After building up a significant amount of savings and investments, you have a legacy of financial success to pass on to your children. If that legacy is passed on wisely, your children can stand on your shoulders and use your savings to gain even greater financial freedom. If they continue the pattern, your legacy will continue benefiting your family for generations.
Unfortunately, many estates don’t last beyond the next generation. In fact, 70% of intergenerational wealth transfers fail because there’s no clear succession planning in place.
Whether it’s due to unforeseen events, family conflict, or poor financial decisions, there are a million and one ways an estate plan can go wrong.
And it doesn’t all centre on your heirs: there are things you can and should include in your estate plan to protect your own finances and make your final years easier.
So how do you protect your estate and ensure a financial legacy for your descendants? Here are 7 mistakes to avoid in your estate plan.
1. Not preparing for your own mental incapacity
Alan is 70 years old and was just diagnosed with dementia. Now, he realises he may become mentally incapacitated at some point in the future and be unable to make sound decisions. His estate plan includes a designated executor in the event of his death, but it doesn’t include any contingency for his becoming mentally incapacitated.
Alan talks to his lawyer and changes the estate plan to give his executor power of attorney, which means that person can act on Alan’s behalf if Alan himself is deemed mentally incompetent.
Power of attorney is granted by the person who owns the estate, and grants someone the power to act on the grantor’s behalf. Ideally, you want to decide who will have power of attorney and put this in your estate plan while you’re still competent. This way, you can decide who you want it to be, state the exact circumstances under which they’ll receive this power, and dictate how and for what purposes they can use the funds in your estate.
Another thing Alan could do, especially if he has a large number of assets, is place those assets in a trust and appoint a contingent trustee. This person, who could be Alan’s spouse, child, friend or lawyer, can step in under certain circumstances and decide how the assets in the trust will be used. For example, Alan could authorise his trustee to use the money in the trust for his medical care, if needed.
2. Not including medical directives and guardianship
Jane, a 65-year-old woman with lung disease, is admitted to the hospital in a critical condition. Shortly after arriving, she slips into a coma and is put on life support. When her children arrive, the doctor explains that there’s nothing he can do to save her, and the only thing keeping her alive is the medical equipment.
Her daughter says Jane wouldn’t want to be kept on life support, but her son says they should keep her alive as long as they can. Unfortunately, Jane didn’t leave any medical directives in her Will.
Medical directives, also known as your “living will,” dictate the type of medical care you want to receive in critical situations. This is where you state whether you want to receive life support, tube feeding, and other care that may prolong your life without curing you, such as the use of ventilators and heart-lung machines.
Another thing Jane could have done is appoint an enduring guardian. While it’s best to include a medical directive in your Will so no one has to make that decision for you, a guardian can make decisions about where you’ll live and what medical care you’ll receive, in the event that you’re unable to make these decisions for yourself.
3. Not clarifying your intentions for non-estate assets
Pat (26) and Ellen (27) have been dating for a year, and decide to move in together without getting married. After 6 months together, they get into a car accident and Ellen dies.
At the time of her death, she has a car, a bank account with $15,000 and personal effects equaling about $5,000. She also has a super fund with a payable death benefit of $350,000.
There’s just one problem. Ellen’s estate plan names her parents as her beneficiaries, but the super isn’t part of her estate. As such, it’s not clear if it should go to her parents or Pat.
Non-estate assets like a super fund can be tricky. That’s why it’s best to include a statement in your estate plan detailing who should receive these assets. Non-estate assets include:
- Assets in your super fund
- Assets jointly owned by you and someone else
- Assets held in a discretionary family trust or private company
- Reversionary pensions or annuities
- Insurance policies where the benefits aren’t paid to your estate
4. Not considering potential family conflict
Tom and Jenny were married for 10 years and had two sons together. Then they separated. Because court fees are expensive and they didn’t think they would remarry, they made a mutual decision to not get divorced.
A few years later, Tom moved in with Kayla and they had a daughter together. After living with Kayla for 8 years, Tom gets into an accident and is put on life support.
Unfortunately, Tom made a Will shortly after marrying Justine, in which he appointed her as his estate executor and gave her power of attorney in the event of his mental incapacitation. Because of this, while Tom is on life support, Jenny manages his finances. When he dies, the entire estate goes to Jenny and her two sons.
Kayla challenges this by making a family provision claim. Now, the estate has to go through a long court process which will subject it to costly litigation fees and delay the beneficiaries—whoever they turn out to be—from receiving their funds.
Unfortunately, things like this happen all too often. Tom probably thought he had plenty of time to revise his will, or maybe it didn’t even cross his mind that he needed to. Whatever the case, reviewing your Will every few years—and talking to your family about it—can help you avoid these types of situations.
Learn more about keeping your Will up-to-date.
5. Not minimising tax leakages
Emma is a successful businesswoman who, upon her death, leaves an estate worth $2.5 million to her daughter Taylor, who has three children.
If Emma had left the entire estate to her daughter as an outright gift, Taylor would have had to pay a hefty amount in taxes, which would have significantly reduced how much she received.
But being a shrewd businesswoman, Emma put the money into a discretionary family trust and named Taylor as the beneficiary. Now, Taylor can split the inheritance among her three children and save about $54,600 in taxes.
As Emma knew, taxes can take a big chunk out of your estate. Creating a discretionary family trust and naming multiple family members (or one family member who can distribute the money among their children) ensures that the income from this type of trust can be split among multiple family members, thus minimising the tax burden for each of them.
6. Not protecting vulnerable beneficiaries
Sam is a widower with two children: Eva, who is currently working full-time and has healthy financial habits; and Zane, who suffers from mental health issues and has trouble managing his finances.
In his estate plan, Sam leaves half his money to Eva. He puts the other half into a testamentary trust—which means the assets stay within the trust and are administered by a trustee appointed by Sam before his death—and names Zane as the trust’s beneficiary. Now, the trustee can allocate the funds to Zane as needed, without the risk of Zane losing his entire inheritance.
7. Not protecting your assets from creditors
Sierra is a business owner-operator who inherits $50,000 from her parents upon their deaths. She receives the money as an outright gift, meaning it isn’t placed in a trust but becomes part of her personal assets.
Then, she gets sued by a customer and loses. Costly litigation fees suck up a large chunk of the $50,000, and the court orders her to pay the rest to the plaintiff.
Under certain circumstances—such as lawsuits, bankruptcy, or divorce—creditors can seize or garnish your assets, and unfortunately, this applies to money and/or other types of assets inherited through an estate.
To avoid this scenario, Sierra’s parents could have put their money into a discretionary family trust. Assets held in this type of trust cannot be taken by creditors because they’re not held by the beneficiary, but by the trust. At the same time, they allow you to distribute the income in the trust as you choose among one or more beneficiaries. It’s a flexible solution that protects your assets from creditors.
