Chapter 1
What is estate planning?

Many people despise wealth, but few know how to give it away.

Francois de La Rochefoucauld

While most of us would prefer not to think about it, we all face a number of inescapable truths:

1. Whether we like it or not, all of us will die.
2. The timing of our death is unknown.
3. We can't take anything with us when we die!

We have a simple choice: do we plan for this inevitable event, or do we choose to ignore it and hope that everything will somehow work out?

Estate planning is the process of planning and recording your wishes for the distribution of your wealth after death. This definition appears straightforward. For this reason, it is often assumed that 'estate planning' refers only to the preparation of a will. In some cases, it is not this simple. There are aspects of estate planning that go beyond the will. For example, how are family trust assets to be dealt with? What happens to superannuation? How are jointly held assets treated?

In understanding estate planning, the term itself is helpful. It describes the two essential aspects:

1. 'Estate'?-?indicates that the process is concerned with a period of time following your death. This aspect is guaranteed: we are all mortal.
2. 'Planning'?-?refers to the need to organise your affairs during your lifetime. This aspect is not inevitable. It requires action.

Why is estate planning important?

Wealth creation and wealth preservation tend to be popular pastimes. Most of us aspire to financial security and do what we can to achieve it. The enormous growth in the financial-planning industry in the last 20 years confirms this. However, the distribution of wealth after death has not held the same fascination. This has changed in the last decade or so. The importance of planning the distribution and succession of wealth is now an essential part of personal and financial planning. There are a number of possible reasons for this:

• Overall wealth has increased. This is due partly to the significant increase in superannuation contributions since the introduction of the superannuation guarantee in 1992. It can also be explained by the real estate boom that has occurred in most states of Australia that has seen the median house price in the capital cities increase significantly.
• Australia's social fabric has changed enormously. The traditional family structure is now no longer the norm. Data from the Australian Bureau of Statistics in June 2016 predicted that the number of couple families without children is projected to become the most common family type in Australia between 2023 and 2029. Statistics have also confirmed that in recent decades trends in divorce and remarriage have contributed to changing numbers of one-parent, step and blended families. As a result, more deliberate planning is required to deal with such diversity.
• The use of alternative investment structures such as trusts, companies and self-managed superannuation funds has increased. The Australian Taxation Office estimates that as at 30 June 2022 there were more than 600?000 self-managed superannuation funds in existence in Australia (an increase of 8% since 2017-18) with more than 1.1 million members.
• Australia's population is ageing. Figures provided by the Australian Bureau of Statistics suggest that 15 per cent of the Australian population is currently aged 65 and over. By 2030 this percentage is predicted to be more than 20 per cent. The number of Australians aged 85 and over is expected to quadruple between 1999 and 2051. The life expectancy of Australians is also increasing. This changing demographic has brought with it novel estate-planning issues that tend to be age specific, such as the consequences of a reverse mortgage and the implications of a move into aged care.

These and other related topics are discussed in part VI.

Features of estate planning

Thorough estate planning has a number of characteristics, outlined as follows.

Estate planning must be tailored

As every person and every family is different, an estate plan needs to be tailored to your specific circumstances. Your estate plan will not be the same as your neighbours'. The view that one plan suits all is a dangerous one. A detailed review of your circumstances will identify unique estate-planning issues that will need to be addressed. Examples of these issues may include:

• family members who require special treatment because of a disability, addiction or other health concern
• antiques, family heirlooms or collectables that need to be dealt with specifically
• business interests
• family circumstances, such as a second marriage or children from different relationships
• potential challenges to your will
• the existence of a self-managed superannuation fund or other trust structure.

Estate planning needs to be flexible

Your estate plan needs to be flexible enough to deal with a change to your circumstances and to the circumstances of your beneficiaries. Wherever possible, you should avoid locking future generations into arrangements that may become restrictive and unworkable. Examples of such arrangements include the creation of life interests, and binding directions requiring the indefinite retention of estate assets.

Case study

Constance leaves a will that directs that her family home is not to be sold until all her children have died. Her intention is to ensure that her children have a home to return to should they find themselves in financial difficulty or experience a relationship breakdown. At her death, none of her children want the house retained and would prefer it to be sold and the proceeds divided. The prospect of maintaining the property for the rest of their lives is not one that appeals to any of them.

Estate planning must be understood by you

It is important that you understand your estate plan, and that it can be understood by others, including your executor and family members who survive you. If you do not understand it, there is a very good chance that others will also have difficulty. Unnecessary complexity and ambiguity may serve to defeat your intentions. Remember, when your will is administered, you will not be present to explain what you intended; your intentions must be clear from the terms of the will. For example, if your will contains a specific gift of personal items such as jewellery or artwork, the description of the relevant item needs to be precise. For a further discussion of personal chattels, see chapter 6.

Estate planning must be reviewed regularly

Your estate plan should be regularly reviewed. Estate planning is not a discipline that relies on the 'set and forget' principle. A five-yearly review at a minimum is recommended, however there may be circumstances that justify more regular reviews.

Following is a list of circumstances that would justify an estate-planning review and/or a meeting with your adviser to determine whether your estate plan requires amendment:

• marriage, separation or divorce
• entering into or ending a de-facto relationship
• having children (including adopted or foster children)
• the death of a proposed beneficiary
• other major events occurring in your family
• major events affecting your assets, including the disposal of an asset that is referred to in your will
• a change in the need to ensure a gift for spendthrift, intellectually disabled or bankrupt beneficiaries is protected under the will
• a proposed beneficiary qualifying for a means-tested social security pension
• a change to the extent to which your beneficiaries will benefit from other sources, such as jointly held assets, superannuation and life-insurance proceeds, and family trust distributions
• changes to the taxation laws
• the death, ageing or ill health of your proposed executor
• the establishment of a family trust or a new business venture
• the transfer of assets to a business or family trust
• the existence of trust income allocated to a beneficiary that has not been paid to or applied for the benefit of the beneficiary that may require adjustment. For a further explanation of this issue, see chapter 6
• the desire to implement a plan for business succession. Business succession agreements are discussed in chapter 18.

Estate planning is the result of collaboration between professional advisers

Where you have existing professional advisers, thorough estate planning relies on the collaboration and cooperation of all of these advisers. The process is illustrated in figure 1.1.

Figure 1.1: the relationship between clients and advisers

Each person shown in figure 1.1 has specific knowledge and skills that are drawn on during the estate-planning process. These are outlined as follows:

• The client understands his or her personal circumstances, beliefs, values and long-term goals and objectives.
• The financial planner has financial and investment expertise and understands the nature of the client's investment portfolio and risk profile.
• The...