This is a guest post by Alban Smith. Interested in writing a guest post? Please email us at info at jayperoni dot com.
Estate Planning: Why is it important?
While most of us are trying to live our lives to the fullest, we don’t want to think about dying, or what will happen in the event of our death. However, the reason we are trying to get the most out of life is that we never know what is around the corner, and looking into your options for estate planning will mean you truly can kick back and enjoy life, because you know every eventuality is taken care of.
What Does Estate Planning Involve?
Estate planning is simply a means of ensuring that your estate is passed on to the people you want to have it when the right time comes, and in the most tax effective manner. Estate planning usually caters to the eventuality of your death, however, can also be useful if you are overseas, or you lose the ability to manage your own affairs due to illness or injury.
Your estate plan should be a part of your financial plans, but rather than just looking after your assets for yourself, your estate plan ensures that your assets are managed correctly during your lifetime, to preserve your wealth in a manner that allows it to be distributed according to your financial plan after you die. Your Will is the basis of your estate planning as the document allows you to choose who will benefit from your estate and what each person will receive.
However, an estate plan takes the wishes in your will a step further, by helping ensure that your personal and family goals are achieved, even after you die. This means that in choosing who receives your assets when you die, you can ensure that your children have the education you want them to, or your spouse is looked after as they get older for example. Another important aspect of estate planning is reducing the amount of tax your estate has to pay, ensuring more of the benefit goes to your beneficiaries, not to the tax office.
The Importance of Estate Planning
In our lives we like to be in control of as much as we can – everything from what car we drive to which charities we support. We also work hard to be able to afford that car and that extra money for donations, not to mention all of the other assets we are accumulating throughout our lives in the form of homes, investments and cash. That is why we all need to be thinking about how estate planning can help us all keep our assets controlled, even when we are no longer there to do it ourselves.
Another important part of estate planning is regular maintenance. For example you may have put a lot of time and effort into creating your Will, but that shouldn’t be a one off investment of your time. Every time your circumstances change, your estate plan should be reviewed and part of this is updating your Will – whether you’ve gone through a big change such as getting married or divorced, or a smaller change such as acquiring a major asset or starting a business. Also remember that if you get married or divorced, this can revoke an existing Will, so you may think you have a Will when you don’t.
Estate plans should also be reviewed when the circumstances of your beneficiaries change, for example as your children get older they may not need the type of support you had laid out in your Will 10 years ago, or when they get married you may want to stipulate restrictions on what their spouse can access, or when they have children you may want to allocate the children part of your estate too. Estate planning also involves keeping up with changes in tax laws. When changes are made to existing tax laws you should review your Will, even if your assets haven’t changed and you don’t want to change your beneficiaries.
While estate planning may sound like a lot of work and a lot of upkeep if you don’t have a Will then your assets will be distributed to your next of kin according to the current legislation when you die – regardless of your wishes, or whether this is in the best interests of your beneficiaries. Plus, if you die and don’t have any other living relatives, your estate is passed to the government, when you may have wanted to start a fund, a scholarship or donate to a charity.
As a result there are five important benefits you can gain from estate planning:
Live a fulfilling life. We work to earn money to provide a comfortable and enjoyable lifestyle for ourselves and our family, and when you have an estate plan in place you can rest assured that you and your family are looked after in the future.
Distribute your assets in the way you choose. No one likes being told what to do, least of all when they have plans for a way of doing things already in their mind. Therefore, estate planning is important so that your assets are distributed to the people you choose, in the way that you choose.
Provide guardianship. If you are unable to look after your children in the event of your death or a serious illness or injury then you want to be able to choose the best people for the job, and as part of estate planning you can name guardians for your children if they are still minors.
Avoid probate. Probate can be a long and expensive process where the title of an asset needs to be transferred, which you can avoid if you have a detailed and up to date estate plan.
Avoid taxes. If you are leaving your assets to your beneficiaries you want to make sure they receive the full value of those assets, so you want to minimise or eliminate the amount of tax paid on your estate.
How to put your Estate Plan in Place
Now you know the benefits and the importance of estate planning for your future and the future of your loved ones, you can use the following steps to set up your estate plan to reflect your wishes:
1 – Choose executors
You can choose anyone to be the executor of your estate, from a friend or family member, to a professional advisor or a trustee company. However, your choice should take into consideration the nature of your assets and who would be best placed and suited to be able to carry out your wishes. You may also need to consider providing some remuneration for the trustee, especially if they are not a beneficiary of any of your other assets.
2 – Provide for your spouse
Think about what your spouse or de facto spouse would need to carry on their life, and how they are likely to live after you die. In nominating assets for your spouse keep in mind that they may remarry and this can significantly affect the rights your children have to their share in the estate. Therefore, balance what you intend to leave for your spouse, with what you want to leave for your children and for future generations of your family.
3 – Provide for your dependents
When nominating assets for your children you need to balance what you are giving them against the risk that they will lose or waste their portion of your estate. Therefore, if you want to leave part of your estate to a child, or a dependent who has trouble managing money, is already in financial difficulty or who has a disability, you can set up a trust in your Will. You may also want to think about setting up a trust for your children if they are in an unstable relationship for example.
4 – Establishing a trust
Even if you don’t feel you need to set up a trust for asset protection purposes, establishing a trust as part of your Will can also offer your beneficiary significant tax benefits. If your assets are held in a family trust they do not form part of your estate for distribution under a Will. In choosing this method of estate planning you need to make sure that the intentions in your Will can still be carried out in relation to the trust assets. You will also need to look at the type of assets you have, and what they involve, for example transferring a house which has a mortgage liability attached. Also remember that when gifting an asset the beneficiary may be required to pay Capital Gains Tax, and their pensions or other entitlements could be affected.
5 – Superannuation
Don’t forget about the assets you have in superannuation as they will not necessarily be distributed according to the terms of your Will. To make sure your superannuation assets are distributed to your dependents according to your wishes, you need to make a binding nomination in favour of your estate, to the trustee of your super fund. Binding nominations also need to be renewed every three years to be effective.
Guest post: Alban has been writting personal finance articles for the last 3 years. When he is not sharing tips and advice, Alban reviews online savings account at Savings Account Finder.