The essentials of estate planning
Estate planning is an essential part of life planning, yet many people are unaware of its significance. Estate planning is the process of arranging for the management and disposal of an individual’s estate after their death. It involves creating legal documents such as a will, enduring power of attorney, and an advance health directive. It also often involves consideration of guardianship, trusts, or other arrangements. In this article, we will explore what estate planning entails, who should plan their estate, key steps in the process, common mistakes, common terms, and elements of an estate plan.
Who should plan their estate?
Estate planning is recommended for anyone who wishes to ensure that their assets are distributed in the manner they want after their death. It is also essential for parents who have minor children or dependents. In Queensland, dying without a valid will can cause significant problems. Thus, any adult who owns assets or property or has dependents should plan their estate.
Leaving a will is the most basic form of an estate plan. Depending on your circumstances you may want to provide more structure and take into account considerations such as minimizing tax, reducing the chances that your will be challenged, providing for blended families, or even taking steps to equalise the distribution of assets.
Key steps in estate planning
There are several steps involved in estate planning. The estate planning process is one that entails making and recording financial and legal decisions that are legally binding. A valid estate plan will assist your executors or your legal personal representative with the guidance they need to manage your affairs and settle your estate. An estate plan involves:
Identifying assets
You will need to identify your estate assets, such as investment accounts, real estate, personal property, life insurance policies, any other relevant insurance policies, and business interests.
Defining beneficiaries
The second step involves explicitly defining your beneficiaries. Beneficiaries are individuals, trusts, or organisations that you wish to receive your assets upon your death. This could include family members, friends, charitable entities, or even your pet. It’s crucial to be as specific as possible when naming your beneficiaries to avoid any potential confusion or conflict after your demise. In particular, you may want to protect vulnerable beneficiaries or provide for future generations in your estate plan. You may wish certain assets to designated beneficiaries.
You may have completed a binding death benefit nomination for your superannuation fund, this is another example of a basic aspect of estate plans.
Assessing liabilities
The estate planning process isn’t just about all your assets, you will need to assess your liabilities – mortgages, loans, and other debts you might have as well as paying any income tax. These liabilities are important as they are deducted from your estate’s value before distributing assets.
Making choices and clarifying your final wishes
While nominating your intended beneficiaries is important, you will also want to consider who you will choose to act as an executor of your will, and who you might nominate for your power of attorney and/or advance healthcare directive.
This takes careful consideration as you are choosing a trusted person or family member to handle your financial affairs and, potentially, exercise medical power. They should be financially responsible and able to take on the responsibility of making financial decisions or medical decisions. If you don’t really want a person near your bank account, they are not the person to choose.
You may also have very specific wishes you would like carried out and have a preference for your burial arrangements. You will need a high level of confidence that your chosen representative will follow the estate plan and respect your wishes.
Getting legal assistance
The fourth element is to consult a legal professional to assist you in the drafting of your will and other vital estate planning documents or structures. The documents should clearly express your wishes and provide a roadmap for the executor of your estate to follow. Your solicitor will be able to outline what the power of attorney entails which will help you make your own decisions about who you might choose to take on the attorney role.
Particular structures such as a testamentary trust or family trusts may reduce the estate’s tax liability and protect your beneficiaries. Engaging a legal professional should provide clarity on these matters. Of course, consulting a solicitor is likely to be your first step if you need guidance about how to start the estate planning process.
The estate planning process is a natural extension of any thoughts you have for your retirement plans. You will want to make sure that any structures you put in place allow you to access your money and other assets before and after your reach a certain age.
Getting financial advice
A financial planner can play a role in helping you to build an effective estate plan by addressing your personal finances, considering your life insurance and other insurance coverage, and decisions about how hold assets or invest money. For example, if you had two children and own a business, you may wish to leave it to the only child that worked in it, and plan for equalising the share for the other child, possibly through life insurance.
Regular review
Finally, it’s important to regularly review your estate plan regularly as life circumstances change, just as it is advisable to regularly review your financial planning. Ensure that all the intended beneficiaries are up-to-date and that any newly acquired assets or liabilities are accurately accounted for in your will.
You will need to update your estate plan, particularly in the face of significant life events such as marriage, divorce, the birth of a child, or the purchase of a substantial asset like a house. Remember, estate planning is an ongoing process, not a one-time task.
Common elements in estate planning
Estate planning typically involves several important documents:
- A will: A legal document that allows you to determine how your assets are distributed upon your death.
- An enduring power of attorney: This document allows you to appoint an individual or organisation to act on your behalf in the event you become incapacitated.
- An advance healthcare directive: This document, sometimes referred to a s living will, allows you to specify your wishes for medical care in the event of a medical emergency or another critical health situation.
- A guardianship order: This document appoints someone responsible for taking care of minor children if their parents become deceased or incapacitated.
- A family trust: This document is used to provide for the financial security of family members or other beneficiaries upon your death.
Each document should be drafted and signed in accordance with state laws by a qualified legal professional. The above documents will provide your legal personal representative and trustees with clear instructions on how to manage and distribute your estate according to your wishes.
Common estate planning mistakes
Issues in estate planning often stem from overlooking critical details or misunderstanding the intricacies of the process.
One common error is failing to update the estate plan to reflect significant life changes such as marriage, divorce, the birth of a child, or the acquisition of substantial assets.
Many individuals also neglect to coordinate their will and trust, leading to discrepancies and potential legal conflicts. Similarly, they may fail to consider business succession planning, leading to unforeseen issues for business partners.
Another common mistake is not adequately considering the tax implications of bequests, which may result in unnecessary tax burdens for the heirs.
Finally, choosing an inappropriate or unprepared executor can lead to mismanagement of the estate and potential discord among beneficiaries.
Therefore, seeking professional legal advice and regular review of one’s estate plan can help avoid these common pitfalls.
A few key terms
- Probate: One critical term related to estate planning is ‘probate.’ Probate is the legal process of validating a will through the Supreme Court and authorising your executor(s) to pay off debts and distribute assets. The probate process can be lengthy and expensive, depending on the complexity of the estate, so many people use trusts or other vehicles to avoid having their assets go through this process.
- Intestate: When an individual dies without a valid will in place they die intestate. In such cases, the state will distribute the assets according to its laws. It is important to note that intestacy can result in outcomes that are very different from what the deceased person may have wanted, so it is best for individuals to make their wishes known through a will or other legal document.
- Trust: Trusts are legal arrangements in which one party (the trustee) holds assets for the benefit of another party (the beneficiary). A ‘living trust’ can help avoid probate and create a smooth transition of assets to the beneficiaries.
Questions to ask your solicitor
When you are searching for a solicitor to help you with your estate planning, you must know what to ask. Some questions you may want to consider include the amount of experience the solicitor has in estate planning, and their fee structure. Additionally, inquiring about the estimated time the planning process will take, and what documents will be required to complete the process is also essential.
Conclusion
Estate planning is a fundamental life-planning process that everyone should carefully consider. It ensures that your assets are distributed according to your preferences and that your loved ones are protected. By engaging in estate planning early, you are securing the future of your dependents and avoiding any potential legal problems. Take the time to understand the essential aspects of estate planning to find the right solicitor. With your solicitor’s assistance, you can create a comprehensive estate plan that meets your unique needs.