The beginners guide to retirement part 10:Estate planning

Show of hands how many readers have a written will or trust of what will happen when you get sick or die? I can’t see your hands but the statistics show only about half of New Zealander’s have a written estate plan. ‘Intestate’ is the term used to describe a person who has died without having made a will.

This is a statistic that needs to get better. You might argue you don’t have an estate, you are not rich and you don’t have anything to leave behind. It doesn’t matter. Everyone should have an estate plan. There is more to estate plans than just the financial aspect.

 

Components of an estate plan

1/. Will
This is the most talked about component of estate planning. The will is a written document that states where your money and assets will go upon your death. Who will benefit from your assets? A will needs to have an executor. This is a nominated person that acts on behalf of the deceased, to carry out the instructions of the will.  Also, who will be the guardian for any children under your care?

If you don’t have a will, your assets will be distributed by the courts, generally in the order below taken directly from the Administration Act 1969. Part 3 – 77:

  • If the deceased had a husband or wife or a civil union or de facto partner, but no surviving parents or direct descendants, the spouse or partner will get all of the estate.
  • If there is a spouse or partner and also direct descendants, the spouse or partner will receive all the personal chattels, the first $121,500 of the estate and a one-third share of the remaining property. The other two thirds go to the direct descendants.
  • If there is a spouse or partner, no direct descendants but surviving parents, the spouse or partner receives all the personal chattels, the first $121,500 of the estate and two thirds of the remaining property, with one third going to the surviving parents.
  • If there are direct descendants but no husband or wife or civil union or de facto partner, the estate goes to the direct descendants.
  • If the deceased did not have a surviving spouse or partner nor any direct descendants, the deceased's parents will receive the whole estate.
  • If there are no parents, the deceased's brothers and sisters or their direct descendants receive the estate.
  • If there are no brothers and sisters, nor any of their descendants, the estate is shared between grandparents or, if none, aunts and uncles.
  • If none of these parties exist, the Crown will receive the property.

If a remaining member of the family is not happy with the court process, then they can apply to be the administrator of the will. Effectively fulfilling the same role as the executor. An application is made through a lawyer, in writing to the high court. If someone else challenges that person being the administrator, then it can go to the high court.

Without a will, things can get very messy indeed.

 

2/. Financial power of attorney
If you have an accident or get sick, where you no longer have the ability to make decisions for yourself, a power of attorney will make them for you. This is someone you have chosen to make decisions on your finances for you. Unfortunately, bills do not stop coming in just because you are sick. A power of attorney will look after your finances and must be someone you trust. The power of attorney will cease upon death.

 

3/. Medical power of attorney
Same as the financial power of attorney, except it is someone that makes your healthcare decisions should you not have the ability to. This doesn’t have to be the same person, but should also be someone you trust immensely. Ideally, they will know you very well, including your beliefs and wishes.

Powers of attorney are important because they go further than a living will. A will only applies on death. Wills don’t cover situations where you are alive, but unable to communicate or make decisions. You need powers of attorney to cover such a situation.           

 

4/. Living trust
A trust is the legal relationship created when a person (the settlor), places assets under the control of a person (the trustee) for the benefit of some other person or people (the beneficiaries), or for a specified purpose (such as a donation). There is often more than one trustee, one of which is often a Lawyer or Accountant. Having an independent trustee helps to avoid any suggestion that the trust has been set up as a sham.

All trusts need a settlor, assets that need protecting, a trust deed, one or more trustees, and beneficiaries. The settlor and trustee can often be the same person. This is a good way to ensure the trustees operate the trust according to your wishes. The trustees have a duty to act in the best wishes of the beneficiaries, not the settlor. So if you, as the settlor, are not a trustee, there is a possibility you may not have the assets distributed as you wanted.

Unlike a will, a drafted, living trust can avoid probate. Probate is the court order recognised in a will that confirms the legal executor who has the legal authority to deal with the deceased’s estate. If you have a will, the estate distribution process can take 12 months or longer. If you don’t have a will, you could be looking at even longer. A trust avoids these delays.  The successor trustee can transfer ownership of the trusts’ assets in just a few weeks.

Under a will, if someone else makes a claim on the estate they can do so within 12 months of the probate being granted. This can include someone challenging the will or being owed money. A trust will avoid any challenges to the will and any probate related fees. When you make a living trust, your family members can quickly and efficiently pass to the beneficiaries you name, without the hassle and expense of probate court proceedings.

Any assets not included in your trust, will need to be included in a will. There is room for both if your situation demands it.

A trust’s assets are controlled by the trustees. Although you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, it is important to remember that assets you transfer to the trust are no longer your own. If you continue to treat the assets as your own, any trust could be open to challenge as a sham.

Trusts can be costly, so they are not for everyone. Start-up costs can be approximately $3,000 and ongoing maintenance fees (if you have an independent trustee) of around $500 per annum. These are ballpark figures, as the cost depends on the complexity of your trust and the nature of the assets to be transferred.

 

9 Common estate planning mistakes

1/. Dying intestate
Where there is no plan for your death and your assets are distributed as seen fit by the local courts. This greatly effects your surviving family members and can result in a costly, stressful, and drawn out process where relationships may be fraught.

 

2/. Only having a will
This is better than mistake number 1, because at least you have named your beneficiaries. But this is still required to go through the probate process which can take 12 months or longer before the assets are distributed to the named beneficiaries.

 

3/. Trying to avoid probate by owning property and assets jointly
This applies to naming anyone who is not your spouse, to be part owner of your assets. If you name your children as co-owners on your property for example, then if one of the children experiences issues with the law, or marries and divorces, the property also gets pulled into it. If you do this, just make sure that the joint owner is someone that you want to benefit from your passing. Because if you pass away, the property will go directly into the name of the other owners, not to the estate of the deceased owner.

 

4/. Outright distribution to just one beneficiary
Imagine you are a single mother with one daughter, Emma. Emma is married to a dead beat named Tom. They have 2 children.  If you leave all your inheritance to Emma, when Emma dies, she is very likely to have all her assets be transferred to her spouse, Tom. Not to the kids. Unless a specific will/trust is set up for them. Tom will end up with the inheritance and he may re-marry. The grandkids are suddenly disinherited in just 1 generation. The money is going sideways to Tom’s family and can end up in the hands of people that you didn’t even know when you were alive. If you want your inheritance to last in YOUR family more than a generation, then think carefully about spreading the distribution among more than just one person. Even if you think that person is responsible.

This is a more common situation than you may think. Over our lifetime, approximately half of all marriages end in divorce. This is a lot of people with multiple in-laws.

Blended families are also more common, where the spouses have pre-existing children that they bring into the relationship. What I like to call the Brady bunch situation. Estate planning is especially important for these families. If you have no plan and pass away, your spouse will get all the estate. BUT, when that spouse dies after you and they have no estate plan either, all inheritance will go to their children and not yours. As you can see, even people with the best intentions can disinherit their children.

 

5/. Not funding the trust properly
This is where you go to the effort to establish a trust, but don’t put your assets in it.

 

6/. Not updating your estate plan
It is recommended you review your trust every 3 years or when your situation changes. Situation changes may include:

  • A change in family circumstances such as a new grandchild, new spouse etc.
  • A change in your asset levels.
  • A change in your estate decisions.

 

7/. Doing it yourself
There are a few websites that offer cheap online forms to create your will. It is easy to leave something out of these or not consider things that a professional legal service would be able to inform you of. They can help you avoid any traps and pitfalls and I highly recommend professional advice, despite the higher cost.

 

8/. Believing a trust alone is enough
You should never just have a trust alone. A trust is only one component of what makes up your estate plan. Your trust also has several supporting documents that go along with it, such as financial and medical power of attorneys.

Not even spouses are entitled to each others medical records and we are usually finding this out in an emergency type situation. We want these documents ahead of time. We don’t want our loved ones guessing what you would want to have happened when you are no longer to communicate. It is a very stressful situation for our families to be placed in, and we want to leave them some guidance, some directive as to what we wanted.

The power of attorney documents are often the most overlooked.

 

9/. Procrastination
We are our own worst enemy. We often put estate planning as last on our list and something that is so far in the future. Making the decision on who gets what and thinking about our mortality is not pleasant, but something this important needs action.

 

Bonus tips

Name more than one successor trustee to manage the trust because they may also die and there will be no one to take care of the estate. Same with executors for a will. Otherwise the state appoints someone and your wishes may not be correctly followed. Alternatively, one of the beneficiaries in the will/trust can apply to be the administrator/executor.

Name a couple of people to manage any money/property left to children under the age of 18 until they meet the conditions of the will/trust. i.e. Going to college, or reaching age 21.

Ideally, beneficiaries should leave the money in the trust, even when the settlor has passed away. This is so you don’t expose yourself to creditors or ex-spouses and your assets are protected. This is an asset protection trust within the original trust. I understand that not everyone can afford this though as you may need the money now. Just be aware of the implications if you do.

If you want to ensure your inheritance remains in the immediately family, put some of the assets in a trust for the grandchild that lasts for the lifetime of the child. If we have a responsible child, we allow that child to be their own trustee, so they are in full control. If we have an irresponsible child, then we have someone else serve as the trustee. Since that trust lasts the lifetime of the child, we get to choose what happens to the assets once the child dies. Whether it is your grandchildren, or your siblings, etc. This is how we keep money in the family line and ensure future generations can inherit something.

 

Final Thoughts

When people discuss estate planning, the word ‘will’ gets thrown around a lot. For some situations, a will may be the right choice, but at least consider all the options. Even if you have no assets, at the very least your will should include financial and medical power of attorney.

There are more advantages associated with a trust, but it really depends on your situation. If you have no property and less than $15,000 assets in any one bank account, then a will may suffice and you may not be required to go through the drawn out probate process.

The key takeaway is we need to protect our assets, as well as our loved ones. We have worked our tails off for too long to have everything taken. Finding a good lawyer is well worth the investment. The last thing we want is to create family disruptions and lengthy legal proceedings on our passing.

This article is for informational purposes only. Please consult a qualified legal professional for your personal situation.

 

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

So, do you have any horror stories of an inheritance going to the wrong people? Any long, drawn out court proceedings? Do you have an estate plan?