Guide to Estate Planning

Welcome to our e-book on estate planning.

Broadly speaking, estate planning is the process of arranging for the management and transfer of your assets in anticipation of your death or incapacitation. It’s really about ensuring your wealth and your wishes are handled exactly as you'd want. While most people think of it as just preparing a Will, a truly effective estate plan is much more comprehensive.

A Will is certainly a cornerstone document, but modern estate planning also looks at what happens if you're unable to make decisions for yourself. This involves considering documents like Powers of Attorney. Furthermore, in our increasingly digital world, it also means planning for your digital footprint – everything from social media profiles to cryptocurrency. 🪙

Beyond that, a complete plan considers other significant assets like your superannuation benefits, family businesses, investments held in structures like family trusts, and property you own as a joint tenant. Each of these is governed by different rules and won't necessarily be covered by your Will.

This e-book will walk you through all the major areas of estate planning. We hope you find it helpful, and as ever, please feel free to share a link to this e-book with anyone you think would benefit from having a good read!

A Will is a legal document that outlines your wishes for what happens to your property after you pass away. It is signed by you, the 'testator' or 'Will maker'. For most people, the Will is the most important document in their estate plan. However, this isn't always the case. If you have structured your affairs smartly for asset protection, you may find that you personally own very few assets. The bulk of your wealth might be held in structures like trusts or super funds.

Only assets that you own personally are controlled by your Will. Assets held in superannuation funds or family trusts are not part of your personal estate and are not directed by your Will. These must be considered separately as part of your overall estate plan.

Testamentary capacity

To make a valid Will, a person must have “testamentary capacity”. If a Will is made by someone lacking this capacity, it can be declared invalid. Generally, testamentary capacity means the Will maker is over 18, of sound mind, and understands the nature and effect of creating a Will. This isn't usually an issue for most, but with an ageing population and a greater prevalence of conditions affecting cognitive function, like dementia, it's becoming a more frequent concern.

If a Will is made by an older person, or someone with a known health condition, there's a higher chance it could be challenged later on the grounds of a lack of capacity. To guard against this, it is wise to take steps to prove capacity at the time the Will is signed. This might include obtaining a formal assessment from a doctor, particularly one who specialises in aged care, confirming the Will maker's mental state and their understanding of the document they are signing.

Formal requirements to create a valid Will

For a Will to be valid, it must be in writing, and properly signed and witnessed. Traditionally, this means the Will maker must sign the document in the physical presence of two independent adult witnesses, who then also sign the Will. These witnesses cannot be beneficiaries in the Will, nor can their spouses, as any gift to a witness (or their spouse) would be void. This is why relatives are typically not suitable witnesses. The witnesses are there to confirm that they saw the Will maker sign the document; they don't need to read the contents of the Will itself.

In a significant modern development, many states now have permanent provisions allowing for Wills to be witnessed remotely using audio-visual technology (like a video call). These rules were widely introduced during the COVID-19 pandemic and have since been made lasting. While this provides flexibility, the traditional method of signing in person remains the gold standard for minimising the risk of a future challenge.

What happens if a Will is not valid?

If a Will is found to be invalid for any reason, the law will first look for the most recent, valid Will made previously, and that will be used to administer the estate.

If no valid Will exists, the person is said to have died 'intestate'. The estate is then distributed according to a statutory formula set out in state law. These rules typically direct the estate to the deceased's spouse, children, and other close relatives. Sometimes, a Will might be valid but fails to deal with all of the person's assets. This is known as a 'partial intestacy', and the statutory formula applies only to the assets not covered by the Will.

The possibility of a Will being invalid can also give a disgruntled person leverage to challenge it, as an executor might prefer to settle a claim rather than risk having the entire Will thrown out in court.

Clearly, none of these outcomes reflect the wishes of the Will maker. It is therefore vital to ensure your Will is properly prepared and validly executed.

Executing a new Will revokes the old one

When you sign a new Will, it automatically revokes (or cancels) any previous Wills you have made. While most Wills include a specific clause like, “I hereby revoke all former Wills and testamentary dispositions,” this isn't strictly necessary, as the act of making the new one is enough.

Even so, it is good practice to physically destroy any old Wills and all copies to avoid any confusion after your death.

Some basic rules for executing a Will

• The Will maker should read the final document carefully to ensure it perfectly reflects their wishes.
• The Will maker must sign and date the Will in the presence of two adult witnesses.
• The witnesses must not be beneficiaries or the spouse of a beneficiary.
• The witnesses should then sign each page and print their full name, address, and occupation on the final page.
• Everyone should use their normal signature and, ideally, sign with the same pen.
• Do not make any handwritten changes to the final document. If a last-minute alteration is needed, it's best to have the solicitor prepare a fresh version.
• The original Will should be kept in a safe place, unbound and unmarked. It's also helpful to let your executor know where it is.
• Consider preparing a separate list of digital assets (like online accounts, passwords, and digital photos) and instructions for your executor on how to manage them.

Simple Wills for couples

A very common type of Will for a couple is one where each partner leaves their entire estate to the other. If their partner does not survive them, the estate then passes to their children in equal shares.

For those with straightforward family situations and finances, a 'simple Will' like this is often a sensible and cost-effective approach. Assuming each partner appoints the other as their executor, the main questions to resolve are:

1. If my partner doesn't survive me, who should be the 'reserve' executor to manage my estate?
2. If we both pass away, who should be the guardian of our children under 18?
3. If neither our spouse nor our children survive us, who should inherit our estate?

The answers to these questions are deeply personal.

Reserve executor

The 'reserve' executor should be someone you trust implicitly. It is often wise to appoint two or more people to act jointly, such as a trusted sibling and a good friend. This provides a valuable check and balance. If your children are young, the role of executor also becomes that of a trustee, managing their inheritance until they reach a certain age. In this case, choosing someone with financial sense is a good idea.

Crucially, the guardian and the trustee (executor) should not be the same person. This avoids a potential conflict of interest where the person looking after the children also has sole control over their money. Separating these roles protects the children's inheritance.

Who should be the guardian?

We often suggest that the most natural guardians are the children's aunts and uncles. A common approach is to appoint the siblings from both sides of the family to act jointly as guardians. This allows the family members who are best placed at the time to decide amongst themselves who will take on the day-to-day care of the children. It avoids the problem of nominating one specific person who, by the time they are needed, may be living overseas or be otherwise unable to take on the role.

Remember, the simultaneous death of both parents is a very rare event. In most cases, there is time to update a Will if circumstances change. For the vast majority of families, appointing the siblings of both parents is a robust and sensible strategy.

Who should benefit if no spouse or child survives?

This is what's known as the 'ultimate beneficiary' clause, and it deals with a highly unlikely scenario. You need to decide who would inherit your estate if your entire immediate family were to pass away. Common choices include parents, siblings, nieces and nephews, or a favourite charity. What's important is to have a plan in place. It's better to have a good Will that covers this remote possibility than to have no Will at all because you are undecided on this one point. You can always update it later.

What assets are controlled by a Will?

A Will only deals with assets you own in your personal name. It's critical to understand what this does and does not include.

• Assets owned as 'Joint Tenants': These are not controlled by your Will. The family home is often owned this way by couples. When one joint tenant dies, their share automatically passes to the surviving joint tenant(s), regardless of what the Will says. This is known as the 'right of survivorship'.
• Assets owned as 'Tenants in Common': Your share in an asset owned this way is controlled by your Will. When you die, your portion passes to your beneficiaries according to your Will.
• Assets in a Family Trust: These are owned by the trust, not by you personally, so they cannot be gifted in your Will. Your estate plan needs to address who will take control of the trust.
• Assets in a Superannuation Fund: Super is also held in a trust structure and is not controlled by your Will. We discuss this in detail in a later chapter.

This shows that effective estate planning must look beyond the Will and consider how all your assets are owned.

Who should be the executor?

Choosing your executor is one of the most important decisions you will make. This person (or persons) is responsible for carrying out your wishes, paying your debts, and distributing your assets. Here are some key qualities to look for:

What happens if you die without a Will?

If a person dies without a valid Will, they are said to have died intestate. Each state has laws that dictate how the assets will be divided, essentially following a statutory family tree.

The urban myth that 'the government gets everything' is almost always untrue. The state only inherits if there are absolutely no living relatives, no matter how distant.

The rules vary between states, but as an example, under the Succession Act 2006 (NSW), the distribution is generally as follows:

• If you have a spouse, but no children: Your spouse inherits the entire estate. A 'spouse' includes a de facto partner.
• If you have a spouse and children of that relationship: Your spouse still inherits the entire estate.
• If you have a spouse and children from a previous relationship: This is more complex. Your spouse is entitled to your personal effects, a statutory legacy (a set amount, which is indexed regularly and is currently over $490,000), and half of whatever remains. Your children from the previous relationship share the other half of the remainder.
• If you have children, but no spouse: Your children share the estate equally. If a child has already passed away, their own children (your grandchildren) inherit their parent's share.
• If you have no spouse or children: The estate passes to your parents, then siblings, then grandparents, and so on, following a set order of next of kin.

There are obvious problems with relying on these rules. The process of administering an intestate estate is more complex and costly. Most importantly, the rigid formula is unlikely to match what you would have wanted. For example, most people with children from different relationships would want to design a more tailored outcome than the one prescribed by law. Making a valid Will is the only way to ensure you decide who gets what.

Many people use discretionary trusts, often called family trusts, to hold business assets or investments. A fundamental principle of a trust is that its assets are not owned by any individual person. This means they cannot be gifted in your Will.

This separation is precisely why trusts are so effective. They help protect family wealth from business risks or the personal financial troubles of a family member, and they allow for that wealth to be passed down through generations. Because you don't 'own' the assets in the trust, they are not part of your personal estate to be dealt with by your Will upon your death.

So, how do you ensure the family wealth held in a trust goes to the right people? The answer lies not in gifting the assets, but in passing on control of the trust itself.

Who controls the assets in a trust?

The key to a family trust is not who owns the assets (the trustee does, on behalf of the beneficiaries), but who holds the ultimate power. This power usually rests with a person known as the "Appointor".

The Appointor has the critical power to appoint and remove the trustee. By controlling who the trustee is, the Appointor effectively controls the trust. While the name "Appointor" is most common, some older trust deeds might use other terms like "Guardian," "Protector," or "Principal" to describe this role.

The trust deed is the rulebook for the trust. It will specify who the current Appointor is and, most importantly, what happens to the role if the Appointor dies, loses mental capacity, or wishes to retire. Every trust deed is different, so the first step in your estate plan must be to review the deed carefully.

Some deeds contain automatic succession clauses, naming a successor Appointor directly within the document. More commonly, the deed will outline a process for the current Appointor to nominate their successor.

The Solution: Passing on Control

Since the trust assets themselves can't be included in your Will, your estate plan must focus on ensuring the role of Appointor passes smoothly to the person or people you want to take over.

Where the trust deed allows it, a common and effective strategy is to nominate the next Appointor in your Will. This integrates the succession of your trust with the rest of your estate plan.

For example, your Will can include a specific clause that exercises your power of appointment and nominates your chosen successor(s). Typically, you might nominate the executor(s) of your Will to also become the Appointor(s) of the trust. If your Will establishes a testamentary trust for your children, you might nominate the trustee of that trust to be the new Appointor.

It is absolutely vital to understand what this does and does not do:

• It DOES pass the ultimate control of the trust to your chosen successors.
• It DOES NOT merge the trust's assets with your personal estate.

The trust remains a separate entity and must continue to be administered according to its own deed for the benefit of its beneficiaries. Your successor Appointor simply steps into your shoes, gaining the power to supervise the trust and ensure it is managed properly for the family's future benefit.

Getting this wrong can have serious consequences, potentially leading to the 'wrong' person gaining control of significant family assets or resulting in expensive and stressful legal battles. As trust deeds can be complex, this is an area where seeking expert legal advice is not just recommended, but essential.

Superannuation is another area that is often misunderstood in the estate planning process. A common mistake is to assume your super will automatically be paid out according to the terms of your Will. This is not the case.

Your superannuation is held in a trust environment. When you die, it is the trustee of your super fund—not your Will—who determines how your remaining super benefit is paid out. Unless you have given them a specific, binding direction, the trustee has the discretion to pay the benefit to either your estate or directly to one or more of your eligible dependants.

In making their decision, the trustee will consider various factors, including the nature of your relationships, the financial needs of potential beneficiaries, and any other claims on your benefit. While they will usually try to respect your wishes, problems can arise, especially in cases involving blended families, multiple relationships, or conflict between your children.

Fortunately, there are ways to take control and ensure your super goes exactly where you want it to.

Taking Control: Death Benefit Nominations

The primary tool for directing your super death benefit is a death benefit nomination. There are a few different types:

• Non-Binding Nomination: This is simply a guide for the trustee. You are expressing a preference, but the trustee is not legally required to follow it. They retain the final say.
• Binding Death Benefit Nomination (BDBN): This is a formal, written direction to the trustee. If your BDBN is valid, the trustee must pay your benefit to the person(s) you have nominated. It removes the trustee's discretion.

For members of most large retail and industry super funds, a BDBN is typically 'lapsing', meaning it expires after three years. You must remember to renew it, otherwise it becomes non-binding and the trustee's discretion is restored.

For members of a Self-Managed Super Fund (SMSF), the fund's trust deed can allow for a non-lapsing BDBN, which remains valid indefinitely unless you actively change or revoke it.

A BDBN can be challenged and found invalid if, for example, the fund's deed doesn't permit it, it wasn't signed and witnessed correctly, or the person nominated is not an eligible beneficiary.

Taking Control: Reversionary Pensions

If you are already retired and receiving a pension from your super fund, you have another powerful tool available: a reversionary pension.

When you start a pension, you can nominate a 'reversionary beneficiary' (who must be an eligible dependant, usually your spouse). If you do this, upon your death, your pension balance does not form a 'death benefit'. Instead, the pension payments simply switch over and continue to be paid to your nominated beneficiary automatically.

This is a seamless transfer that operates independently of your Will and any BDBN you may have in place for other super accounts. It is a very effective estate planning strategy for couples.

Who Can Receive a Super Death Benefit?

Here we have a crucial distinction. The law defines who is eligible to receive a super benefit, and separately, it defines who can receive it tax-free. They are not the same.

A death benefit can only be paid to a 'superannuation dependant' or to your estate. A super dependant includes:

• Your spouse (including a de facto partner)
• Your child (of any age)
• A person in an interdependency relationship with you
• A person who was financially dependent on you at the time of death

Notice that a child of any age can receive a super death benefit. However, for tax purposes, the definition is much narrower. A benefit is only tax-free when paid to a 'tax dependant':

• Your spouse (including a de facto partner)
• Your child who is under 18 years old
• A person in an interdependency relationship with you
• A person who was financially dependent on you at the time of death

The key difference is that an adult child who is financially independent is not a tax dependant. This has major tax consequences.

The Tax on Super Death Benefits

The tax treatment of your super death benefit depends entirely on whether it is paid to a 'tax dependant' or a 'non-tax dependant' (like an adult, independent child).

This tax can significantly reduce the inheritance received by your adult children. Strategic planning, such as withdrawing funds from super before death where possible, or timing the use of a BDBN, can sometimes help manage this tax, but requires careful advice.

Asset Protection and Other Issues

Beyond tax, you should also consider asset protection. If you know a beneficiary is going through financial difficulty, bankruptcy, or a marital breakdown, paying a large lump sum directly to them from your super fund may be unwise. The money could be lost to creditors or become part of a family law settlement.

In these situations, a better strategy might be to use a BDBN to direct your super benefit to your estate. Then, your Will can specify that this inheritance is to be held in a protective testamentary trust for that beneficiary's benefit, shielding it from their personal risks. This shows how your superannuation strategy and your Will need to work together seamlessly.

Your life is not static, and neither is your family situation. Getting married, entering a new partnership, separating, or divorcing are all major life events. Each one has a direct and significant legal impact on your estate plan. Failing to update your Will and other documents after a change in your personal life can lead to your assets ending up in the wrong hands.

Starting a New Relationship: Marriage & De Facto Partnerships

When you commit to a new partner, it's a time of optimism and new beginnings. It must also be a time to review your estate plan.

If you are getting married

In Australia, the act of getting married automatically revokes your entire Will. The only exception is if your Will was specifically made 'in contemplation' of that particular marriage.

This means if you have a Will from before your marriage (perhaps leaving assets to your parents or siblings), it becomes void the moment you are married. If you were to pass away without making a new one, you would be considered 'intestate', and your estate would be distributed according to the statutory formula, which may not be what you intended.

The rule is simple: if you get married, you must make a new Will.

If you enter a de facto relationship

Entering a de facto relationship does not automatically revoke your Will. However, after a certain period of time (which varies by state, but is often two years, or less if you have a child together), your de facto partner gains significant rights. They would be recognised as an eligible person to make a claim against your estate for provision if they were not adequately provided for in your Will.

Therefore, when a new relationship becomes serious, it is just as important for de facto partners to review and update their Wills to reflect their new circumstances and wishes.

Blended Families: Balancing Competing Interests

Blended families are a wonderful and common feature of modern life, but they create unique estate planning challenges. A frequent dilemma is how to provide for your new spouse while also ensuring your children from a previous relationship are looked after.

A simple Will leaving everything to the new spouse can be problematic. If you pass away first, your assets go to your new spouse. When they later pass away, their own Will would dictate where those assets go—which may mean your children receive nothing.

Expert advice is essential to navigate this. Strategies to fairly balance these competing interests often include:

• Life Interest or Right to Reside: Your Will can grant your surviving spouse the right to live in the family home for their lifetime (a 'life interest') or for a specified period. After they pass away or the interest ends, the house itself is then passed to your children.
• Testamentary Trusts: You can create a flexible trust in your Will. This can be structured to provide an income stream or capital for your surviving spouse during their lifetime, with the balance of the trust assets being protected for your children to inherit later.

li>Mutual Wills: A couple can make a binding agreement to create Wills with specific terms that cannot be changed after the first person dies. This can provide certainty but can also be very rigid.

These situations require open conversations and careful legal drafting. Our role is to help you explore these options with sensitivity and find a solution that protects all the people you care about.

The End of a Relationship: Separation & Divorce

Just as starting a relationship impacts your Will, so does a relationship ending.

Separation

When you separate from a spouse or de facto partner, it has no automatic effect on your Will.

This is a critical point that many people miss. Even if you have formalised a property settlement, your existing Will remains valid. If that Will leaves assets to your former partner, they will still inherit them if you were to pass away before finalising your divorce and making a new Will. It is vital to update your Will as soon as you separate.

Divorce

In the past, divorce did not automatically change a Will. That is no longer the case.

Today, the law in most Australian states says that when you get a divorce, your Will is read as if your former spouse had died before you. This means:

• Any gift you left to your former spouse is automatically revoked.
• Any appointment of your former spouse as an executor, trustee or guardian is also revoked.

While this new rule provides a safety net, you should not rely on it. It is still best practice to make a new Will immediately after your divorce is finalised. This is because the automatic revocation only applies to your ex-spouse. It may not remove their family members whom you may also no longer wish to benefit. Furthermore, if your Will appointed your ex-spouse as the main executor and beneficiary without naming adequate backups, revoking their provisions could lead to a partial intestacy.

A new Will provides certainty and allows you to build a fresh estate plan that reflects your new life.

The family home is more than just an asset; it's a place of memories and often the cornerstone of a family's wealth. How you plan for its future depends entirely on how it is owned. Ownership can be by a single individual or by multiple people as co-owners.

Individually-Owned Homes

If you own your home in your sole name, it forms part of your estate when you die. It will be dealt with according to the instructions in your Will. For example, if your Will states that your estate is to be divided equally between your children, they will inherit the home together. They can then decide whether to sell the property and share the proceeds, or to keep it, perhaps as a shared investment.

Co-owned Homes

There are two ways for multiple people to co-own property in Australia. The method of co-ownership is critical, as it determines what happens when one owner passes away.

Joint Tenancy

This is the most common form of ownership for couples. The defining feature of a joint tenancy is the 'right of survivorship'.

When one joint tenant dies, their interest in the property automatically passes to the surviving joint tenant(s). This happens by operation of law, regardless of what is written in the deceased's Will. The property does not form part of the deceased's estate.

For estate planning, this means that while a joint tenant is alive, their 'share' cannot be gifted to someone else in their Will. However, it's still essential to have a Will, because you might outlive the other joint tenant(s) and become the sole owner, at which point the property would form part of your estate.

In the rare event that joint tenants die at the same time (for example, in an accident), the law generally deems the older person to have died first. This means the property passes momentarily to the younger joint tenant, and is then distributed according to the younger person's Will. This can have unintended consequences if the joint tenants have different wishes for their estates.

It's also possible for one joint tenant to 'sever' the joint tenancy without the other's consent, converting the ownership to a tenancy in common. This is a powerful tool if circumstances change—for example, in a relationship breakdown—as it allows your share to be directed by your Will rather than automatically going to the other owner.

Tenants in Common

Under a tenancy in common, the right of survivorship does not apply. Each co-owner holds a distinct, transferable share of the property (e.g., 50/50, or any other proportion).

This share does form part of your estate and is distributed according to your Will. This form of ownership is common for business partners or family members (other than couples) who purchase property together. It provides certainty that each owner's share will pass to their own chosen beneficiaries.

Tax Treatment of an Inherited Home

Generally, if you inherit a person's main residence, there are favourable tax rules. If the executor sells the home within two years of the person's death, any capital gain is usually disregarded, and no Capital Gains Tax (CGT) is payable. The Commissioner of Taxation has the discretion to extend this two-year period if the delay in selling is for reasons outside the executor's control.

If you inherit the home and decide to keep it, you are generally taken to have acquired it for its market value at the date of death. When you eventually sell it, CGT will be calculated based on the change in value from that date. If you live in it as your own main residence, you may be able to claim the full main residence exemption yourself. The tax rules for deceased estates can be complex, and professional advice is always recommended.

Specific Issues to Consider

Second and Subsequent Marriages

As we saw in the last chapter, marriage revokes a prior Will. This is a critical issue for blended families. If you own your home before entering a second marriage and intend for it to go to your children, your marriage will void the Will containing those wishes. It is essential to create a new, carefully drafted Will as part of the process of getting remarried to ensure both your new spouse and your children are provided for as you intend.

Residential Aged Care and the Family Home

Moving into residential aged care is a significant life event with major financial and estate planning implications for the family home.

• Aged Care Means Test: How the family home is treated for the government's means test depends on who is living there. The value of the home is generally exempt from the assets test if a 'protected person' (like a spouse or dependent child) continues to live there. If not, it will be included in the assessment, which affects the cost of care.
• Funding Aged Care: A major decision is whether to keep or sell the home to fund the accommodation costs, often paid as a large lump sum called a Refundable Accommodation Deposit (RAD).
• Impact on the Estate: This decision has a huge impact on your estate. If the home is kept, it passes to your beneficiaries as real estate. If it is sold to pay a RAD, what remains in your estate is the RAD balance, which is returned as cash after you pass away. This can unintentionally alter who gets what, especially if your Will gifts the 'house' to one person and your 'cash' to another.

Planning for aged care should always be done in conjunction with a review of your estate plan to ensure the two are working together.