Your wishes for your inheritance are legally stipulated in a will – but that doesn’t mean they will be honoured.

More and more wills are being contested. Mainly, due to children or dependents believing that they deserve a larger share of the will than what was stipulated. The Intergenerational Wealth Transfer between Baby Boomers and their children is estimated to be 2.4 trillion dollars. This issue is only going to become more common.

The most common reason to contest a will is on Family Provision grounds. Wills and Estate Lawyers Australia believe that on average, 74% of Family Provision Claims in Australia are successful.

Looking at these figures, it is more than likely that there will be a variation to how your assets are distributed when you die from what you intend. Here are a few considerations for estate planning and establishing your will.

This episode leans on the insights from Abbey John from Partners Legal Solutions for the best way to protect your inheritance.

You can find the full article here.

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The full transcript of the podcast can be found below:

Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

Mark LaMonica: All right. So, Shani, today we're going to talk about wills. I don't know if that's the most uplifting topic. We should do an episode where we talk about…

Jayamanne: Isn't financial security and your financial future being secured?

LaMonica: Well, but you're dead.

Jayamanne: Some people like to leave inheritances.

LaMonica: No, I hope people that know me like to do that. We should do an episode where we talk about Will, who's the podcast producer.

Jayamanne: We have floated many ideas over the years about bringing Will on to a podcast.

LaMonica: He spoke on one, remember?

Jayamanne: He did, but…

LaMonica: When we drew the winner for the competition.

Jayamanne: Yes, but something a bit more meaty than that.

LaMonica: Yeah. And one thing to think about while we're going through all this information on wills is people could leave money to Investing Compass. We've been talking about taking this show on the road, going to some of these mostly war-torn countries where we don't have any listens yet. So, we could go drum up personal…

Jayamanne: In Greenland.

LaMonica: Yeah, I wouldn't call Greenland war-torn.

Jayamanne: No.

LaMonica: But I was thinking about some of the other countries. But anyway, if somebody left money to Investing Compass, the three of us could go to a lot of these places.

Jayamanne: And record it in these countries.

LaMonica: Exactly. So, just something to think about. But the way that we came up with this idea is we did recently do an episode on inheriting a house and another on just inheritances in general and what you should do with it. And we made a couple of comments during those episodes about will contests. So, not contests for Will, the producer of this podcast.

Jayamanne: Will versus will.

LaMonica: Will versus will. But obviously contesting those wills in court and how common that they are becoming.

Jayamanne: And we received a lot of emails and comments about that and what these contests are and why they're occurring.

LaMonica: And it is a very good question. So, one that we're going to try and answer today. And not only we're going to go through that explainer, we're going to go through six factors and considerations to make your will more airtight and to increase the possibility that your wishes, like giving your money to Investing Compass, are actually honored.

Jayamanne: And we're not experts. We're not estate planning lawyers. So, we leaned on an expert for this episode. And that was Abbey John, who is a partner at Partners Legal Solutions. So, she answered many questions about the process and helped us with some context around some of the decisions we were mulling over when it came to estate planning.

LaMonica: Yeah. So, a huge thank you to her for helping us out.

Jayamanne: So, let's get to it. More and more wills are being contested. And that's mainly due to children or dependents believing that they deserve a larger share of the will than what was stipulated. And the intergenerational wealth transfer is estimated to be $2.4 trillion transferred from baby boomers to their children. So, this issue is only going to become more common. Do you think that we should have like a new drinking game every time we say the intergenerational wealth transfer? I feel like it's every podcast now.

LaMonica: I mean, why not?

Jayamanne: Okay.

LaMonica: I mean, we can see if Buffett's will is contested. Although, I think he's laid out where all his money is going. Not obviously that we hope that that happens anytime soon. But let's get back to these will contests. So, the most common one is on family provision grounds. Wills and Estates Lawyers Australia believe that on average 74% of family provision claims in Australia are successful, which I think is shocking.

Jayamanne: It is. It's pretty incredible. So, looking at these figures, it's more than likely that there will be a variation to how your assets are distributed when you die than what was intended. I think one thing that I'd like to say is that estate planning has traditionally been something that people leave until later in life. We're an investing and personal finance podcast and a lot of our episodes revolve around building wealth and creating a comfortable life for yourself. It is important to understand that this is a crucial part of that, and it is ensuring that any wealth that is left behind goes to the intended recipients.

LaMonica: And none of us, of course, have a crystal ball. So, it's important to do this as early as possible. You have no idea what's going to happen, and you can't predict the future. You want to make sure that your loved ones are taken care of, and your wishes are considered. So, firstly, why don't we go through what this most common contest is, this family provisions contest?

Jayamanne: Okay. So, family provisions is a claim that the estate is unfairly distributed and it's usually children that have been excluded from an estate. To make this claim, you have to be considered an eligible person. So, Mark, what's an eligible person?

LaMonica: I mean, I hope I am an eligible person in all sorts of ways, but an eligible person is defined in legislation and it's under section 57 of the Succession Act to be precise in case you want to look that up. And there are a few different types of eligible people, and it includes the surviving or a former husband, wife or de facto of the deceased, the children of the deceased, including adopted children.

Jayamanne: And someone who is either wholly or partly dependent on the deceased, a member of the deceased's household or a person who was in a close relationship with the deceased.

Now, when we were putting this together, we also spoke to a few more family lawyers and barristers about their common experiences with this. And really, anecdotally, the most common contests that you see are from children. It may be children versus other children or also very common children disagreeing with the amount that was left to charities in the will, like the Investing Compass Charity. So, in other words, you may decide that you want to leave something behind for your favorite charity as well as your children. Some children decide they want to larger share and deserve part of the share that was left to charity.

LaMonica: Yeah. Well, I can't imagine anybody doing that with the Investing Compass Charity.

Jayamanne: No.

LaMonica: Who wouldn't want to support our goal of traveling around to obscure countries around the world?

Jayamanne: Yes.

LaMonica: So that would probably hold up, but perhaps other charities could be contested. So outside of charity, these claims can come when children are estranged, if they have married a partner that the parents do not agree with, or simply if they believe they deserve a larger share of the estate. It can also come from carers, even professional carers that may have received payments outside of contractual payments.

Jayamanne: And there are many circumstances for which provisions can be claimed. But why is it so common? As we mentioned before, 74% of will contests are successful when it comes to this particular claim.

LaMonica: And the reason is that contests are an expensive exercise. Going to court for a will contest can cost upwards of $100,000. For many estates, this cost just does not make financial sense. So, when there is a contest from an eligible person, a lot of the time, two or more parties will simply engage in something called mediation.

Jayamanne: And mediation happens when the two legal representatives want to make a concerted effort to solve the contest out of court. And mediation does not consider who is right or who is wrong. It does not consider the evidence. It does not consider whether one sibling is better off financially than the other. It is based on the ability to negotiate how much of the estate should be awarded for the contest.

LaMonica: And in realistic terms, what this process is doing is it is finding the number at which it makes sense for both parties to walk away from this without having to pay the significant court costs.

Jayamanne: And for many that are part of this process, it really is just a cost-benefit analysis. It's weighing up whether it's better to give away, say, $60,000 of the estate to another eligible person instead of whatever the court fees might be. And in that decision, whether the court decision doesn't go in their favor, they might be up for legal costs of the other parties.

LaMonica: Now, that was all quite complex. But basically, what it means is that family provision claims have been successful to such a large degree because for most estates, it is easier to settle for a sum than to go through the court process to defend the will and the wishes of the deceased.

Jayamanne: So, we've run through a few of the most common contests and why they're successful. The conclusion is that will contests come in all shapes and forms. So, let's get to some of the tips to make your will as airtight as possible and now that the explainer is out of the way.

LaMonica: All right. The first tip is from Abbey and comes from her experience in drafting wills for clients. It is to consider whether your bequests are actually what you want. She believes that it's important to take a step back from the space you're in when you are establishing a will and look at why you may be allocating larger portions to some dependents and not others.

Jayamanne: She explains that a very common reason is that some children may be living closer to parents while others may have moved interstate. So, for example, you might have a sister and a brother. The brother lives in Queensland and the sister lives close to her parents in Victoria. The sister is there to clean the house each week, to take them for walks a few times a week, the grandkids are around, she's just more present. And because of this, there's this perception on the parents' part that she is the one who cares for them and deserves a larger part of the estate. Now, the brother has moved for work to Queensland. He's got two young kids, they're both a handful and he's trying to juggle these caring responsibilities with work. And he tries to make it down to Victoria to see his parents when he can.

LaMonica: So, the parents may decide to give a larger portion to the sister that tends to visit more often and take on the caring responsibilities. But in Abbey's perspective, a reflection on the circumstances of each child shows that their limited contact is not out of malice or indifference, but the barriers of distance and time commitments.

Jayamanne: And she adds that many of her clients tend to revise their wills upon this reflection. It really is that their children have chosen to live different lives and that doesn't mean that they should be punished for it.

LaMonica: Yeah. And another completely hypothetical situation, Shani, is that let's say an American moves to Australia, which is very far away and very difficult to get back to.

Jayamanne: Okay. You're an only child though. So, I don't think you need to worry about this.

LaMonica: I am an only child. So that is true. But really going through this process of talking this through and thinking about why you've made certain provisions that you have can prevent any ill will or contests, which will push family members apart, which may be the last thing that parents wish for after their passing. Depending on the size of the estate, distributing in equal portions when there is no strong reason not to will also mean the estate will not be reduced by legal fees incurred during mediation or court proceedings.

Jayamanne: If a parent is appreciative of a dependent or child providing care, another option is really partial gifts prior to death. And that might be a good compromise.

LaMonica: Okay. So, let's move on to the next tip, Shani. Ensure that you have your will drafted by an estate planning lawyer. It's extremely important to have a legal professional construct your will. The costs for this can vary depending upon the structure in place for the estate. For example, more complicated wills with trust costs more to draft. Abbey gives an estimate of under $1,000 for a simple will and upwards of $3,000 for a more complex situation.

Jayamanne: And complex situations might include complex asset structures, the involvement of trusts or companies and blended families.

LaMonica: And going through this process gives you peace of mind that there are no contests based on ambiguity in the will and also means that there will be an established process for housing your will. They can arrange for your documents to be stored in a safe location. An estate planning lawyer will also be able to give you the advice on structuring your assets to reduce the possibility of contests.

Jayamanne: And Abbey explains that having a professionally drafted means that at a particularly emotional time in people's lives after the passing of a loved one, it's important to have a plan with clear intentions to avoid as much ambiguity as possible.

LaMonica: The next tip, and of course, depending on the size of the estate is consider a testamentary trust. And this should only be considered in certain circumstances. So, what a testamentary trust does is it gives the inherent protection rather than giving it to the dependent directly and in their own name.

Jayamanne: And Abbey has used this with clients in a number of different situations. So, for example, if there are children involved that may need protection from themselves, such as if they have unhealthy habits or addictions, it might be gambling, it might be drugs or alcohol, it might be something that impairs their decision making. And really, the parents just want to ensure that it has some structure around it to ensure the best outcomes for their child. Another example where testamentary trusts might be used is if the parents don't agree with a marriage and choose to use a testamentary trust to protect the inheritance from potential separation or divorce proceedings.

LaMonica: And the trust means that there is a trustee that will make the investment or withdrawal decisions. And there is benefit to this layer of protection in circumstances where the dependent should not have direct access to the assets.

Jayamanne: The next tip is one that we've mentioned a couple of times, but it's probably one of the most important actions or steps you can take when you're going through the estate planning process. And that is really to have conversations with your family and make your intentions clear.

LaMonica: And of course, encourage a conversation where the intentions of the will are verbalized. Although this has no legal validity, it will give a clear reference point to the wishes of the deceased and a starting point for constructive discussions about how these assets will be handled when the owner dies.

Jayamanne: All right, then next one. If your assets are mainly in cash, you can consider joint accounts.

LaMonica: Yeah. And Abbey mentions that to make the transfer of assets easier, you're able to utilize joint accounts. This means that if there is a dependent that you would like the funds to go to upon death, opening a joint account with them allows them to access those funds immediately.

Jayamanne: And you can use joint accounts with other asset types, but the sale of assets may trigger tax consequences that an inheritance would not. And one last one – spend the money or gift it before death.

LaMonica: Exactly. Nobody likes talking about death, but ideally, parents and children should discuss both the estate plan and the specific assets held. And this transparency really helps. Most of the investors that we speak have an innate desire to better their children's lives and are purposeful about planning bequest.

Jayamanne: And if a parent chooses to leave money to their children, they want that money to be useful. It's worth having a conversation about the intentions for the assets and funds that they have because the tax situation can be managed prior to death. And we know that this is uncomfortable, but it can end up benefiting both parties.

LaMonica: And remember that younger people are likely to have lower marginal tax rates. There's another group of people that are likely to have lower marginal tax rates, those in retirement. Tax situations are unique, but in many cases a retiree will have a lower marginal tax rate than their children. If the funds are held in super – and Shani has written an article that specifies the various tax treatments, depending upon your circumstances.

Jayamanne: So, we'll pop a link in that to the article that'll be listed in the bio. But proper planning can determine whether it is worth selling the assets while the owner is alive, pay the taxes and hold the funds in a way that will benefit the child most. If the beneficiary wants to use shares to fund a mortgage, to travel or any other goal that requires liquidating assets to cash, it might be a pathway worth considering. After all, it might actually bring parents' joy to see their beneficiaries' lives enriched while they're alive.

LaMonica: All right. So, I feel like that was a cherry note to end on, even though we were talking a lot about death today.

Jayamanne: Yes.

LaMonica: So yeah, good way to end. But we hope you found this interesting. Shani does have some great articles on this. You'll see those links in the show notes. So go check out her articles and thank you very much for listening.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)