What is estate planning?
Often, an effective estate plan does not end with a Will. It should adopt strategies to ensure that your wealth is protected during your lifetime, as well as enable the effective transfer of your wealth to your beneficiaries, without causing unnecessary stress and expense.
Estate planning involves identifying your goals and objectives and putting in place strategies to assist you to meet those goals and objectives. Your main objectives may be wealth creation, tax minimisation or asset protection. You should integrate your estate planning measures with your financial and business plans.
What can happen if you do nothing?
Perhaps the best way to demonstrate the importance of estate planning is to give some examples of the potential consequences of not implementing an effective estate plan.
- You are married with two children. You have a Will in place under which you give your estate to your spouse. If you and your spouse both pass away, you give your estate to your children in equal shares. Your son operates a business and is experiencing serious financial difficulties. Your daughter is disabled and requires ongoing care and support. When you and your spouse pass away, your children inherit your estate personally. Some issues with your Will are as follows:
- If your son becomes bankrupt, the assets received under your Will would be used to satisfy your son’s creditors; and
- Your daughter will inherit your estate outright and is unlikely to have the capacity to manage her own affairs.
- To address the above consequences, you could have prepared a Will gifting your estate to separate testamentary trusts established for the benefit of your respective children and grandchildren. If structured appropriately, such trusts will:
- Provide maximum protection for those assets against creditors and bankruptcy of your son; and
- Enable you to appoint a trusted person to manage your daughter’s inheritance to ensure that she receives adequate care and support.
- You operate a business with family members via a company with shares held personally by each family member. There is no shareholders’ deed in place which governs the process for dealing with a shareholder’s interest if a shareholder dies. When you pass away, your intention is that your interest in the business will revert to your family members.
- You are married without children. You pass away without a valid Will and your spouse passes away a few months later, also without a valid Will. Under the intestacy laws in Queensland, your estate (including your interest in the business) is inherited by your spouse’s next of kin, being a brother and sister.
- Your family members do not wish to carry on the business with your spouse’s next of kin. As a result, your family members must obtain adequate funding to enable them to acquire your interest in the family business from your spouse’s next of kin for market value. This causes unnecessary stress for your family members and puts significant financial strain on the business.
- The consequences outlined above could have been avoided by taking the following steps:
- Preparing a Will under which you give your shares in the company which operates the family business to your remaining family members in the relevant proportions (if your intention is to gift your interest to your family members); and
- In addition, a shareholders’ deed could have been put in place between the company and the shareholders, outlining the process for dealing with the shares of a deceased shareholder. For example, the remaining shareholders could have the option to acquire the shares of a deceased shareholder for market value in the same proportions as they hold shares in the company (and this could be funded wholly or partly by an insurance policy).
Is it worth the cost?
As the above scenarios demonstrate, the benefits of implementing an effective estate plan will far outweigh the costs in the event of a misfortune. If you do not take steps now, your wishes may not be fulfilled when you pass away and your family may be faced with unnecessary stress and costs after you pass away.
This article was written by Lindsay Reed, Partner and Anisha Singh, Senior Associate.
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