Estate Planning in a COVID-19 World
As the world adjusts to ‘the new normal’ in the face of COVID-19 (or coronavirus), one often overlooked impact of the virus is its effect on estate planning. Whilst you may be part of the fifty percent of Australians who already have a Will in place, the impact of COVID-19 may mean it no longer reflects your intentions1. Alternatively, if you do not have an estate plan, now, more than ever, it is a good time to consider putting one in place.
What is an estate plan?
An estate plan involves implementing documentation to ensure your affairs are looked after and managed in accordance with your wishes in the event of your death, or if you were to lose the ability to make your own decisions.
Having a valid Will in place is only one part of an estate plan. This is because your Will is only capable of passing estate assets, which are those assets you hold in your sole name or as tenants in common (as opposed to joint tenants) with another person. It is important to have documentation in place to effectively distribute assets that do not automatically pass in accordance with your Will, including benefits held in a superannuation fund or assets in a family trust.
To manage incapacity, each state and territory has their own enduring power of attorney documentation to enable you to appoint someone else (‘your Attorney’) to manage your affairs in the event you are unable to make your own decisions in the future. This document is equally important to your Will, as it ensures the appropriate people are looking after your affairs and making decisions on your behalf if you became unable to do so. In all states and territories, these documents account for financial decisions, such as operating bank accounts and dealing with property. The document may also include the ability for your Attorney to make medical decisions on your behalf, however that will depend on where you live within Australia and it might be necessary to implement additional documents to cover medical decisions.
It is important to take a holistic approach in crafting your estate plan to ensure that each document works together to meet your intentions. One incorrectly drafted document could undo your whole estate plan.
Impact of COVID-19:
There are particular issues arising from COVID-19 that may have an impact on an existing estate plan.
One such issue is the effect that COVID-19 has had on the value of certain assets, including shares and real property. These fluctuations in asset valuations may have unintended consequences on your estate plan.
Additional examples of these issues are included below which help illustrate that by implementing a robust estate plan, many of these issues can be avoided.
Example 1: Gifts of specific assets
A Will maker has implemented a Will which leaves a specific property to their son (valued at $700,000) and a share porfolio to their daughter which they considered would be relatively close in value.
If, as a result of share market volatility, the share portfolio has decreased in value when the Will maker dies, their children will not receive an equal distribution of their estate, as intended, with their son potentially receiving a significantly greater share.
Example 2: Monetary gifts and gifts of residue
A Will maker has implemented a Will which gives $100,000 to each of their five children and the remainder of their estate to their spouse. Their estate consists of a share porfolio valued at $1,500,000 and a house.
Based on asset values at the time of implementing the Will, it was intended that $500,000 would be divided equally between the children and the remaining $1,000,000 in addition to the house would pass to their spouse.
The Will maker’s share portfolio has suffered a 30% drop in value bringing its value down to $1,050,000.
If the Will maker died without updating their Will, the specific monetary gifts would need to be paid first. This would result in the children receiving $500,000 shared between them, and the spouse would only receive $550,000 and the house, as opposed to the intended $1,000,000 and the house.
In this instance the impact of including specific monetary gifts as part of your estate plan means the spouse has had their share of the estate significantly reduced whilst the children receiving specific monetary gifts are immune from market volatility.
Example 3: Enduring power of attorneys
A client has executed an enduring power of attorney, appointing both of her children as joint attorneys to make decisions for her in the event of loss of capacity.
As one child is based in Western Australia and the other in Victoria, if the attorneys need to urgently make a decision using the power of attorney they may find it difficult to do so as a result of current travel restrictions.
Our top six estate planning tips during COVID-19:
Our tips for avoiding estate planning issues during COVID-19 are:
- Consider leaving proportions (or percentages) of your estate, rather than large specific monetary amounts. This will ensure that distributions remain proportional ― even when asset values change.
- If you are leaving monetary gifts, consider the impact that fluctuating asset values will have on the residual beneficiary.
- If you must allocate different assets between different beneficiaries but want to ensure equality, consider including an equalisation of benefits clause which directs the executor to adjust the gifts made to beneficiaries to ensure they are equal.
- Review superannuation binding death benefit nominations and any percentage or fixed gifts in the context of your overarching estate plan.
- Review enduring power of attorney appointments and whether interim arrangements need to be put in place whilst travel restrictions remain in place.
- Review your estate plan every 3-5 years and when there are significant events (including global pandemics).
How we can assist you:
We strongly encourage you to consider reviewing your estate plan to make sure it still reflects your wishes.
To keep our clients and staff safe during this time, our team are all working from home. We do however have infrastructure in place to assist clients with implementing their estate plan and lawyers available to help you finalise your documents in a safe manner.
If you need any estate planning advice or if you have any questions at this time, please do not hesitate to contact our team.
We hope you all stay safe and well.
This insight may contain general advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Evans Dixon Law Pty Limited (ABN 41 138 556 573) (Evans Dixon Law) provides legal and estate planning services. Evans Dixon Law is a related entity and member of the Evans Dixon group of companies.