09/12/2010

I want to challenge one of the common myths about estate planning - that estate planning is only for wealthy people. 

The myth is so broadly believed that at a recent estate planning seminar presented by a high profile estate planning lawyer, he observed that “clients don’t need estate planning if they don’t have at least $1 million in their estate”. 

I respectfully submitted (we lawyers never argue, we just “respectfully submit” that the other is completely wrong) that, depending on how you define estate planning, not only do you not have to have a large sum of money in your estate but that the amount of your estate is irrelevant.  He was last seen heading back to the office to start building a whole new client base.

There is no generally accepted single definition of estate planning.  It is therefore important to set the context for discussion.

One eminent expert has defined estate planning as “the strategies, processes and actions to preserve your capital … for yourself, your family and successors”.  If we adopt this very broad definition then we could ask: why would such an activity be limited to a particular dollar value of the estate?  Would a person with say $400,000 in their estate want this preservation and protection for their family any less than someone with $800,000 or $10 million? 

Interestingly enough it is the growth of superannuation that has resulted in the need for estate planning by just about every adult in Australia who has worked at any time in the last decade.

Before every worker started accruing 9% of their wages in super most people’s wealth was in their home and perhaps a life insurance policy.  The home was owned jointly with their spouse who was also the beneficiary of the life policy.  Their Will did not really need to deal with either of these assets.  The house automatically transferred to the spouse and the life insurer paid the spouse the policy proceeds. 

After the death of one of them (most often the husband) the surviving spouse would prepare a new Will to pass the property to the children.  Wills were short and dealt with only a small range of issues. It was a simpler time (he said nostalgically).
 
The advent of compulsory superannuation has meant that every worker in Australia now has a significant asset that sits outside the reach of their Will.  Their super benefits are held in a trust controlled by a third party trustee (at least in theory in the case of self-managed funds).  As such those benefits do not form part of a person’s estate and cannot be regulated by their Will.

So now the Will is not enough.  For a person to properly “preserve their capital … for their family and successors” they will need a death benefit nomination to the trustee of their super fund.  In that one requirement we have estate planning.  Not simply Will preparation but something more – the planning for how their assets will be dealt with: estate planning.

And it doesn’t stop there.

Medical science has made some significant advances in keeping people alive longer.  This has brought with it additional challenges that require planning.

In that simpler time we referred to earlier a power of attorney ended when the person granting it became mentally incapable.  Powers of attorney were used mainly by those travelling overseas in a time when it took most people six weeks to travel to Britain.

The world is much smaller today but with more and more people suffering from mental incapacity, either through age-related dementia or while suffering a condition that in an earlier time they would not have survived, the power of attorney has again become important. 

Now we can create a power that continues to have effect despite the grantor’s mental incapacity – an enduring power of attorney.  So there’s another part of the estate plan that needs to be implemented for everyone – not just the wealthy.

And while we’re talking about medical science, most people do not want their loved ones to go through the anguish and cost of keeping them alive artificially.  They want a document that makes clear their wish for such machine-dependent vegetative life to be brought to an end.  Another part of everyone’s estate planning.

In some States there is also the capacity for a person to designate who their guardian should be if they become unable to look after themselves.  In most States the power of attorney is limited to simply dealing with the grantor’s property, not their person, so a separate appointment is necessary of someone to have the right to decide where a person will live and what sort of treatment they should have if they can’t decide for themselves.  Such a guardianship document is particularly necessary if they have no capable next-of-kin.  Another piece of the estate planning puzzle.

These are the five documents that almost every adult in Australia needs – five documents that make up their estate planning.  Are any of these dependent on how much money the person has?  Clearly not.  Would only wealthy people want this level of protection?  Nonsense.

And we haven’t even begun to discuss the additional estate planning needs of the over 2 million people with a small business in Australia, many of whom will likely have a family trust to deal with which also sits outside the power of their Will.

Often the main reason people think estate planning is only for the wealthy is because they believe it is expensive.  It is not.  It is fantastic value for money.  With most people having a house and substantial super it is not difficult to amass an estate worth $500,000.  To pay only a fraction of a percent of that amount to protect it properly and ensure it is used for the benefit of those selected by the testator is great value.

So if estate planning is for everyone – how’s your estate plan coming along?