We’ve all heard the terms “estate plan”, “will” and “trust”, however not everyone understands what they mean. Estate planning is the process of putting in place structures to ensure that the wealth you have accumulated over your lifetime is transferred to your beneficiaries in a tax-effective manner and in accordance with your wishes.
A will is an essential part of your estate plan. Your will is a legal document that outlines how your assets and possessions are distributed upon your death. It can cover a range of areas including making provisions for any children, assets that do not form part of your estate, as well as any charitable wishes you may have.
Your will should also nominate the executor of the estate. The executor is the individual who will be responsible for carrying out your wishes as outlined in your will.
Anyone over the age of 18 can be appointed and in most cases, they tend to be one of the main beneficiaries. The person appointed should be someone you trust, who will act responsibly, and who agrees to be your executor.
If someone has named you as the sole executor, it’s highly recommended to consult a solicitor due to obligations and responsibilities associated with the role. Administering an estate isn’t always straightforward, particularly if there are multiple beneficiaries. And as the executor, you can be held liable if you get it wrong.
Responsibilities of an executor may include:
- Applying for the death certificate from the Registry of Births, Deaths and Marriages
- Managing the funeral arrangements (if the will stipulates this, or if there is no next of kin)
- Locating and identifying the assets of the deceased
- Contacting all beneficiaries
What is a trust?
A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in a number of ways and can outline precisely how and when the estate’s assets will pass to the beneficiaries.
A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be able to manage money well. Instead of the assets passing to an individual beneficiary in his or her own name, they would pass to a legal entity controlled by, or on behalf of, the intended beneficiary.
As the assets are held by the trust on behalf of the beneficiaries, they are not treated as an asset of a beneficiary in the event of them being involved in any legal proceedings, such as divorce or bankruptcy. In addition, a trust can distribute income to certain beneficiaries, but the beneficiary doesn’t have any direct control over the assets held within the trust.
Powers of Attorney
A power of attorney is a legal document that allows another person to make decisions on your behalf. The person making a power of attorney is called the ‘principal’ and the person appointed by the principal is the ‘attorney’. There are two types of powers of attorney:
General power of attorney
A general power of attorney is where you appoint someone to look after your affairs for a specific period of time. With a general power of attorney, your appointed person can make financial or legal decisions on your behalf in your absence (i.e. if you are overseas for extended period of time).The general power of attorney can then make financial decisions on your behalf, such as paying bills or selling your house. It’s important to note that if you appoint a general power of attorney and you become incapacitated and are no longer able to make your own decisions, the general power of attorney ceases.
Enduring power of attorney
An enduring power of attorney is where you appoint someone to make financial or legal decisions on your behalf if, in the future, you lose the capacity to make decisions yourself. Enduring powers of attorney are useful for estate planning - if you become incapacitated due to illness or injury, or develop dementia, for example. Your enduring power of attorney can then legally manage all of your financial affairs.
How do you get started?
Estate planning is a complex area that requires careful consideration and assistance from qualified professionals such as an accountant, solicitor and financial adviser.
A well-structured estate plan will ensure your wishes are carried out once you are gone, and help protect the financial wellbeing of your dependants.
To find out more, contact your financial adviser.
Source: Capstone Financial Planning.