Attwood Marshall Lawyers Wills & Estates Partner and member of STEP (Society of Trust and Estate Practitioners), Angela Harry, explains the impact the current economic environment may have on people’s future estate plans, and why this is a critical time to review your overall estate plan to ensure the transfer of your assets and wealth to future generations is protected.
As the likelihood of a global recession appears to be imminent, we can’t help but wonder how Australia will fair and if we will enter a recession.
When recession is looming, property prices, shares, and superannuation investments are at risk of diminishing in value.
For anyone with an estate plan in place, this can serve as an important time to revisit and review the plan. The economy goes in cycles, and fluctuating asset values must be given consideration to determine if the estate plan is still suitable both now and into the future. It may be some time since you looked at your estate planning and your assets may have changed, both in value and how they are legally owned. Many people think a simple Will is enough to sort out their affairs. Sadly, there is no such thing as a ‘simple’ Will in these modern times and having a proper estate plan that looks holistically at your individual situation is a must. The economic uncertainty and the impact on your assets simply underlines the importance of getting the right advice for you and your family.
For those who don’t have a Will or have not taken steps to obtain advice about their estate plan, now is the time to get that advice! Dying intestate can cause huge problems for the loved ones you leave behind, and sometimes your affairs may end up with the Public Trustee. This can be a further nightmare for the ones you leave behind.
Factors that can impact an estate plan
Given that no two estates are the same, there are many factors that need to be considered and advised upon when reviewing and strategising for your estate plan.
The top three issues include:
Share price value
In general, most people who own shares have had to diversify their portfolios during the pandemic and accept some short-term volatility. The pandemic has had a significant impact on people’s retirement plans, with ASX reporting that nearly 3 in 10 investors stated the market performance during COVID will directly affect their retirement plans and the value of their share portfolios. It is important for people to consider how declining share price values may cause inequality of gifts in an estate plan.
We are all very much aware of how the pandemic reshaped the housing market. Although early in the pandemic housing prices declined, they quickly turned around to achieve record-breaking prices, nearly jumping by 25 per cent. As the pandemic phases out, and the economy struggles to deal with inflation, property prices are once again declining, with further drops expected as interest rate rises continue to the end of the year. With real property often being the most substantial asset many people own, the value of the property is a significant consideration when completing an estate plan and determining what will happen to that property after death.
Up until December 2020, the government allowed people to access a portion of their superannuation early to support those who lost their jobs or income during the pandemic and who were experiencing financial hardship. Early in 2021, it was reported that $36.4 billion was withdrawn from Australian super accounts, with Queenslanders making up approximately 25 per cent of the people who withdrew super early. Not only will this impact any plans people may have for retirement that factor in their superannuation, reducing superannuation benefits may also impact plans for who people choose to leave this asset to after they die. Fluctuation in the value of superannuation must be considered when looking at an estate plan.
What once may have seemed like a fair distribution of assets, may change significantly which may see one beneficiary inheriting much more than another. When you start to see inequality of gifts in Wills, this may increase the risk of Family Provision Claims after someone passes away, as a testator fails to appropriately adjust the gifts to ensure they are providing adequate provision for the proper maintenance and support of their children and other dependents.
Estate Planning Strategies
There are various tools and strategies that can be used to combat a turbulent economy and give consideration to fluctuating asset values and family circumstances.
Reviewing your Will regularly, every 2-3 years, is best practice. This helps ensure that people keep on top of any changes to the values of property or assets they hold and provides an opportunity to adjust their Will in line with those changes.
It may also be the case that the pandemic or economic downturn has impacted a beneficiary named in a Will, which may mean their changes in circumstance also need to be considered. Perhaps they have more financial need than other beneficiaries, and the Will-maker may wish to alter their Will to provide more for that individual. Again, any changes to family circumstances, financial circumstances, or values of assets should trigger a review of the document.
There are different ways a Will-maker can choose to structure the division of their assets. Instead of leaving property or assets wholly to one beneficiary, such as a singular gift like a property to one child and a superannuation balance to another, a Will-maker may opt to leave a percentage of an asset to each beneficiary. This can be a good option if someone wants to ensure their assets are shared between beneficiaries evenly and will factor in fluctuations to asset values.
For example: Someone has two adult children they wish to provide for in their Will. Before the pandemic, they chose to leave their home to the oldest child, and their superannuation balance to the youngest child. At the time the Will was drafted, the two assets had relatively similar values. Fast-forward two years, the property value has risen drastically, but the superannuation balance has diminished as the Will-maker had to withdraw some money early during the pandemic, and a percentage of the value of the super also diminished due to market fluctuations. The two gifts are now no longer of similar value.
Setting up a trust
As estate plans become more complex, more people are interested in creating a testamentary trust to preserve their wealth for future generations.
This can be a great strategy to visit when reviewing an estate plan to determine if a trust may better manage tax obligations, and provide better protection against creditors and family law proceedings for vulnerable beneficiaries.
The general consensus concerning retirement and transferring wealth
There is a level of concern being shared by older generations who are nearing retirement.
Crestone Wealth Management completed a survey in 2021 called “State of Wealth” which revealed that the pandemic caused more than half of the high-net-worth individuals surveyed (58%) to rethink their pre-existing retirement plans.
The most common reason for this was that individuals wanted to have a clearer plan in place (26%) or needed to discuss the plan they had with their family earlier than intended (23%).
One in five participants wanted to put a Will in place or transfer their wealth earlier than anticipated.
More than twice as many high net wealth individuals appeared very worried about their wealth transfer now compared to two years ago, with the percentage of high net wealth individuals seeking professional advice about their situation increased to 34 per cent in 2021, compared to 23 per cent in 2019.
There appears to have been a shift with people moving away from self-directed management and towards the need for assistance from professional financial and legal advisors to make sure they are getting trusted and up-to-date advice.
As lawyers, we understand that no two estates are the same and no two families or situations are the same. The greater community are starting to understand that the “cookie-cutter” DIY Will Kits, and online Will templates that are becoming increasingly popular, are not the best option and more people seem to be inclined to seek professional advice for their estate planning needs during an economic downturn.
Attwood Marshall Lawyers – helping people plan for the future and preserve their wishes
Attwood Marshall Lawyers have a dedicated team who practice exclusively in estate planning. Our lawyers understand the best ways to mitigate the risk of today’s economic pressures when creating estate plans to help our clients protect their assets, their family, and transfer their wealth successfully to the next generation.
We are able to look after everything from mums and dads, to pensioners, to high-net-wealth clients by assisting with Will-drafting, completing Enduring Powers of Attorney, setting up testamentary trusts, binding death benefit nominations and the transfer of superannuation benefits, and business succession plans.