in the format of a Will doesn’t mean that it actually covers everything that a Will needs to cover.  This is especially true when the person who fills out the Will form has no knowledge about structuring financial affairs or sorting out ownership of assets.

A good example is choosing an Executor.  Choosing the correct Executor is vital to making sure the estate is properly distributed as the Executor is the one that has the power in the estate.  Choosing the wrong person for the job may cost the estate time and money and, in some cases, leave the beneficiaries with a long period of vexation and anxiety while they wait for their inheritance.  

5. Under-estimating estate size

An estate is rarely too small to justify some kind of planning.  The classic example is superannuation – most, if not all, working Australians have superannuation which can include significant life insurance.  This alone can be enough to warrant an estate plan. It may be as simple as ensuring that someone has been nominated as the beneficiary of the super fund but even this is worth doing properly.

Keep in mind that a divorce generally does not nullify the binding death benefit nomination.

6. Waiting until ‘later’

It is an inescapable fact that people do pass away before their time even if few of us want to contemplate it.

It is therefore vital that anyone with young children have some kind of Estate Plan in place should anything happen to them so that their children have someone to look after them and oversee any money that is left to them.

Not doing so exposes loved ones to needless stress and financial hardship as well as potentially eroding wealth through unnecessary taxes and legal fees.

Those who die intestate (i.e. without a valid Will) will have their assets distributed according to a legislative formula – a formula that might not reflect their wishes.

7. Ignoring competency issues

Few people want to think about this area either but statistics suggest that 1 in 10 people aged over 65 are affected by dementia. 

Estate planning is not just about planning for when we pass away but should also take into account what happens if someone becomes mentally incompetent.  Areas such as appointing an attorney should be included in estate planning. 

8. Not taking family feuds seriously

Regrettably, it is becoming more and more common in Australia for family members – and even other parties – to challenge a Will in court.

Each state in Australia has its own specific legislation covering who can challenge an estate. In some states, the list is very broad and can include anyone to whom an individual has an obligation or responsibility. 

For example, prior to recent changes in Legislation within Victoria, a neighbour who felt they had helped take care of someone, perhaps by helping with their food shopping or walking their dog, was able to make a claim on their estate.

Whether or not such a challenge could succeed would depend on the individual circumstances of the case including the nature of the relationship and the size of the estate. 

Creating a proper and detailed estate plan can obviously help minimise the chance of successful claims against the estate.

9. Not keeping up-to-date 

An Estate Plan is not a ‘set and forget’ approach. It should be reviewed every few years at a minimum, or whenever there is a significant change to someone’s personal or financial affairs. Regular reviews make sure a Will is still current and that the beneficiaries along with assets left are still correct.

As a general rule, it is a good idea not to dictate exactly what is to happen to each specific asset. A better approach is to plan based on the value of the estate, as assets may have been sold or may be valued differently to when the plan was first created.

Another potential problem in this area is that people distribute assets via their Will that they do not actually own. 

While most assets can be dealt with in a Will, there are some significant exceptions which, by Law, are not included in the estate and must be covered separately in an Estate Plan. These include: 

  • Jointly-held property – i.e. property owned with another person as joint tenant. If, however, the property is held as tenants-in-common, the share in the property can be passed on to beneficiaries named in the Will. 
  • Superannuation – Superannuation assets are held by the trustee of the super fund and, as such, might not be included in an estate. Many superannuation funds include the option to nominate a beneficiary and this nomination will override the Will.  If no binding nomination has been made, the death benefits will normally be paid out at the trustee's discretion, and this again may not be as per the deceased's wishes in their Will.
  • Proceeds of life insurance policies – If a policy is held with a nominated beneficiary, the proceeds will pass to that person upon death, regardless of the beneficiaries named in a Will. 
  • Assets held in trust – These are not included in an estate but continue to be held in trust. 
  • Company assets – A company is a separate legal entity and, as such, its assets themselves are not distributed by a Will (although generally the shares in the company are).

10. Forgetting tax planning

There are a number of tax considerations that will impact on how much beneficiaries end up receiving from an estate such as income tax, capital gains tax (CGT) and land tax.

In most instances, any assets owned at the time of death can be transferred to beneficiaries without having to pay capital gains tax at that time (though it may be payable when each asset is eventually sold by the beneficiary).

There are notable exceptions such as growth assets (e.g. Australian shares) gifted to a foreign resident which may attract capital gains tax. 

One of the most effective ways to minimise tax on income, particularly when leaving assets to minor beneficiaries, is to establish a Testamentary Trust. 

A Testamentary Trust is simply a trust set up via a Will that can be used to protect a beneficiary’s inheritance and tax-effectively distribute income. 

Disclaimer: This article is not legal or personal financial advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every reasonable care has been taken in distributing this article, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information contained within it. Any views expressed are those of the author(s) and do not represent the views of Australian Unity Personal Financial Services Ltd. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Taxation Information in this document should not be relied upon without seeking specialist advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in December 2018. © Copyright 2018