This place will become your tomb – Estate Planning

Most of the time I write about cool things like safe withdrawal rates, or which Aussie equity index ETF is better, or diversification, emergency funds, savings rates and the like.  You know, fun and light hearted entertaining stuff!  This post isn’t going to be like that unfortunately, but it is important. 

I’m going to put in a disclaimer that none of what I say below is specific advice, it is not tailored to anyone’s personal circumstances, you should not be relying on anything written here, and you should seek advice from a professional about your estate planning.  I’ve talked to a couple of professionals in this area when researching this post, but I cannot guarantee that I’ve interpreted what they said correctly or even repeated it accurately, so please go and see a professional to get it sorted out properly. 

Also, I’ve simplified some of the discussion and left some parts out entirely so that I don’t get too bogged down in details and this post doesn’t end up being even longer than it already is. 

Basically the idea of this post is to get you thinking about estate planning and then seeing a professional to actually get it sorted out properly.  With that out of the road, let’s get cracking!

What is Estate Planning

Estate planning is making plans for what happens if you pass away, or if you’re incapacitated and can’t make decisions for yourself.  So basically what happens if you die, or what happens if you don’t die but can’t look after your own affairs.

I’m young and healthy, what do I need to worry about this stuff for?

I get it, I too was once young and invincible and thought nothing bad could ever happen to me.  And typically when you’re young the odds are actually pretty good that nothing will happen to you.  You can see from the table below that there are very few deaths in your younger years, and a lot more as you get older. 

Diving deeper into the data in 2018 there were 2,169 deaths of people in the age brackets from 5-29.  .  I’ve edited this from an earlier version of the post to say that even more tragically, a huge number of these were from suicide.  Mental health is getting more attention than it used to and we’ve started to move on from some of the old stereotypes which made this even worse, but there’s still a lot of work to be done.  Reach out to your mates to check that they’re doing ok, and if you are struggling yourself then keep in mind that there’s lots of help available out there from family and friends as well as organisations like Lifeline and Beyond Blue as well as plenty of others.

Obviously the number of deaths in one year isn’t the same as the number of deaths over that roughly 25 year period, but chances are excellent that you will make it through childhood and your twenties without dying, and it’s pretty likely that you weren’t close friends with someone who did which is where it might really make a difference to your mindset. 

I’m not a good enough writer (understatement of the year) to convey what it feels like to have this happen.  Fortunately Morgan Housel who is one of the best finance writers out there wrote this amazing post about what happens when you do though, and I would encourage everyone to read it.  Be warned, you may need tissues by the time you’re done.  Seriously, click through before reading the rest of this post.

What does it mean for me?

Here’s a scenario for you. When you were a bit younger you had a kid with your partner at the time, but the relationship didn’t work out unfortunately.  Happily you still get on ok, and if something were to happen to you then you’d want to make sure that there would be plenty of money for your child, especially given you know that the child support you’re paying helps out a lot. 

In the meantime you’ve been in a new relationship for a few years now and all is going well, maybe you’ve even got married.  Your new partner gets on okish with your child from the previous relationship on the weekends you have custody, unfortunately they’re not really close but hopefully things will get better with time.  They definitely don’t like your ex, but that’s not unusual and they don’t have much contact anyway.

You never got around to getting a will in place because who has the time, and you didn’t fill out the beneficiary form for your super fund either.  So when a drunk driver went through the red light at the intersection and cleaned you up, there was nothing in place to say where your money went.  It’ll probably be all right though, there’s some sort of formula that’ll make sure that your kid will get a fair whack of money either to help out with expenses now or down the track.  Right?

Well the good news is that there is a formula in each state.  The bad news is that in the state where I live (Victoria) assuming your super fund took the easy option and paid the funds out to your estate rather than some sort of split between your child and your current partner, the current partner would get the first $451,909 of your $500,000 total assets, plus 50% of the balance above $451,909.  This works out as $474,954.50 going to your new partner, and $24,045.50 going to your child, or more realistically your ex partner to look after your child given they’re under age. 

Now maybe you wanted your new partner to get 95% of your assets and your child to get 5%, but my guess is probably not.  If you’d had $450,000 in total assets then your child would have missed out entirely, and I’m really hopeful that nobody would want that to happen, although I guess whoever wrote the intestacy laws in Victoria obviously was ok with it.

Sure your current partner could give some more money to your child, but they don’t have to, they’re not really close remember, and they definitely don’t like your ex who will more than likely end up with the money so I wouldn’t want to bet on this happening.

If you want to know what the intestacy laws look like in your state (it varies a lot) then I found this very handy link.  Well, unless you’re in Tasmania or the territories which apparently don’t count in which case googling it will probably let you know pretty quickly.  FYI, if you live in Victoria or NSW and are in a relationship and have children from a previous relationship, then in my humble opinion they’re getting majorly screwed.  The other states aren’t quite as bad, but they’re still not necessarily ideal to my mind at least. 

I don’t have kids from a previous relationship, so what do I care?

As an alternative scenario, let’s say you didn’t have kids.  Like the first scenario, you never did up a will or filled out your binding nomination form for your super. You’ve been in a relationship for a couple of years but it’s not really working any more for you and you’re about to break up.  You haven’t actually done so yet though and haven’t really talked to anyone about it because you want your soon to be ex to hear it from you rather than through the grapevine. 

For obvious reasons you don’t want to leave any money to someone you’re about to break up with, and if the worst were to happen then you’d want the money to go to some combination of your parents and siblings to help them out.

You get hit by the same drunk driver as in the first scenario.  Your partner who you were about to break up with potentially qualifies as a spouse for the purposes of your super fund and for your estate.  In which case in Victoria they would get all of the money, your parents and siblings get nothing. 

So if you had read my post on insurance, talked to an adviser, and got say a million bucks worth of life insurance in your super, they would get all of that.  Your family gets zero, zilch, nada, nought. 

Now maybe those two scenarios don’t apply to you specifically, but in any case there’s a reasonable chance that you’d want some or all of your money to go to your family rather than to wherever the state intestacy laws decide is appropriate.

And hopefully you can see how not having an estate plan in place can lead to outcomes that you wouldn’t have wanted.  You can say all you want that it won’t happen to you, but I bet that almost everyone who it has happened to thought the same thing.  If you watch the news then almost every day somebody set off in their car to go to work or to pick up their kids or go to the shops, and didn’t come home, often through no fault of their own.

So what do I need to do?

The two main things you need to look after the financial side of things is to get a binding death benefit nomination on your superannuation, and a will.  If you have a trust then that’s also a separate issue which I’m going to leave well alone apart from saying see a professional to get it sorted.  Also if you have personal insurance in place (and you probably should) then you need to make sure that you have the correct beneficiaries in place on that as well.

Binding Death Benefit Nomination

The binding death benefit nomination looks after everything inside your super, and the will looks after the rest of your estate.  Contrary to what a lot of people seem to think, your super does not automatically form part of your estate, it is dealt with separately.  You can make it form part of your estate and be dealt with by your will if you want to by directing it to go to your legal personal representative (LPR) but you can also have it go directly to certain beneficiaries.

Eligible beneficiaries are people like your spouse, your children, somebody who is financially dependent on you, or your estate. 

Your parents and your siblings and friends are not eligible beneficiaries unless they are financially dependent on you.  If you jokingly put down one of these as a beneficiary then it may invalidate the whole form, so do not do this!!!  Also you need to get the form witnessed by two other people when you sign it.

With most industry super funds your binding nomination expires every 3 years and you have to renew them, some retail funds offer non lapsing binding nominations so once you’ve made them you don’t have to do anything again unless your wishes change.

So there’s a pretty good chance that even if you filled out the form properly when you originally signed it and got it witnessed etc, it may have expired by the time you pass away (unless you’ve kept up to date on renewing it) in which case the trustee of the super fund gets discretion over who to pay the funds to, although they’re restricted to the list above of eligible beneficiaries.  Maybe they pay it all to your spouse or your children, maybe they pay it to your estate, you no longer have any say.

Binding nominations are very powerful legal documents because they’re not as easily challenged as a will is, from my discussions on this when doing research they are very difficult to overturn if not impossible.  So if you don’t update your binding nomination to reflect your separation from your partner, your ex is getting whatever it says on the form, although apparently divorce does negate it. 

Likewise if you don’t update your binding nomination to include your new partner or a new child etc, they’re not getting anything from your super which in a lot of cases where people have most of their assets and most of their insurance.

All of the lawyers I talked to when researching estate planning had horror stories of what had happened when somebody hadn’t filled out their binding nomination form, hadn’t renewed it every 3 years, or hadn’t updated it when their circumstances changed.  Please don’t become one of those horror stories, for multiple reasons obviously!

Your Will

A will deals with everything that’s not your superannuation or a trust.  So any financial assets that you hold in your own name, your car, your personal belongings etc.  It can also be dealing with the money from your super if you directed your super to go to your legal personal representative, ie your estate. 

It’s a much more flexible legal document than a binding nomination on your super, so if you want to leave $5,000 to the old pets home or the local lighthouse preservation fund etc then you can do so.  Likewise if you want to leave jewellery or a specific gift to someone, this is the place to do it. 

It can be challenged, but unlike in the old days where it seemed like every man and his dog could have a crack at your estate, there are only certain people who can do so now in Victoria at least.  This is basically pretty close family or financial dependents is my understanding, it does vary from state to state though.

If you’re into FIRE then this is likely going to be the document that will deal with a lot of your assets and potentially all of them if you pass away, so you want to make sure that it’s done correctly.  You also want to make sure that your will and your binding nomination interact with each other properly. 

If most of your money or your insurance is in your super, but you want it to be dealt with by your will because it gives you more flexibility, then you need to make sure that your binding nomination on your superannuation reflects that.  Otherwise all those great plans you made for testamentary trusts and money to go to charities or your parents/siblings and the like might be for nothing. 

So make sure that when you talk to a professional about this stuff that you check what you’re meant to do with your binding nomination and then make the changes if necessary.

Tax on your estate

Man I am not even going to attempt to get into the different way your estate can be taxed depending on who you leave it to and from where.  Suffice it to say that this is a very complex area and one that can have a huge impact on how much of your money the taxman can get his hands on, and you definitely need to be having this conversation with an estate planning expert.

There are also some things you can do to make an inheritance more tax efficient for your beneficiaries (particularly young kids) or to help them protect their assets like testamentary trusts, again this is a conversation to have with a professional and I’m not going to touch on it other than to say it can offer a lot of benefits, but it’s not for everyone.

What about my kids?

For me the first thing I’d want taken care of if I were to pass away is my kids, although obviously a lot of people who are into FIRE don’t have kids or partners yet.  If my wife is still around, then she can take care of the kids so that’s one problem solved.  Between super and investments and insurance there is enough there that she’d hit FIRE immediately and would be able to look after the kids full time without having to work.  Similarly if she were to pass away then I’d be fine financially.

If we were both to go though, well then who’s looking after the kids?  This is where guardianship comes in.  Our situation with potential guardians is a bit more complex than for many people for reasons I won’t get into (nothing bad, just more complex), but in most cases people plan to leave their kids with one of their own siblings or close family friends in a similar age bracket. 

I think it’s also important that you don’t leave a financial burden for whoever you choose at the guardians of your children if you’re not around.  I’ve written previously about the cost of raising kids, and I think that if you’re asking someone else to raise your kids for you because you’re not around then the least you can do is make sure that they’re not going to come up with the money that requires themselves.  Whether you have the money through your own assets or through insurance there should be enough there that they’re not having to find money to look after your kids.

But if you don’t have it written down who you want to look after your children, unfortunately sometimes they’re going to end up being looked after by someone who just wants the money that you’ve left behind.  It’s horrible to say, but that’s the way it works sometimes unfortunately.

This is why it’s important to specify in your will who you would want to be guardians of your kids if you weren’t there to bring them up.  It’s not guaranteed that this is who will actually end up doing so, but it increases the chances quite a lot so long as they’re suitable guardians. 

Anything else?

Powers of attorney are the other main estate planning documents.  These basically allow somebody else to act on your behalf if you’re unable to do so, and they normally deal with your financial and medical affairs. 

A financial power of attorney allows whoever was given power of attorney to pay your bills, transfer money etc so long as it’s what you would have done yourself were you able to.  Likewise a medical power of attorney allows whoever has that power to make decisions for you if you’re not able to do so.

Obviously again these are pretty powerful instruments and you want to make sure that you’re giving them to people who you trust to do what you would do if you were able to.

So what do I get out of doing all this stuff?  I’m going to be dead anyway?

For me FIRE means taking responsibility for my financial situation and for my life.  Even after it’s ended, which hopefully will not be for a very long time!  I don’t want to leave a massive financial and legal mess that somebody else has to clean up.

Having all the right documents in place means that there is a clear set of instructions for what I (and my wife) want to have happen if something happens to one or both of us.  It means that our kids will be looked after and that there will be sufficient money that it won’t be a burden, it means that the money will go where we want it to, any specific gifts we want to make are made, everything is as tax efficient as possible.

It saves a lot of hassle that will happen if you don’t have a will and/or binding nominations in place, and makes the process a lot smoother.  Ideally it also reduces the chances of family disputes (not that I anticipate any myself), because instead of it being a formula made up by the state or a decision by a super fund, it’s a decision that I (well we as we have mirror wills apart from the gifts) have made and is therefore likely to be more easy to accept.

Ok, you’ve convinced me.  What do I need to do?

Well the whole aim of this post has been to get you to think about your estate planning, you then need to talk to an estate planning lawyer to get a plan in place.  In Victoria at least the Law Institute offers this as a specialist qualification, so you may want to be talking to someone with this qualification. 

Depending on your individual situation you may also need to discuss things with your accountant, your financial planner, and fill out some forms with your super fund and insurance provider.  Basically the main documents you want to get in place are a will, up to date binding nominations on your superannuation, beneficiaries on your insurance, and powers of attorney.

Then once you’ve done that you need to make sure that your executors know where your will is kept, know where your assets and insurance are, and know how to contact the beneficiaries of your will and your guardians.  All of this is stuff that the lawyer should go over with you. 

I do hear of some people who keep all this information in a folder in a filing cabinet, which sounds great but what happens if the house burns down with you and the folder inside?  I have emailed all of this information to my executors instead so they have a more permanent record.  Well, so long as they don’t delete the email and do remember what folder they put it in I guess, but I’m pretty hopeful this won’t be an issue given they’re very responsible people.

What arrangements do I personally have in place?

Pretty much exactly what I’ve described throughout this post.  My wife and I have professional written wills (actually we have two of them, one to deal with our overseas assets and funnel them back into the one that deals with the Australian estate) and there is a testamentary trust, plus it looks after guardianship of the kids. 

We have binding nominations on our super which we make sure to keep up to date, same with an overseas pension which I have.  Our insurance has the correct beneficiaries in place so that if something were to happen to either or both of us the money goes to the right person or entity depending on what happens.  We also have powers of attorney so that if we can’t act on our own behalf someone else can.

My executors have a basic spreadsheet that gives the details of where all our various investments, super and insurances are, and they’ve been told as well as emailed the location of the wills and powers of attorney are, and they know how to get in contact with the beneficiaries. They’re also the guardian, so this is taken care of as well and they know there is more than enough money to make sure the kids aren’t a financial burden on them.

So hopefully pretty much everything is sorted out, and we’re even more hopeful none of it has to be used for a very long time!

What about my parents?

One of the other things you should be thinking about it what plans your parents (and maybe your siblings) have in place, because if they don’t have any then it’s gonna be you who has to sort it out and it’s not likely to be fun. 

It’s probably not the most fun conversation in the world, and bringing it up directly may lead to a misunderstanding where they think you’re trying to figure out how much inheritance you get whereas really you’re just trying to make sure they’ve got everything sorted (hopefully anyway). 

We’ve had some pretty frank conversations about it in my family simply because we’re fairly open about money and being responsible, but I get that not every family is going to be like that.

In which case one easier way to talk about it is by asking them some advice for your own situation.  “Hey Mum/Dad, I’m getting all my estate planning stuff sorted, how did you guys go about doing it?  Which solicitor did you use, have you got any tips I should think about?”.  Hopefully this leads to them telling you about what they’ve got in place, as well as potentially giving you some advice on things that you need to be thinking about.

Is that it?

Well it’s all I’m planning on writing so to that extent yes?  Really though this can be a hugely complex topic depending on your circumstances which is why it feels like every second paragraph says to go and see a professional about it all! 

Have you got an estate plan in place?  If not, are you now planning on getting one sorted out?  If you liked this post and would like to read more like it then please subscribe using the link on the right!

PS. One of the things that keeps me writing is knowing that it’s helping people understand and making a difference. As much as I think my other posts are useful, this is one where I would really like to see people take action.  So if this post inspires you to get an estate plan in place please let me know in the comments or drop me a line at aussiehifire@gmail.com as I get a huge thrill out of knowing that I’ve helped people.  Thanks!