Seven estate planning myths busted

Over 60% of Australians die without a valid will. That number includes people who have incorrect wills and those who don’t have a will at all. How can this be the case in a supposedly highly educated and intelligent country like Australia?

It begs the question – is the traditional Aussie culture of “she’ll be right mate” getting in the way of practical common sense and will it mean that our families will be short changed?

There are a lot of common myths out there in relation to estate planning. And if we don’t know what we don’t know, how can we fix the problem?

Here are seven myths busted to help small business owners get a better understanding so they can better plan their estate and protect their family by ensuring their assets end up with the people they intended.

Myth 1: All “my assets” will be treated in accordance with my will

This myth is founded on the premise that you “own” all of your assets. This could, in reality, be a fallacy.

For most people, including small business owners, their large value assets include their home and super, which may include life insurance. Whether your family home forms part of your estate will depend on how you hold (or own) the property. Most couples would own their home “as joint tenants”. This means in the event of the death of one of the parties (i.e. tenants), the property automatically reverts to the surviving party (tenant). Your share of the property does not form part of your estate.

Some people (generally unrelated owners of properties) will hold the property as “tenants in common” in agreed-upon proportions (e.g. equal shares). In this case, the death of one “tenant in common” will mean their share of the property will be dealt with in terms of their will and will not go to the survivor co-owner.

It is absolutely crucial you understand how your property is held and therefore whether or not your share of the property will form part of your estate (and dealt with in terms of your will) or not. 

Myth 2: My superannuation will be treated in accordance with my will

The reality is your super is held in a trust, being the super fund, so you don’t actually “own” it. You are therefore reliant on the trustee of your super fund to distribute your super, including any life insurance you have in your super fund, to those you intended it to be distributed to.

Your perception that you “own” your super is entirely that – a perception – unless you have specifically instructed your super fund trustee to distribute it in a certain way. However, you can’t just instruct your super fund trustee in any old way. You have to give them a binding death benefit nomination, or more specifically, a non-lapsing, binding death benefit nomination.

As the description suggests, this nomination is in writing, it doesn’t lapse and therefore remains in place until you revoke it, it is binding on the parties and it nominates who you want your death benefits to go to.

Importantly, every super fund trust deed is different and may contain specific provisions about the form and content of the nomination. It is critical that you specifically follow the requirements of your trust deed to ensure your nomination is binding on the trustee. This is particularly the case where you don’t have a self-managed super fund. In this case, you are reliant on a trustee who you don’t know and have never met, to distribute your super in the manner you had intended. Blind trust – perhaps.

Myth 3: If I die without a will, things will all work out

Wrong!

If you die without a will, your state government decides how your estate will be distributed. There are particular rules regarding intestacy (dying without a will). Specifically, the government has a predetermined methodology of determining how to distribute your assets if you die without a will. This may, or may not be, how you had intended them to be distributed.

To illustrate how things can go very wrong, I want to give you a real life example. Recently, a young lady tragically passed away in an accident. She was over 18 years of age and died without a will. As she had no dependents, the intestacy laws in her state prescribed that her substantial death benefit (i.e. life insurance) in her super fund was to be paid equally to her mother and father. Sounds fair enough doesn’t it? The only problem was that the young woman and her mother had been estranged from her father since she was a young child and they had nothing to do with him since then.

Unfortunately, the rules of intestacy meant he ended up with half of her death benefit. Sad, but true.

Myth 4: I want all of “my assets” to form part of my estate

In most cases, this may well be the case. But what if you are recently divorced from an ex-spouse with children? What if you are in a de facto relationship with someone other than your spouse? What if you are leaving your estate to some children and not to others? What if you are in a “blended” relationship with current and recent ex-spouses, children from prior relationships, step-children?  And the list goes on. Do you really want all of your wealth forming part of your estate where it can potentially be challenged?

To the lay person it may seem logical and almost automatic that your assets must form part of your estate. However, for the reasons previously mentioned, there may be valid reasons why you want your estate to contain little, if any, assets. For example, if your will is likely to be challenged.

As discussed, it is possible, in fact probable, that your jointly owned home together with your superannuation will not form part of your estate and therefore beyond challenge. The same goes for interests you may own in a business or other structure, particularly in a trust.

Myth 5: I don’t have a lot of assets so I don’t really care how my estate is distributed

As illustrated by the example in myth 3, even relatively young people can have a sizeable estate due to life insurance held in their super fund. Anyone without a valid will needs to think long and hard about where they want their wealth to end up and where it might end up if they die without a will.

Myth 6: It’s my money and I’ll leave it to whom I see fit

Yes, but  . . .

Generally the courts will look at whether the deceased has made “adequate provision” for potential beneficiaries. This might include situations where the deceased leaves a disproportionate share of their wealth to certain children in preference to other children. This could potentially also apply to step children and illegitimate children.

In determining whether adequate provision has been made to a particular party, the courts will look to things such as the size of the estate, the nature of the relationship of the parties, how the estate has been distributed and a number of other factors.

The bottom line is unless “adequate provision” has been made for the respective parties, there is the risk the courts will overrule the will of the deceased and distribute the assets in a different proportion. This shows why, with adequate planning (as discussed in myth 4 above) it may be possible to minimise the size of an estate.

Myth 7: I’ll just leave my estate to my spouse and they’ll leave their estate to me and it will all work out

Maybe, and maybe not.

This will depend on a number of factors including the age at which you or your spouse die, the age and marital position of your children and a raft of other issues.

The reality is, fortunately, we’re all living longer. This means if you or your spouse dies relatively young (and to some 60 could be relatively young) there is a fair chance your spouse may remarry or enter into a de-facto relationship. If you leave all your wealth to your spouse (at the expense of your children) there is the possibility they may subsequently break-up with their new partner or spouse and that part of your estate will end up in the hands of their estranged spouse. This won’t make your children happy.

Similarly, even if you spouse doesn’t remarry they may leave the balance of your combined estate to your children. What happens if your children subsequently divorce? Deja vu.

For these reasons, many people’s wills contain a testamentary discretionary trust. In other words, a trust is created on your death and all or part of your wealth is settled on this trust. The beneficiaries of this trust are your blood relatives. Whilst these are not always effective in the Family Court if your spouse and/or children end up there, they probably represent the best protection going around.

In summary

A myth is just a widely held, but mistaken, belief. Don’t be hoodwinked by estate planning myths. Everyone’s situation is different, so also don’t do something just because friends have done it. Get professional advice about your specific situation. The cost of doing things right now will pale into insignificance compared to the cost to your estate (and your loved ones) in getting it wrong.

Grant Field is Australasian chairman of accounting firm MGI and specialises in advice for family and privately owned businesses.

The information contained in this article is general in nature and readers should seek their own professional advice in relation to these areas.