Most financial advisers are familiar with the basics of estate planning - the process of enabling people to control and distribute their wealth in the way they wish after their death.
Most advisers are equally aware - usually first hand - of the problems that can arise when people do not have a properly prepared or current will, or even no will at all.
Add to this the generally-accepted perception that challenges to wills are on the rise, and the fact people's affairs are usually more complicated than they used to be, and you start to get an inkling of just how complex estate planning can be.
"When people say 'my affairs are basic', it's not often the case," MBA Partnership director Michael Beddoes says.
"The reality is for your average mum and dad it's quite normal to have an estate worth $1 million. That is not 'simple affairs', as many people like to believe."
Townsend's Business and Corporate Lawyers principal Peter Townsend says that although 95 per cent of his clients say they don't want their estates to be too complex, the days of simple wills are long gone.
He explains that most people need to address things such as superannuation, an enduring power of attorney, guardianship and a living will (dying and death instructions).
"After 35 years of practising law, I'd have to say will drafting is some of the hardest drafting there is. Ambiguity is a complete anathema to wills because you can't resolve anything that's unclear - the person who ordered the will is no longer there to consult. That's why will drafting has become more and more of a speciality - these days, you get what you pay for, and chances are the more money you have, the more you need to spend on your will," Townsend says.
A rise in challenges to wills
Beddoes and Townsend both agree claims against estates are on the rise, pointing to the increasing complexity of family units - such as blended families and multiple marriages - as a contributing factor.
Despite this, will makers - known in legal circles as 'testators' - should seek legal advice before omitting a family member or dependant from their will.
"Certainly when you make the will you should have in mind the potential for claims," Townsend says.
"One of the questions we ask is: 'Has anyone been financially dependent on you at any time?' If yes, they may have a claim on the estate."
It's important the adviser is told the full extent of family and financial considerations so they can provide the most relevant advice.
In some situations it may also be appropriate to discuss the will with family members. At a basic level, in order to avoid challenges to a will it's important to ensure the will is properly signed and witnessed.
It's crucial to avoid having beneficiaries witness the will.
"While I would certainly say that claims against estates are increasing, making a challenge-proof will is possible in some circumstances - but the more complex the will, the less likely it can be guaranteed to be 'watertight'," Townsend says.
Common probate pitfalls
According to Equity Trustees estates senior manager Georgina Borg, it is widely accepted that more than 40 per cent of Australians don't have a will.
Many who do have wills neglect to regularly review them to ensure they reflect current circumstances. Borg says one of the most common mistakes when it comes to wills is unclear intentions - pointing out that do-it-yourself will kits are often in this category.
"If the intention of the will maker is not clear, this can lead to challenges to the will or even proceedings to have the terms of the will decided by the court," she says.
"The result can sometimes cost the estate far more to 'fix' than having a will prepared by a professional in the first instance."
Another common trap is failing to consider debt. Borg says in most instances debts of the estate are payable before any distribution of the estate can take place, so it's important to consider what debts may be associated with what assets and how the testator intends to deal with the debt and the distribution.
Finding the right person to serve as an executor can be difficult. Family members or trusted friends may not be financially aware or responsible; if there is family conflict they may not take an objective view; or if they are of a similar age to the testator they may not be around for the lifetime of the trust.
Beddoes points out another common probate issue is that a will can only cover assets within the definition of the estate - assets held jointly may go to the joint owner rather than the beneficiaries nominated in the will, and assets that might not be covered by a will at all could include those within or owned by a trust, or super.
Superannuation
Self-Managed Super Fund Professionals' Association of Australia national technical director Peter Burgess sees a lot of elaborate wills that are ineffective because superannuation assets have not been properly taken into account.
"When it comes to your superannuation monies, you need to inform your super provider of your wishes," Burgess explains.
"This can be done through a binding or non-binding death benefit nomination. One option in a SMSF is to hard wire your nomination into the trust deed, which can then be binding on the trustees and doesn't need to be renewed every three years like a binding nomination in a larger fund. This is also known to some as an SMSF will."
He points out there is a downside to binding nominations - for example, if circumstances have changed since the binding nomination was made, it gives the trustees no discretion over the way the nomination is carried out, which they would have if it was non-binding.
He cautions people to ensure their binding nomination is up to date and to check that their super fund accepts binding nominations in the first place.
"SMSFs can be a powerful estate planning tool for dispersing your assets. You can determine which assets go where; they can be quite specific. You don't always have the same flexibility with the bigger funds," he says.
Most trust deeds allow a surviving spouse to be paid either a lump sum or a pension. Generally, adult children can only receive a lump sum, which attracts a 16.5 per cent tax rate on the taxable component.
"When it comes to estate planning, there's a balancing act between tax versus control. A SMSF pension is usually more tax effective than dispersing the funds via the estate, but it can be more difficult to restrict access to the capital in a SMSF. A testamentary trust, which is specified in the will, can give more control over who the money goes to and when," Burgess says.
Testamentary trusts
Testamentary trusts, which do not become active until the testator's death, are established under a will and set out rules and conditions that must be met in order to distribute assets.
They are often used in situations for beneficiaries aged under 18, or to give a second spouse rights to reside in the family home until their death.
Another common use is by families that wish to try and ensure their assets end up with their bloodline, such as their grandchildren, rather than their children's spouse or the spouse's children - or as a way to deal with 'problem' children.
"An example is a family of four children whose parents left them all an equal share through a testamentary trust, but one child who had a drug and alcohol problem, so her share was under the control of her siblings," Beddoes says.
"Her siblings as trustees could only act in accordance with the conditions set out in the trust, so the 'problem' daughter's share could only be given to her under conditions established by the parents."
Testamentary trusts are not always about control. Borg says other advantages of testamentary trusts include tax-advantaged distribution of income to underage beneficiaries, flexibility in distributing income and asset protection for beneficiaries.
A numbers game
Tax implications of particular bequests are a fundamental consideration when it comes to estate planning. Argyle Lawyers director Peter Bobbin says one good way to minimise tax payments around an estate is to create a spreadsheet that explores the various options available to the client.
"In truth, this is just a numbers game, modelling their different personal estate planning wishes and observing the tax outcomes. Such an approach will usually reveal different outcomes and strategies within the client's personal estate planning wishes. For example, what numbers (tax bill) will arise if I do something pre-death and what numbers will arise if I do something post-death?" Bobbin says.
"Rules of thumb are fine and fun. Application of the rules to the actual situation is what real advice is about. The latter distinguishes an academic from a professional adviser; it sets the basis for the charging of fees and demonstrates the value of a financial planner. Spreadsheet tax analysis is client-specific and valuable to that client."
At the same time, he warns against letting tax issues dominate when it comes to estate planning. He says all too often, for example, clients who say they wish to leave a property to a charitable trust are told not to because they'll create a tax liability.
"So what? The professional adviser helps the client to make an informed decision (which may be affected by the tax). The unprofessional adviser lets tax get in the way of their decision to help a client. If the client objective fails, disappointment results. Generally I advise client-public: don't let tax get in the way of a good decision, make the good decision and then tax test it to see if the decision can be made better. Clients appreciate this advice," he says.
Gift giving before death
Given no-one is bestowed with advance knowledge of the exact hour of their death, giving gifts before death can be tricky.
If it's given in advance, it can never be retrieved. "For example, in the case your son now owns your house, what if he develops a gambling problem and loses the asset?" Beddoes asks.
"There is only one circumstance I think gifting is a good idea: if you are very concerned your will might be contested. This would really only apply to somebody who has more money than they need to live on, and are quite elderly or sick."
Another bogeyman for gifting, Townsend says, is the New South Wales-only family provisions principle of the 'notional estate', which extends the testator's personal estate beyond the assets held in their name for as many as three years before their death.
This means an asset gifted to a charity within three years of the testator's death could potentially be taken into account in calculating a claimant's entitlement if there is a challenge to the will.
Borg says that where there are sufficient funds, a charitable-foundation approach in the name of a loved one - which means the gift lasts forever - is a good strategy.
"There may be benefits in setting up a charitable fund or private ancillary fund during one's lifetime as it can give the donor an additional interest, they can involve the family, and there can be tax advantages," she says.
Opportunities for financial planners
Bobbin perceives estate planning to be an area of expertise in which planners can distinguish themselves from others and support a fee-for-service approach.
However, he cautions that if you don't have the knowledge, refer the work to somebody who does, because estate planning is getting far too intricate to bumble through. "Estate planning is a specialist professional skill," he says.
"A planner can be a generalist and know the importance of estate planning and be a legal principle-rules-of-thumb person. This is quite okay and is valuable. It is a service. But if this is the service, don't tell the client what to do, just what some of the issues are and if the issues appear - from the client perspective - to be complex, refer to a specialist planner, or be the specialist planner who can do the outcome analysis."
Townsend, who holds a similar view, suggests individual financial planners who decide they want to specialise in estate planning study it in detail. Because estate planning often revolves around super, financial planners who specialise in this area are in an especially good position to add estate planning to their repertoire.
"Financial planners are very useful as an intermediary and at helping to translate knowledge about the assets, particularly with more complex estates," Townsend says.
"If they're keen to be involved, they can help explain the bigger picture to a lawyer, with a view to better managing the assets and pointing out any issues the lawyer might have overlooked."
The key for financial advisers, Beddoes says, is to ensure there's enough money to carry out the intentions of the will.
"The problem with wills by nature is that we all think we're 10-foot tall and bulletproof," Beddoes says.
"We think 'a will is something I'll do one day'. Of all the horror stories you hear, in nearly every circumstance they could have been easily avoided." «
When the Katz is away, the mice will play
One of the most crucial lessons of estate planning in recent years came in the form of the Katz v Grossman case in 2005.
"Most clients are shocked when they hear the details of this case," Powers Superannuation Services director Charles Page says.
"It's not artificial, it's not from a textbook; it's a real-life case from which they can draw parallels to their own life."
Ervin and Evelin Katz were individual trustees of their self-managed superannuation fund. When Evelin died in 1998, Ervin appointed their daughter, Linda Grossman, as an additional trustee of the fund. When Ervin died in 2003, Linda appointed her husband, Peter, as a trustee.
Ervin had made a non-binding nomination of beneficiary in which he indicated he wanted his superannuation benefit to be divided equally between Linda and her brother, Daniel. Linda and Peter refused to follow Ervin's non-binding nomination and decided to pay the whole benefit - around $1 million - to Linda.
Daniel challenged the appointment of Linda and Peter as trustees of the fund, but the court held both Linda and Peter were validly appointed as trustees.
"It is fundamentally clear from this case to get your estate planning in place and to control your superannuation fund, which has the power to pay death benefits; that your will gives the executors the ability to reduce beneficiary entitlements from the estate if a superannuation benefit has been received; and ensure trustee changes are fully documented and retained," Page says.
