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CRUCIAL CONVERSATIONS: ACHIEVING AN ESTATE PLAN THAT STANDS THE TEST OF TIME

By Kristine Pham, Associate Financial Planner

If you are a person who has achieved a stage of financial independence, it is vital that you have an effective Estate Plan to protect you and your family. An Estate Plan is not limited to having a Will. It generally involves more complex decisions around the control of your personal, family and business affairs in the event of death or incapacitation.

If a plan is poorly constructed and communicated, it can lead to damaging disputes. You may have heard about the Rinehart family feud? Or the family who never reconciled when the granddaughter took her grandmother’s antique engagement ring? How about the estate that got whittled away to nothing by legal fees? And the neighbour who passed away without a Will and suddenly a mistress emerged in the aftermath? We’ve all heard the horror stories – and many of us, sadly, have been involved in them.

Poor planning, lack of open communication, high emotions and high stakes when handling an estate are a combustible mix and can lead to family relationships breaking down. None of us want this in theory – but it happens tragically often.

This article focuses on ways to help ensure you avoid such problems by putting in place an effective Estate Plan – by which we mean one that is complete, valid, and well-communicated.

Having the tough conversations

Having a conversation about your own, or a family member’s, mortality isn’t easy. It touches on everyone’s values as well as the health, wellbeing and relationship dynamics of all the related parties – often difficult issues! And the logistics can be tough too. It’s rare for all family members to be in the same place at the same time, and when there is a gathering it’s usually for personal or seasonal celebrations – which doesn’t naturally lead to discussion of a family member’s aging.

But doing this is absolutely essential. Ensuring your wishes are clearly communicated, and giving key people a chance to have their say about roles and responsibilities, can save a world of trouble down the track. And with the increasing incidence of Alzheimer’s, once a person is diagnosed it becomes extremely difficult to obtain legal verification of their wishes. It is often at a crisis point when people become physically and/or mentally incapacitated, that critical financial and care related decisions are made. Having the conversation early and clarifying wishes can help the loved ones left behind to understand decisions, rather than being angry and resentful when it’s too late to make any changes.

Preparing for the conversation

It’s important to make a specific time and place for the conversation, and ensure it suits all involved. Trying to rush the conversation without adequate preparation, or in the wrong setting, can cause unnecessary upset and not achieve the desired outcome.

A good starting point is to frame the conversation in the context of the person’s health. As a natural part of aging, emotional, mental and physical functioning capacity can wear away. And for many people, a difficult health diagnosis is the trigger for this conversation. Or you can always make us the bad guys!

Conversation starter tips: “I’ve been thinking for a while, that we should probably chat about what we all want to happen in the next few years as I/mum/dad/grandma is/are/am getting on. Always better to do this early while there isn’t a problem! How about a drink/breakfast/event on [date] at [place]?”

OR

“My financial planner is hassling me to sort out my estate planning – always best to do this before there is a problem! There are a few things we should probably all discuss, so that everyone is comfortable with who would do what and so on. How about a drink/breakfast/event on [date] at [place]?”

Key points to raise

Who should look after my affairs – now, and/or if I become incapacitated?

A Power of Attorney (PoA) lets you nominate a person to legally look after your affairs on your behalf. This can be useful if you want to be free of the logistics with record-keeping and financial paperwork, or if you are overseas and cannot be present to deal with these matters.

However this will no longer be valid if/when you lose mental capacity, and this is where an Enduring Power of Attorney (EPoA) becomes relevant. This allows the nominated person to make all financial related decisions on your behalf – even if you do lose capacity to engage in the decision-making process yourself.

Who should make what decisions about my health and care if I become incapacitated?

An Enduring Guardianship allows the appointed person (known as the Enduring Guardian) to be engaged in making the decisions for your lifestyle, care requirements and medical treatments when you are unable to make these choices yourself.

Arranging to have an Enduring Guardianship lets you convey the beliefs and values you have regarding your quality of life, and what types of medical care/assistance you want at a time when you need it most. Having a real conversation and documentation to draw upon can assist the person you nominate as your Enduring Guardian to make the right decisions that best reflect what you want.

What will happen with my assets and with my dependants?

A Will is a legal document that confirms the beneficiaries and details of what they are to receive in the estate when the Will maker (testator) dies. It is only the assets that are directly owned by the testator that can be passed on by the Will. Examples include cash, shares, real estate etc. that are directly owned by the testator. Jointly owned assets do not form part of the estate.

Because Super is not part of your estate, you also need to nominate beneficiaries, directly with your super fund/s.

If you have people dependent on you (such as young children), it is also important to define who you would like to look after them, and what assets will support them.

Another important role here is that of executor – the person or people who will be responsible for carrying out your wishes (collecting & distributing assets, paying tax / debts, obtaining probate and so on). It can even include funeral arrangements.

This document is often the most contentious of all, and the most often challenged. It is important to understand the law surrounding wills, and to clearly communicate your wishes. If those close to you understand the reasons for your decisions and feel included in discussions, there is less likely to be trouble later on.

Roles and responsibilities?

For each of the questions above, it’s important to think carefully about and discuss both who you appoint, and what decisions you would like them to make for you. In most cases you can appoint more than one person to a role if you wish. That person / people should be capable of performing the role, willing to do so and trusted by the family.

Taking action from the conversation

Once the conversation has taken place and key decisions have been made, the next step is to legally formalise this with your solicitor to help ensure you have a complete and effective estate plan with robust legal documents in place. We strongly recommend that you use a lawyer experienced in estate planning matters. Having a competent and trusted professional doesn’t necessarily come cheap, but when done correctly in the first place, it can help save on much more costly legal fees down the track!

Once the plan is in place, ensure your loved ones know where the key documents are stored. It can help to include all your other important documents as well such as insurance policies, funeral plans, superannuation accounts, marriage and birth certificates to assist executors, curriculum vitae to assist with eulogies, and so on.

Contested estates

It is not uncommon for estates to be challenged, most commonly disputes about the validity of a particular Will, or challenges to the bequests under the Family Provision Act.

Validity

For a Will to be valid, it needs to comply to formal writing, witnessing and signing requirements (for example, a witness cannot be a beneficiary and the testator must also sign the document itself). Other issues can include unclear wording – which is common in “DIY” Wills.

The validity of a Will can also be disputed on the grounds of the testamentary capacity of the testator. In making or changing a Will, the testator must be of sound mental capacity and be free from any undue influence such as duress, coercion and/or inequality of power between the testator and another related party – such as a carer who is also a family member, solicitor, accountant and so on.

Family provision claims

The Family Provision Act covers the legal obligations of the testator to provide for certain individuals. This includes a married spouse, de-facto and children to former spouse(s), grandchildren, or those with an interdependent relationship with the testator. A claimant must prove that the testator did indeed have a responsibility to make a provision for them. From here, the family provision application generally has two stages:

  1. The first stage is to confirm whether the testator has given adequate provision for the education, maintenance, advancement and/or support for the claimant.
  2. If the provision is found to be inadequate, the court will determine whether extra provision from the estate is to be made, and if so, to what extent.

The court considers the balance between the deceased’s moral obligation to provide adequate care through provisions from the estate to the claimant; the claimant’s need for such provision, and finally, why provision wasn’t made. At times, court decisions may not seem “fair”. For example, an even 50/50 monetary split of the estate to two children may seem ‘fair’. However, if one has a severe disability, whereas the other has accumulated a significant amount of wealth, this simple 50/50 distribution may not stand.

Conclusion

The process of formulating and implementing an effective estate plan can be confronting and time consuming, and many people put it off until it is sometimes too late. However, engaging in open dialogue and legally formalising what it is that you really want does make everything so much easier for you and your loved ones in the long run. A complete, effective and well communicated estate plan is vital to promote family harmony and to leave the right legacy of your life.

If the steps outlined above seem daunting, a capable Financial Planner can help! A large and important part of our role for our clients, is helping them through this process. Involving your planner as an impartial outsider can really help defuse tensions and ensure your wishes are carried out.

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