Noel Whittaker’s key tips for estate planning
Morningstar’s James Gruber caught up with Whittaker to discuss his new book, Wills, death & taxes made simple.
Personal finance guru, Noel Whittaker, is out with a new book, this time covering the thorny topic of estate planning. Morningstar’s James Gruber caught up with him to discuss it.
James Gruber: Wills are central to estate planning, yet a lot of Australians die without a will. Why do you think that is?
Noel Whittaker: Making your will is one of those things that’s important, but not urgent. So, you keep putting it off. And also, there could be difficult choices. If you've got three kids, there’s one you might want to give more money to than others, and who will you have as executors? There can be potential family friction type choices. That's another thing that adds to putting it off.
Gruber: Why is making a will important then?
Whittaker: Well, it's important because the way the law is structured, if you die without a will, the Government says where your money will go, not you. Now, I spoke to a guy recently who is 45, he does gardening work for us, and I asked, “have you got a will?”. And he said, “oh no, never got around to it”. And then I asked if he’d been married before and he answered, yes. I replied, “well, if you die without a will, it's your first wife and those kids will get your money, not the present ones.” So, it's a good to have control over your money.
It's also great for tax planning. Estate planning is in four fields: there’s law, super, tax, and all the financial planning stuff. They're all very important and getting it wrong can cost hundreds of thousands of dollars, not to mention a lot of much stress.
Gruber: When people get a will, they often don’t update it. They don’t keep records. There are all kinds of things they don't do, even if they have a will.
Whittaker: Yes, because circumstances change. In 15 years, your parents could be going to aged care. Your kids may be married with their own kids. There could have been a breakup in a relationship. It's as important to keep reviewing the will as it is to make your will. Then, of course, have it where someone can find it.
Gruber: What are some of your tips for making an effective will?
Whittaker: I think advice. Because a loosely drawn will can cause more troubles than not having a will. Advice doesn't cost, it pays. And it's very important for tax purposes that the will is pushed towards the tax consequences.
Many people don't understand that death does not trigger capital gains tax. It passes the liability to the beneficiaries who will only pay it if they dispose of the asset. Therefore, if you've got a big parcel with shares, and one kid doesn't want shares, two kids do, then you're better off to leave the two kids the shares and compensate the other person who doesn't want the shares. Ideally, you would tailor your will to suit the needs of the beneficiaries.
Gruber: Tell us about enduring powers of attorney, and why people should have one.
Whittaker: There comes a time for most people when you lack capacity, and someone else has to do it for you. This could be going into a nursing home, it could be care, all sorts of issues. By signing a power of attorney, you give someone else the right to do those actions for you. The enduring power of attorney means that it endures despite the donor losing capacity.
It’s also important because people rush to do things. You need to take your time and think about it. Time and time I hear: “my partner died, and I ran to the bank, and they froze the account”; “I couldn't pay for the funeral”.
You don't need to rush down and tell the bank. Not at all.
Gruber: What about super? It's not automatically left according to a will - what we need to consider there?
Whittaker: Basically, it's the trustee of your fund has the decision, not you. Therefore, if you want to have it done the way you want it, you have to do a binding death benefit nomination to the trustee, and they would normally be forced to comply with that.
But again, take advice about it because there's death tax in super. I had a case where I gave a talk about this, and a couple rushed home. They had $4 million in super and gave half to her and a quarter to each child. Each child were doctors on high incomes. The husband died, and the family got a 17% death tax on their share of the super. If there would have been no binding nomination, it [the tax] could have all gone to the wife. So, a binding nomination is important in the right circumstances.
Gruber: What about property? A lot of people retirees own their own property - when they die, what should they be thinking about in terms of estate planning?
Whittaker: First of all, who owns it? Property as joint tenants will automatically go to the survivor on death. Property as tenants in common doesn't. Now, as people live longer, there's more and more new relationships of older people. Normally, the young marrieds - they're in joint tenants. But when people re-partner at 70 or 75, they normally want to keep their assets for their own side. And that's when it’s more important to have tenants in common.
Gruber: Executors – what are they? How do they fit into the picture?
Whittaker: Until I started writing the book, I thought you just tell somebody to be an executor. Except, it's a very onerous job. They are now standing in place of you. Have they got the ability to do it? Are they prepared to do it?
I've got a friend, a senior executive, who was telling me last week that he's now an executor. He’s got an 82-year-old who died, he’d never married, and there are 13 beneficiaries spread right around Australia. My friend has to track them down. And everyone is terrified of legal challenges and cases. He also said a further complication was that the guy was an executor for another estate. Then, because he'd never filed a tax return, he didn't have an accountant. But because the death tax is paid out of the estate, they're [the beneficiaries] all non-dependents. They had to get a tax file number, and my friend spent four hours on the phone to the Tax Office, because they wouldn't do it any other way but by phone.
Noel Whittaker is the author of 'Retirement Made Simple' and numerous other books on personal finance. See noelwhittaker.com.au. Noel's new book is Wills, death & taxes made simple.