Family wealth rarely survives past the second generation into the third generation. A combination of bad financial decisions, bad luck, family rifts, court battles and even fraud means that most will squander their inheritance and the third generation will get little to nothing of the wealth painstakingly created by the first generation.
An estimated 70% of wealthy families will lose their wealth by the second generation while 90% will lose it all by the third generation. Kids in wealthy families often appear “ham-handed” when it comes to wealth creation, wealth preservation and wealth management. They lack the methodical grace and drive that drove their parents or grandparents to work so hard and be so disciplined in their financial affairs.
But even most critically, families may lose it all if they leave it all to kids to decide the future direction of the wealth. Most wealth is wiped off due to lack of or incomplete estate planning on the part of the founders or the current custodians of wealth.
What is estate planning?
At its most basic, estate planning simply refers to the process of putting your affairs in order. During estate planning, you will work out how you are planning to divide and distribute your possessions and financial assets after you are gone. Estate planning can also define how you want your financial affairs, lifestyle and health to be managed in the event of a serious illness or incapacitation.
Putting an estate plan in place ensures that your assets are managed and distributed according to your wishes and in the most tax-effective way. Most people assume that an estate plan merely constitutes writing a will. However, this is just the first and most basic of steps. There are various other aspects that you have to keep in mind when it comes to estate planning.
There are two main aims of estate planning:-
- To eliminate or minimize the risk of family rifts or squabbles on the distribution of your estate.
- To look after your next of kin and ensure they do not suffer financially after you are gone.
But estate planning is more than just about passing on wealth and minimizing conflicts. It is also about tax planning with an aim at minimizing the tax burden on your estate. Professional estate planning is also done to ensure that you are able to make the most use of and enjoy your assets when you are still alive while also looking after your beneficiaries.
In the past, estate planning was only used in case of a death or where there were estate duties. While this is no longer the case, you will still grapple with some taxes such as capital gains tax that will make it prudent to pursue a tax-advantageous estate planning course. A good estate plan should have the following:-
- It must be administratively simple to operate and execute.
- It shouldn’t be too expensive to maintain
- It should be reviewed on a regularly basis
- It should create a balance between the lifetime enjoyment of your estate or assets and the preservation of wealth for the beneficiaries after your death
Steps to follow in estate planning
Strategic estate planning is highly important given the increasing complexity of the family unit. In some cases, family relationships are often more business-like than familial with a steep focus on the money and an estate plan imposes some order in managing all the varied interests, egos and needs. Here are simple steps to follow in estate planning:-
- Start by organizing all your finances and assets during your lifetime.
- Perform your estate planning at a point in time when you still healthy and have all your faculties intact. This is the time when you have the capacity to make all the strategic decisions relating to your estate by yourself.
- The assets in your estate should be distributed to the people to whom you are responsible.
- Employ tax minimization strategies that will help reduce the taxes that are payable on your estate.
- Structure out your estate such that the assets are distributed in a way that you would want them to be distributed. The estate plan should reflect your will.
Estate Planning Based on Values
An estate plan is you managing your financial affairs from beyond the grave. In its formulation, you need to pause and think about your personal values. What things do you cherish in your life and how can you ensure that your legacy lives beyond your lifetime? What values do you wish to pass on when you can no longer make decisions? Estate planning becomes a lot easier and clearer when it is structured around your values. If you don’t inject some of your values and coherence into the estate plan, it is most likely going to be contested and decided by a judge who may not necessarily base their judgment on your wishes.
Things to Keep in Mind When Formulating Your Estate Plan
There are various factors that you need to keep in mind when building a framework for establishing your estate plan. These include the following:-
- Accountability: Think about whom you will be accountable to when drawing up your estate plan.
- Who can you trust to take care of your interests whether in life (even upon incapacitation) and upon your death?
- How will your beneficiaries handle the inheritance passed onto them?
- Which promises are you making in the estate plan that are likely to survive your incapacity or even death?
- What other people will have the rights to attach to the properties that you own?
- How do you want your family to operate upon your death, disability or incapacitation?
- How will you extract the value of the equity that you have invested in your estate?
- What are some of the financial and life risks that you are facing and how can you minimize these risks?
- Do you worry about your beneficiaries being unable to manage your estate or taking risks with your family assets?
Estate Planning via a Trust
One of the most failsafe ways of surmounting the risks associated with passing on your estate and assets to beneficiaries who may not be so ham-handed is by using a trust instead of entrusting all your assets in the hands of one person.
Trusts are more popular because they offer a higher standard of prudence and competence when it comes to wealth management. There is also the longevity factor. Trusts are constituted by accountants and lawyers to serve various purposes. The most common form of trust in Australia are the discretionary trusts which make it possible for you to transfer your assets from your name into the trust entity while still retaining control of the assets.
In estate planning, you can include a trust as part of your will. This is referred to as a testamentary trust and it offers several advantages:-
- With a testamentary trust, you can still maintain your social security entitlements
- It offers income tax and capital gains tax advantages
- The testamentary trust ensures that the assets pass to kids in case the surviving spouse remarries.
- It helps provide for kids that have a mental illness or intellectual disability.
- It will protect the assets in the event the trust beneficiary becomes bankrupt or is divorced.
However, a testamentary trust may not be ideal in all cases. It is advisable to talk to an accountant Melbourne expert or family lawyer to counsel you on whether a testamentary trust will be the best option for you given your circumstances and how you plan to leave your assets or estate.
Whether you will need to do estate planning will ultimately depend on your choices and financial situation. In case you have a reasonable amount of assets as well as money in your superannuation, you should seriously consider estate planning. A professional lawyer can also guide you on how you can maximize on the assets that you will pass on to your beneficiaries after your death and give you a breakdown of the costs and benefits contained in every estate plan. Estate planning will be useful in various kinds of scenarios such as the following:-
- You are planning to pass on a family business to your heirs or a trust.
- You want to gift a charity
- Where you have a super payout
- You have life insurance
- In case you are looking for some flexibility in how you distribute your assets
- In case you are grappling with family debts
- Where you have incurred capital losses
You can work with a host of lawyers and financial planners to help you with your estate planning needs. There are also trustee companies and financial advisers that can offer good counsel on your estate plan.