It might be a tough conversation, but good estate planning ensures your wishes are upheld and that you leave a lasting legacy. Find out more.Continue reading
Money and Life
(Financial Planning Association of Australia)
No one likes unpleasant surprises. Talking about your Will with your family can be stressful, but it can also help to avoid a worse situation when you are gone.
Contemplating one’s own death can be hard and in many families, talking about money or inheritances is taboo. Some parents worry that letting their children know how much they stand to inherit may cause a sense of entitlement or encourage them to become less productive. Others fear the chat could stir up jealousies, insecurities and feuds among family members.
But no matter how stressful that conversation is, not talking about what’s in your Will could cause confusion, bitterness, far bigger family feuds and even legal battles after you’re gone.
Having a transparent and open talk about its contents could help your family understand the reasons behind your decisions and ensure their expectations are realistic. It can also reduce their anxiety. After all, it’s often the unknown that stresses us the most.
The talk may also allow you to express any special wishes you have that are not specifically included in your Will. And, you may gain better insight into what different family members value and want. A conversation about your finances and wishes will help to clarify who to contact, and how to pay for basic expenses, as well as your funeral, when you pass.
One of the most contentious aspects of settling an estate can be the distribution of personal property like family jewellery, art or special collections, whether worth a lot or just of sentimental value.
Here are five ways to reduce the stress of these conversations:
#1: Identify potential hotspots
Think very carefully about what you plan to do with your assets and why. Do your research and speak to your lawyer about what’s possible and what’s not. Identify areas that could be touchy subjects.
For example, do you have a child you plan to leave more to than others? This could be because that child has a disability requires additional financial assistance or because that child is a single mother on a low income, whereas her sister is a lawyer married into a wealthy family.
Are you planning to make certain arrangements to protect your heirs? Perhaps one has a drug problem or can’t manage his or her financial affairs very well. Or, another is in a rocky marriage and you don’t want your hard-earned money being split with that child’s spouse.
It’s important to plan how you will broach these topics in your discussion with your family, if at all.
Giving good reasons for these decisions and getting buy-in now from everyone could avert problems later on, if they only hear about your plans when you are gone.
#2: Have a game plan
Decide whether you want to talk to each child separately, rather than addressing everyone as a group. If you choose the group route, will it be one discussion or a series of discussions?
Consider who should be involved in these meetings. In addition to your adult children, should you include adult or teenage grandchildren? Should spouses also be invited?
Proper planning can go a long way to keeping peace. Before the talk, determine the goals and objectives you want to achieve from the discussion. Draw up a meeting agenda and some talking points.
Chose a neutral venue for the chat, one that will make everyone feel comfortable and secure.
Consider having your solicitor, accountant or a trusted family elder or friend at the meeting – someone who could step in if things get heated and steer the discussion back on track.
Carefully explain why you have made the choices you have, especially if you are leaving more to one child than another or if you want sentimental items to go to specific people. Simple explanations can go a long way towards avoiding bad feelings.
Explain the principles, history and values behind your decisions. Let family members ask questions and provide feedback on your plans.
Listen and be open. Give everyone a chance to express their views. This will encourage a healthy dialogue and a common understanding of what different family members want.
#4: Keep the peace
Speak in a calming tone. Don’t shut down or lash out if things aren’t going the way you want.
Remember that talking about your passing can be a very emotional conversation for your children.
Try to stay focused on the topic at hand and not let other family issues get in the way. Remind everyone that relationships matter more than money and things.
No matter what is said, you have the power to choose how you would like your assets distributed. If a family member doesn’t agree with you, let them know they have been heard, but don’t feel pressured to change your plan.
#5: Follow up
After the discussion, draft a simple summary of your estate plans and distribute it to your heirs for final input. This draft could also include information such as where your important financial documents are located and what you’d like for your funeral.
It’s important to ensure that everyone has understood what was discussed and is one the same page.
Still think that a conversation with your loved ones about your Will is too uncomfortable and troublesome? Start by writing a letter to share your thoughts, reasons and wishes. Maybe you could even film yourself reading out. And remember while the conversation might be based around money, it’s really about values.
Planning our estate is a vital part of any wealth management process. Deciding who is entitled to what after we die is not something that can be put off and left until later. It must be clearly and legally defined well ahead of time.
This article is designed to serve as a guide, answering some of your questions and preparing you for planning your estate. Don’t forget to get in touch for further information or support.
Our will is essentially a contract; a legally binding document which dictates what happens to our estate after we are no longer here. In many instances, a will is straightforward and non-complex, but it should not be assumed that this is the case.
Instead, it is critical that we understand precisely the contents and structure of our will so that we can ensure that each benefactor is getting what they are entitled to. Passing on a legacy and assets is a serious business. It pays to make sure everything is being taken care of.
Wills and Power of Attorney
A Power of Attorney document is similar to a will but it is enacted while the individual in question is still alive. In short, it ensures that a trusted candidate is able to take legal and executive action regarding your assets or estate if you are unable to do so yourself.
There are two types of Power of Attorney applicable in Australia. Each comes with its own set of caveats according to which state or territory you are in. The types are:
Enduring power of attorney – which enables a nominated individual to manage your assets in the event of an illness or accident, or in the event that you are absent.
Medical power of attorney – which enables an individual to take control of your assets and act in your best interests if you medically are unable to decide for yourself.
What Happens Upon Death Without a Will in Place?
If the worst happens and someone dies without an adequate will in place, the estate will be dealt with according to the laws of the territory or state. In Western Australia, for example, the estate is divided up among immediate family members and the spouse, based on a ratio which decides who is entitled to what.
This can lead to step-children being left with nothing, for example, or a spouse being left homeless because the house is in the deceased’s name and is more than their entitlement is worth.
Superannuation as Estate Planning Vehicle
A superannuation can provide an effective means of planning your estate and ensuring the right benefactors get the right assets. However, this can be a complicated procedure, thanks to the taxes involved with superannuation death benefits and the fact that not all assets tied up in the fund will automatically be counted as part of the estate.
However, despite the complexity, the SMSF option can still be beneficial. By including a death benefit clause to pay out to your children – all minors – in the event of death, your children can receive the benefit tax free if tragedy occurs. This can be reviewed at a later date to ensure that you and your loved ones continue to enjoy the most advantageous terms.
Tax Dependent vs Superannuation Dependent
Under Australian law, a tax dependent is defined as any individual who is classed as a dependent for tax purposes. This can include a spouse or a child under the age of 18.
A superannuation dependent, on the other hand, is defined as an individual named as part of the superannuation death benefit benefactors, but is not dependent on the trustee for tax purposes. This can include an adult child, for example.
A death benefit on a superannuation fund can be paid out in a number of ways, based on which of the dependent categories the benefactor fits into.
If the benefactor is receiving a lump sum directly from the fund, they must be classed as a superannuation dependent. If they receive a pension from the fund, they may be classed as a tax dependent in some circumstances.
It can be difficult to disentangle the two categories and to position your superannuation fund in the most advantageous way. Get in touch with us for guidance and more information.
Child Account Based Pensions
Finally, a child account based pension can ensure that a pension is paid to your child in the event of your passing until the child reaches 25, upon which they receive a lump sum. Children with severe disabilities may be eligible to receive the pension for longer.
In certain circumstances, these pensions can be delivered tax free, so it is advisable to seek advice to find out if they are the best option for you. Speak to your financial adviser today to learn more about the importance of planning your estate and to ensure that all the moves you make are the right ones.
Income protection 101
There’s not much you can do without an income. In monetary terms, your ability to earn an income is your biggest asset by far – which is why income protection is so important. When you’re protecting your biggest asset, there are 3 things you need to understand so you know what you’re covered for, and what that means at claim time:
- How much you’re covered for – amount insured
- How long you need to wait for your claim to be paid – the waiting period
- How long your claim will be paid for – the benefit period
1. Sum insured
When you apply for income protection, you can generally choose to insure up to 75% of your before-tax income (which sometimes includes super contributions).
The higher your amount insured, the higher your premium will be. So you need to think about how much money you’ll really need to keep up with your everyday expenses (like your rent/mortgage, bills, school fees etc.). Just because you can cover 75% of your income doesn’t mean you have to.
For example, you might earn $10,000 per month but decide you only need $5,000 per month to keep up with your living costs. That may significantly reduce the cost of your cover (i.e. your premium).
You can also reduce your premium by choosing an ‘Indemnity’ benefit payment type.
This means the amount you receive will be determined by your actual income in the two years before the claim (which could mean you receive less than the amount insured) – as opposed to a ‘Guaranteed’ or ‘Agreed’ payment type where, at claim time your amount insured won’t be adjusted if your income has decreased.
2. Waiting period
The waiting period is the number of days before you become eligible to claim, starting from the date the doctor confirms you are disabled. The most common chosen waiting period options are 30 days, 60 days and 90 days.
Income protection payments are usually made monthly in arrears. So if you had a 30-day waiting period, your first payment would be made 60 days after you first became disabled.
The waiting period affects the premium. Naturally, a policy with a 30-day waiting period is more expensive than the same policy with a 90-day waiting period, because you’re eligible to claim sooner.
For example, if you’re off work for 80 days and have a 30-day waiting period, you could potentially be paid your amount insured for 50 days. But if you have a 90-day waiting period, you may not be eligible to receive anything.
When choosing your waiting period, you should think about how soon you’re likely to need financial support if your income stops:
- If you have access to sick leave or annual leave, or a high level of savings, you may be able to take a longer waiting period and reduce your premium.
- If you’re a casual employee or business owner, or you have a low level of savings, you may want a shorter waiting period, bearing in mind your premium will be higher
3. Benefit period
The benefit period is the maximum amount of time you can receive income protection payments for any claim while you are disabled. It can be based on time (e.g. 6 months, 2 years etc.) or age (e.g. to age 65, 70 etc.) and your choice can make a difference to the total amount you receive.
Say you’re aged 40 and you become permanently totally disabled, meaning you’ll never be able to return to work. If you had a 2-year benefit period, your benefit payments would stop when you’re aged 42. But if your benefit period was to age 65, you would continue to receive benefit payments for an additional 23 years.
Choosing a longer benefit period increases your premium because the potential payout is higher. However, be aware the benefit period is the maximum amount of time you can receive payments. If you’re able to return to work sooner than that, or you reach age 65, your payments will stop.
Also, if your policy offers ‘partial disability benefits’, you may be able to return to work part-time and receive reduced payments until you are able to return back to your pre-claims earnings. This can be a great benefit to have as it means you’re supported if you’re restricted in your capabilities, or you want to try a new occupation.
Oh, and one more thing…
One great feature of income protection is that premiums are generally tax-deductible, which can make it significantly more cost-effective to get the cover you need.
You may also be able to hold an income protection policy inside super, meaning you can use tax-effective super contributions to pay your premiums, however, within a superannuation environment policy feature are generally more restricted..
Check your cover now
If your income has changed significantly since you last updated your policy, there’s a chance you may be over or under-insured – in which case you should talk to your financial adviser.
Did you know?
There’s a common exclusion on income protection policies that means you generally won’t be covered if you suffer an injury or illness because of an intentional act. Also, if your cover is held inside super, you’re generally not covered if you suffer an injury or illness while you’re unemployed.
Want to know more?
If you’d like to discuss any of the content in this article and how it may apply to you, please contact your Financial Adviser.