As with many busy medical professionals, they often fail to take time to consider the long-term effects of certain financial decisions at the time of entering into financial arrangements or acquiring assets. We set out 7 common estate planning mistakes that medical professionals make, which can unnecessarily cost their estate hundreds of thousands of dollars.
1. Failing to Adequately Provide to Dependants
Medical professionals often get into medium term relationships, which may in fact be classified as a de facto relationship under the Family Law Act 1975 (Cth), however, have failed to make provisions for this person in their Will, as they have been financially independent from each other during the relationship. We often see that where there are two medical professionals in a relationship, they sometimes have very separate financial lives and implement their estate plans completely separately of each other. In addition, where a medical professional has separated or divorced, they fail to consider that their ex-spouse, especially if their ex-spouse is financially dependent on them, may still have a right to claim on their estate.
2. Failing to Consider Debts
Often, many medical professionals have assets and investments held either with spouse partners in unequal percentages or hold assets via a family trust. Often, many medical professionals fail to consider certain debts and taxes that would be attributed upon the transfer or sale of that particular asset which results in certain beneficiaries being liable for the debt upon inheriting that asset.
For example, consider the position where a Will maker left her home to one of her children and an investment share portfolio valued at the same amount to her other child. On the surface, it was an equal distribution, but considering that the main residence did not attract capital gains tax and the investment share portfolio will, this will have an adverse impact upon the ultimate benefits received by the two children being significantly unequal.
3. Underestimating the size and complexity of the Estate
As many medical professionals are working as sole traders, or through a company entity, they often forget about one of the biggest assets, being their superannuation and life insurance benefits.
We often find that many medical professionals have failed to implement binding nominations within their superannuation funds or on their life insurance policies. Proper estate planning will ensure that certain benefits received from superannuation or life insurance will be provided to dependent(s) to avoid unnecessary non-dependency tax in the amount of potentially 17.5% of the total amount and will also ensure that for minor beneficiaries, benefits are held within a testamentary trust within the estate. Furthermore, it is important to note that a divorce generally does not nullify the binding death benefit nomination.
4. Waiting until it’s too late
It’s important, but not urgent.
As with many medical professionals, they are committed to their profession and often put aside important tasks that affect both themselves and their family to the side.
Considering that their estate may be sizeable and that they may have various family trusts, company structures and certain beneficiaries that are financially dependent on them, it is imperative that they ensure that they implement their estate plan together with any de facto spouse partner without delay. It is important to also consider implementing their estate plan to ensure that any de facto or spouse partner can understand their intentions and carry out any future intentions to their nominated beneficiaries (i.e., their minor children) by protecting and preserving their estate.
Whilst they may feel their estate is simple, by failing to implement an estate plan, their minor children may not be provided with the necessary protection by way of a testamentary trust to ensure that the assets that they receive from their estate are preserved and maintained. Additionally, they have failed to take advantage of the tax benefits provided under a testamentary trust.
5. Not Updating Regularly
As changes in people’s lives are changing continuously, estate planning is not a “a set and forget” approach. It should be reviewed every few years and must be updated if there is a significant change to personal or financial affairs. Every time there is an acquisition of an asset, establishment of a new entity, or a change to personal relationships, the estate plan must be reviewed. For example, we often find that many medical professionals make investments interstate but fail to implement an enduring power of attorney in that relevant state, to ensure that their appointed attorneys can act on their behalf in respect of that property in the event they were to lose mental capacity.
6. Failing to Consider Particular Assets/Structures
Often, we see that a previous Will has failed to address specific assets such as family trusts, including provisions for successor trustees or appointors, successor directors and transfer of particular shareholdings in company entities or superannuation proceed trusts for any superannuation and life insurance directed to the estate. In addition, we also see estate plans failing to consider assets that fall outside the control of the Will. For example, the assets that may not fall within a Will include:
- Jointly-held property – i.e., property owned with another person as joint tenants. If, however, the property is held as tenants-in-common, the share that person holds in the property can be passed, subject to any mortgage, to the beneficiaries named in the Will.
- Superannuation – superannuation assets are held by the trustee of the super fund and, as such, might not be included in an estate. Many superannuation funds include the option to nominate a beneficiary and this nomination will override the Will. If no binding nomination has been made, the death benefits will normally be paid out at the trustee’s discretion, and this again may not be as per the deceased’s wishes in their Will.
- Proceeds of life insurance policies – if a policy is held with a nominated beneficiary, the proceeds will pass to that person upon death, regardless of the beneficiaries named in the Will.
- Assets held in a trust – these are not included in an estate but continue to be held in the trust.
- Company assets – a company is a separate legal entity and, as such, company assets themselves are not distributed by a Will (although the shares in the company are).
- Overseas assets – assets that they may hold in their personal names in another country, would not be covered in your Australian Will, unless international provisions are applicable and have been drafted in detail.
7. Forgetting tax planning
There are many tax considerations that can affect the total entitlement a beneficiary will end up receiving from an estate. This includes income tax, capital gains tax (CGT), land tax and foreign beneficiary tax. In most cases, assets owned at the time of death can be transferred to beneficiaries without paying capital gains tax. However, if the beneficiary eventually sells that asset, CGT may be payable.
One of the most effective ways to minimise tax on income, particularly when leaving assets to minor beneficiaries, is to establish a Testamentary Trust in your Will. A Testamentary Trust is simply a trust set up via a Will that can be used to protect a beneficiary’s inheritance and distribute income tax-effectively.
Contact Us
MistryFallahi Lawyers & Business Advisors has extensive experience in implementing simple to comprehensive estate planning solutions for many professionals, business owners, blended families and medical professionals. Our team possesses expertise in all aspects of estate planning, including structuring and asset protection.
To learn more about how we can help you, please contact us on +61 2 8094 1247, email us at enquiries@mistryfallahi.com.au or provide us with your initial information by clicking here.
