Common pitfalls to avoid when passing on your wealth

Written and accurate as at: 15 November 2022

As parents, we may often worry about the financial wellbeing of our children (whilst we’re still alive, and once we’re no longer around).

One of the steps we can take is to carefully plan how we might transfer our wealth, now and into the future.

However, transferring wealth to the next generation can be a complex process, with many pitfalls that you need to be aware of. For example, without proper planning, your loved ones may end up with less than you intended (or they expected).

Below, Katerina Peiros from Hartwell Legal shares some common pitfalls to look out for, and things you can do to make sure more of your money ends up in your children’s hands.

Pitfall 1: Not updating your Will after marriage or divorce

If you get married or divorced, it’s important to understand that this event will revoke your Will. To what extent, can depend on which state or territory you live in, as the laws are different. But if you are recently married or divorced, or you are about to be, you need to make sure you update your Will—as well as consider updating your super beneficiaries, any powers of attorney you have appointed (e.g. for personal, medical, or financial matters—Enduring Powers of Attorney or Guardianship or Medical Treatment Decision Maker Appointments, as an example), and any other legal documents you have.

Note that this does not apply to separation. And, in every state except Queensland, the breakup of a de facto or registered relationship has no effect on your Will or any other legal documents.

Pitfall 2: Overlooking non-resident CGT

If the executor of your Will, or any of its beneficiaries, are non-Australian residents for tax purposes, gifting an asset (solely owned by you) to them via your Will, such as publicly-listed shares, may trigger a Capital Gains Tax (CGT) event. In other words, the ATO will view the date of your death as the day you ‘sold’ those assets, because it is seen as though the assets are leaving the country.

Whether CGT applies or not can depend on the asset in question. For example, it may not apply if you leave an overseas resident son or daughter your home, however it will most likely apply if you leave them your share portfolio, units in a unit trust or other assets. And, depending on which country your beneficiary resides in, they may be charged inheritance tax by their local tax authority.

Pitfall 3: Being vague about the definition of children in your Will

Often people will state in a Will they wish to leave certain assets to their “children” or “grandchildren”, without properly defining who they mean or naming them. If your family includes step-children, foster children or step-grandchildren (i.e. children of your children’s spouse or de facto partner), you need to make it clear whether they are included or excluded, ideally by calling out each beneficiary by name. Without this clarity, your wishes may be left open to interpretation and it may be up to the courts to decide who is in, and who is out.

Also, bear in mind that the class of grandchildren closes when you’ve passed away, not when you made the Will. Meaning that grandchildren born after the date of the Will or step-grandchildren who come into your family after the date of your Will, may fall within the definition of “grandchildren” and be eligible to share in your estate.

Pitfall 4: Leaving DIY Will kits open to interpretation

Legal jargon might be hard to understand, but it’s designed to ensure what is written in black and white is absolutely water tight. When using a DIY Will kit, it’s crucial to express your wishes in line with the exact wording provided in the template.

The moment you deviate from the template, complete the form incorrectly, or add in extra wording that is not accepted ‘legal speak’, there can be a high chance that the courts will need to decide what your intentions were. Aside from significant legal costs, court proceedings can lead to unnecessary stress for the loved ones you leave behind.

Pitfall 5: Using a ‘life interest’ in your Will without understanding the implications

In blended families, often couples use ‘life interests’ in their Will to provide for the surviving spouse, while giving ownership of an asset to their children. A common example is the family home. Let’s say you leave your spouse the right to live in your family home for the rest of their life, but you may wish for your children to ultimately own the home once both you and your spouse die.

If you decide to use a life interest in your Will, you need to understand the implications and practicalities. For example, will your beneficiaries be impacted by tax or Centrelink consequences of owning an asset? If you include the family home as a life interest, who will be responsible for maintaining it? Your spouse living in it (who has no right to any capital) or your children (who have a capital interest but are not receiving any benefit for years to come)? And, what will happen to the home if your spouse needs to go into aged care? Test driving the practicalities and ensuring that you have factored in future possibilities is essential and can help avoid disputes.

Pitfall 6: Not being specific when appointing a Power of Attorney

An enduring Power of Attorney (PoA) are legal documents that give a person or organisation the legal authority to make financial, legal, personal/guardianship and medical decisions on your behalf, and as specified by you, when you no longer have the mental capacity to do so. What many people don’t realise, is that legislation states that capacity is task-specific. It sits on a spectrum—you may have capacity for some simpler tasks, but not for more complex ones.

If you don’t clearly state an easily identifiable point in time when your PoA commences (eg. when you have gone into aged care or when you can no longer explain what a PoA is), each time your attorney wishes to act for you, they will need to obtain confirmation from a doctor as to whether you have capacity to make that specific decision yourself. This is not a practical solution and it can be solved by setting an easily identifiable commencement date or event for your PoAs.

The information contained in this article represents the views and opinions of Katerina Peiros, who is not affiliated, associated, authorised, or endorsed by us. In addition, this information is intended for educational purposes only, and does not take into account your objectives, financial situation and needs. For further information or clarity on anything that has been discussed in this article, please consider seeking qualified and professional advice.