ESTATE PLANNING - The elephant in the room

Estate Planning – The Elephant in the room

Here is an expanded version of an article I recently wrote for the Ponsonby News in Auckland. I will follow this with a separate article on succession planning next week which ties in with a lot of the discussion points below.

The reason for writing this article comes from a recent client engagement I started acting for, where the patriarch of the family had died without any formalised plan, which has resulted in the family being torn apart trying to clean up the mess that was left behind. The father passed away with an empire (various companies & trusts) that had overdue income tax returns, unpaid taxes, an out-dated will, no memorandum of wishes, no discussion with the family about who would/wanted to takeover or how that process would work – what has ensued? Complete chaos.

My question for you: Do you want to leave your family a pile of mess which undoubtedly result in tension & perceived inequalities trying to clean it up?

Or, are your parents in a position where they are looking to wind down and none of this has been discussed or planned for?

• Do you have a plan for your family when your time is up?
• How can you ensure that a fair & equitable distribution of assets to beneficiaries will occur?
• Have you sat down with your family and discussed yours/their wishes for the family assets/business?

Estate planning is a topic that no one wants to think about or discuss, let alone plan for. None of us know when our time on earth may be up, or be unexpectedly cut short, but having a formalised plan and documented set of wishes/instructions can help your loved ones navigate your passing.

In the absence of a well thought out exit plan you could be leaving your family in a difficult financial position or with a cluster of mess and tough decisions to navigate. A good estate plan should limit unnecessary court visits, legal & accounting fees and allowing your family to grieve with each other instead of fighting amongst themselves.

The best thing you can do is be proactive, prepare a plan now so when that time comes your trustees, estate executors and family can pull out the play book and follow your instructions.

What should you consider in your estate plan?

1. Will
2. Trusts
3. Enduring Powers of Attorney

A Will – “Last Will & Testament”

A will is a legal document that allows you to state how to distribute your personal property & assets on your passing. While many of us now have our assets held via trusts, with few assets held privately other than personal chattels, a will is a critical part of your estate plan as it gives the executor instructions on how to settle your estate.

Without a Will, New Zealand legislation (Administration Act 1969) dictates who gets what and how much of what you leave behind. It’s a very specific formula, so depending on your situation your assets/property may not end up where you might think. On top of this, the cost of administering this can increase significantly and take a long time to resolve.

Having a will, will allow you to settle your estate, name a guardian for your children, express your funeral wishes, leave your personal assets/chattels to those you wish, or donate to charities.

You can apply for a will as early as your 18th birthday, its easy to put off getting it sorted as no one likes to think about bad things happening, but it should accompany any estate planning you are considering, especially if you have bought a house or have started a new family.

Trusts

The personal asset distribution process (Wills) are very different from assets held/owned in trust. Many people have trusts, and in our opinion they are typically misunderstood (Especially with the new Trusts Act 2019 changes that took effect on 30 January 2021).

There are many types of trusts that can designed to address very different situations which I wont cover here, but the most common of these are the family trust.

A family trust is deemed to be a separate legal entity and therefore you have already passed title/ownership to those assets when settling those assets into the family trust.

A trust may continue until the “final vesting date” as stated in the trust deed when first settled, when which reached will result in the transfer of the trust assets to the named beneficiaries.

A trust has three elements:

• trustees are the people who manage the trust,
• the settlor is the person who creates the trusts and,
• beneficiaries are those who benefit from the trust.

The trust deed outlines those involved (trustee, settlor, and beneficiaries), and the instructions on how the trust will be managed. Depending on the instructions of the trust deed you could still use the assets within the trust, you just wouldn’t own them under your sole name. For example your house could be in a trust but you could continue living in it for as long as it’s stated in the trust.

Similar to a will, you can prepare a “memorandum of wishes” relating to the trust. This records your wishes of what you want to happen to the assets in the trust, which the surviving trustees must consider. This may include your wish for certain assets to be distributed to a named beneficiary, or the final vesting date to be brought forward and the assets transferred/resettled earlier than the final vesting date.

A trust may not suit everyone, and they can be more complex and costly to set up so I would recommend you talk to your accountant/lawyer if you would like to explore this further.

Enduring Powers of Attorney

This is more of a legal matter and not so much a technical piece of accounting advice but is closely related and ties into the ability for a named person to act (or sign) on your behalf. Powers of attorney (EPA) is a legal document that nominates someone that you choose the ability to act on our behalf. You might consider getting an EPA if you want to give someone else the ability to make a decision for you in the case that you are incapable or unavailable to make the decision yourself.

There are two types of EPAs:

• A property EPA enables decision making on financial matters such as money and property, bank accounts, paying bills, and buying/selling property. You can choose at what point you want your attorney’s power to kick in, whether it’s immediately, or only if you’re incapable to make the decision yourself.
• A personal care and welfare EPA enables decisions about your health and wellbeing and can only take effect once a qualified health practitioner has confirmed that you’re not sound to make decisions yourself.

You can appoint the same person for both, however the authority must be appointed separately. An EPA has to be done when you’re still mentally capable so the best time to sort it out is now because you just never know what could happen.

In the absence of an EPA, no one else would be able to deal with your property or financial affairs without a court order (that’s including family members and partners) and this process can be very costly and time-consuming.?

What is the process after a loved one passes away?

The process for distributing the assets following the passing of a loved one can take time, even if they have all their affairs in order as outlined above. Below are the key steps that have to be followed.

Before an executor can “execute the will” and carry out the wishes of the deceased, they must be issued “probate” which is the confirmation of passing being formally recognised by the High court and documented via a death certificate. This can take up to six weeks.

Once probate is granted, the estate of the deceased is established, and the personal assets of the deceased are administered through this vehicle. The estate needs to be registered with IRD and a IRD number applied for, all income and tax of the estate needs to be accounted for until the estate has been executed and wound up. Often bank accounts may be required to be set up for the estate which will require a copy of the death certificate.

The deceased persons affairs also need to be dealt with, which includes notifying IRD of the passing and preparing a tax return up to the date of death (everything after this date will be dealt with via the estate as mentioned above).

The executor of the estate can begin distributing assets as outlined by the will of the deceased person. This can however take some time for the executor to work through, especially if they have passed away suddenly and the executor needs to work through deriving asset valuations, determining what property is owned personally or is owned by the family trust etc.

That covers a general outline of what you should consider for your estate planning, and the process that is involved when a loved one passes away.

The best thing you can do is be proactive and deal with this early, while it may be confronting it will almost certainly make it easier for family – take the time to talk things over with everyone, make a plan, discuss with your accountants and lawyers and then regularly review your plan as required.

#estateplanning #succession #ills #trusts #powerofattorney