Tara (00:50):
Thank you so much for tuning in to the Art of Estate Planning Podcast. It's your host, Tara Luki. As usual, I'm thrilled you've joined me.
(00:59):
In this episode, I want to share a little story that reminded me of the importance of stress testing the estate plan. So level one of estate planning is documenting a testator's wishes, right? But if we want to be gold standard elite level, I really think stress testing the estate plan is absolutely crucial. And something happened a few weeks ago that actually reminded me of this. So it's for myself. And we had had our annual review with our financial advisor. So firstly, I love our financial advisors. They are such a support to us. They're not just sort of selling us products and investment advice. They actually talk to us about our goal setting. If we want to spend any serious money, we ask them first, they tell us whether we can do it or when we can do it. So I just love having them on our team because they really take away a lot of the mental load and uncertainty and crunch the numbers for us.
(02:07):
So I love them. And one of the things that came up in our call was insurance. So I think I've mentioned this a million times on the podcast, but we have quite a lot of insurance. We're fully insured. My husband and I are both professionals, so we have income protection, TPD, trauma, and life death cover. And our TPD is for our own occupations. So if something happens to me and I can't be a lawyer anymore, a lot of general TPD policies and I think the basic ones that come in your super fund say as long as you can get a job doing something, whether it's midnight shift working at Woollies, stucking the shelves, we're not going to pay. But our policies are if I get a brain injury and I can't work as a lawyer anymore, then I do get a payout. So anyway, this is not financial advice, not product advice, but I always just want to mention that because I feel like the general public doesn't know.
(03:13):
Anyway, I'm going on a big tangent, but as we are getting older now, our premiums for our policies keep rising and every year they get more expensive. And we also have to assess how much do we need because the end goal is that I'm rich enough so I don't need insurance, but at the moment I am not rich enough. And I also have two little kids who rely on my husband and I to take care of them. So insurance is a must. And after our annual review, we got sent the recommendation about reducing our insurance cover. And obviously it's a trade-off. You'd be insured for $10 million if you could afford it, but there's a trade-off between what the annual premiums cost versus the amount of insurance we need. And I was looking at the recommendation and I went, "Hold on, why are we reducing our insurance for our death?" And we had another call and I used that as a really important juncture to talk to our financial advisor about some of the things that we've updated in our estate plan, because obviously I sort of manage the estate planning for us and I think they've got copies of our documents, but I update my letter of wishes all the time with ideas and things I hear and see.
(04:41):
And I don't know that I had necessarily communicated to my financial advisor all the updates. And this was just a really great chance to talk to them about our funding needs beyond... They obviously have their own methodology, some kind of science and mystery and maths in there about paying the mortgage, paying the living expenses, but also some of our living expenses will reduce and we won't need two cars. And I don't know, factoring all that in, things go up, things go down. There's also things that we're doing that we don't have to do. We may not have to invest so much of our monthly income because we'll have a lump sum to pay with. And the idea is we don't have to worry about paying our mortgage because there's a lump sum that would pay off the mortgage if one of us died and things like that.
(05:37):
So they've got their own methodology, but Hick is not a mind reader. So I was sort of saying, "Well, I've been thinking if I die or say worse, I guess, if I'm left behind and running our family and looking after our kids, what is my personal capacity going to be? I actually think there's going to be a long time where I'm really going to struggle to show up to work." And they factored that in. I think we had a year where I didn't necessarily have to work, but my work is different because I can't just go on leave or take long service leave or unpaid. If I don't work, the business fails and then there's no work to come back to. And also I'm thinking, okay, how am I going to work? And also I've got two kids who love sport, so I'm going to have to...
(06:38):
My kids, you drop them off at school like 8:30, 9:00 and then... Actually my kids start at school at 8:30, so a bit earlier I guess, which is one good thing. But I have to pick them up right on 3:00 and I have to finish at my desk almost at 2:30 so I could, I don't know, have a drink and make myself presentable and go to the school pick up and get a park and all of that. And then I probably will take them to school post-sport activities. And at the moment, sometimes they go to after school care, but I wonder if one of their parents has died, I think connecting them in with the community and channelling them into sports will become even more important. And so I probably will just have to finish work at 2:30 every day. And how on earth am I going to also have dinner ready and have the lawn mowed and the pool sorted and the house cleaned and all the stuff as well as running a business?
(07:45):
I am really going to need help and I don't know what's going to happen to my income and I'm going to need a lot of extra support, probably counselling, the whole thing. So factoring all that in. And then I was thinking in our letter of wishes, we've got some hopes or wishes about if my husband and I both died. So the people who we've chosen to have as guardians for our kids, their kids who are similar age go to a different school and our kids go to a private school, so the cost of their schooling is more and we really want our kids to stay at that school. It goes from two years old through to senior, grade 12. And on top of losing both your parents and moving home, changing schools would just be another crazy thing. And also it's a really good school.
(08:44):
So we want to have the option to pay for our guardian's children to go to that school if they want to because it's a great school and they've got more kids than us. So that is a big burden on them and we couldn't obviously ask them to do it and they've chosen not to fund that for now. But yeah, maybe they would want the option of sending all the kids to the same school and all that school and we want to fund that. So we have to calculate what that costs and include that so that there's enough money for that in our death payout. I also want our kids to have enough money so that they are set up for life if we both die and have lots of money available to buy a house. There's a house in crisis, who knows what the future generation will have access to.
(09:37):
A lot of families are thinking their kids will never actually own a home. So if that happens, we want to have some lump sums coming in to help them do that, obviously with the protection of a testamentary trust so that it doesn't get wasted away while they're immature and not able to make sound decisions. Also, we want to have enough money to fund family travel so that the family who live interstate and five hours away can have their travel costs and accommodation costs covered for them to come and visit our children or our children can go to visit them and that there's a big budget to cover all of that so that they can keep that connection with their wider family. That's also really important to us. So there's just a few things in there. Oh, actually, while I'm on the note of the guardians, we know that the house that our guardians currently live in would not accommodate two more children, so there's got to be some money available to fund that.
(10:47):
Now in the letter of wishes, I've gone through these scenarios with bumpers around what would be reasonable, so like an interest-free loan or making sure that we're getting the right balance so that there's an income being generated from the capital, but also that our children have a great life with their guardians and we can smooth out the insane impact that our guardians are going to have if they have to take in two more children. All of this being designed that our kids have the best possible life available to them if they suddenly become double orphans. I know people say money can't buy happiness, but it really can, and especially a certain amount of money can... Maybe that's true for the billions and the billionaires, but for Middle Australia, money absolutely can buy happiness in terms of improving your living situation, hiring help and support to help make sure that the caregivers have enough bandwidth to actually be present with the children instead of doing all the chores and actually look after them and their mental health with this additional responsibility as well.
(12:09):
So bloody oath, it can make you a lot happier. So that was really important to us. And having this conversation with our financial advisor, he's like, "I didn't know you were thinking about all these things." So it was really good for him to have that factored in to go back and do the calculations. I mean, on my side, I was like, "Well, I don't actually know what amount of money we actually need to do all of that. This lump sums has a good feel about it. It should be enough." I think they have a much more sophisticated system, including indexation and CPI and all of that. But anyway, so that's my little story. And what it just reminded me of is how important it is to stress test the estate plan, because I've been working on this estate plan for six or seven years, basically since my eldest was born.
(13:07):
And the version when he was a little baby is extremely different to now because I keep thinking of things. I am learning so much from our TT Precedents Club community about what others are thinking about and doing. And the first go is often pretty rudimentary. So you might be listening to this going, "That is not my job. I am not the financial advisor. I am not the counsellor, and I completely respect that." But I do think there are some things we can do in the estate planning process to support our clients to stress test their decisions and find out some of the gaps. Because at the end of the day, Alec, yes, we deliver a will and an estate plan, but I think nearly all of you listening, if you're in our community, if you're listening, you do care so deeply about your clients and you want your estate plan to actually work.
(14:09):
And the challenging thing for us, someone asked me the other day, they're like, "Well, how do you know if someone's a good lawyer or not? And why are there estate planning lawyers who are not doing the gold standard, but just keep going blindly through what they've always done without trying to lift their quality?" I think to me, the answer is we don't get any feedback on the work we do. It's really tough. We prepare a will and hopefully that client lives for another 20, 30, 40 years. So we don't actually get any feedback about whether we did a good job or not. A lot of the time we don't know. I mean, hopefully the clients don't ever... They redo their will in 30 years time and they never needed the will, but we often don't often find out. And even if it might not be until a year or two after a testator has died, five years maybe, that they realise things didn't run as smoothly as they could have.
(15:13):
So that's where I want to talk about this and share ideas. And I certainly am no expert on this, and I was really naive before I became a parent. I still think I'm pretty naive now because I don't have any lived experience touch wood on any of this. So the only way we can get better when we haven't been through it and we don't want to go through it because it's awful is by talking about it and sharing ideas. So here's some of the things that I've been thinking about that is worth stress testing with your clients when developing their estate plan as a last check or as part of actually putting the strategy together. So things like timing and what gets frozen or stuck. So a beautiful example of that is one spouse dies, one survives, what cash do they have access to? If everything's in joint bank accounts, they probably have access to a lot of things.
(16:13):
If they run their finances so that they have separate bank accounts, maybe they only have one joint bank account that they each put money into from their salary and they only put a certain amount in there and then they are each responsible for paying separate things, like say the spouse who dies, their bank account that was responsible for paying the mortgage. Well, if they are the sole holder of that bank account and they die, then as soon as the bank finds out, those funds are going to be frozen. So where's the cash coming from to pay the mortgage still and triage that? And even if there's money there, it might be sitting there frozen until the grant of probate is obtained, and you could have a few months where you've got a cash flow problem for that surviving spouse and they have to live on credit cards and max things out.
(17:17):
And that is an insane amount of stress for someone who has lost a spouse, whereas it can really easily be overcome with having money in a joint bank account because that account is not frozen and the joint holder can keep accessing it. So even just sort of asking the question, exactly what bank accounts have you got with cash in them and what won't be frozen and what will be so that we can make sure we don't leave a spouse in that scenario. The next thing is timing. Even when it comes to setting up testamentary trusts, when do we really want those testamentary trusts set up? What is it going to look like for a surviving spouse who's in their 60s or 70s? Do they need a testamentary trust when they've never ever had anything to do with companies or trusts before? Or is this actually way too complicated for them and overwhelming?
(18:19):
I know with my granddad passing away when he was in his early 70s, my nana had a stroke after the funeral from, I guess, the stress. So even though they were totally independent living at home, her world turned upside down in a flash and she couldn't live at home anymore. Her husband of, I don't know, 40 years was gone and there's no way she could have managed a testamentary trust. So we've got to think about yes, gold standard, but also the reality of do we keep things simple for a surviving spouse and only look at testamentary trusts after they've both passed away? I've also seen wills. I had to do a really tough matter years ago now where the will from the testator had beautifully drafted testamentary trusts, but unfortunately all their assets were in super and life insurance in the super fund and there was no nomination and the super fund insisted on paying it directly to the surviving spouse and they had little minor kids left.
(19:33):
So there was nothing in the testamentary trust. So we had to try and do a post-death trust, a super proceeds trust, which is not at all a substitute for a testamentary trust and inferior on all levels, but it was better than just the basic option. And I thought we've just gone through with tunnel vision here, the person drafting that will and not thought about what the assets actually were because they could have sorted that out with the BDBN and a super proceeds trust in the will, and it was just that extra step that wasn't done because they didn't stress test it. Another thing, like I mentioned before, is looking at the assets and what is going to happen to them realistically and getting the balance right for our beneficiaries. Adult beneficiaries might just need capital assets and not worry so much about how that's producing income.
(20:34):
Whereas minor beneficiaries or a surviving spouse with young kids, income replacement is probably going to be really important. So what type of structure are we setting these up in? Who's in charge of making those decisions? Who will actually know what is needed? And like I sort of said before about that scenario where funds are available for the guardians of the minor children, my children, we need to have some checks and balances on the decisions because if my guardians decide that they want to live in a beautiful Oceanside mansion and use up all of our capital as an interest-free loan to let them do that, well, what my kids are long-term, they're going to have a great upbringing for sure, but they're missing out on the capital growth of those assets for when they turn 18 and then what's going to happen in terms of actually extracting that capital when they want it.
(21:39):
The family's going to have to sell the home probably. So you need some checks and balances on people making shortsighted or self-interested decisions. I don't actually think that would ever happen. I trust the people we've appointed, but that's possible. We also need to think about the tax consequences and the inherent tax liabilities and nature of assets that we're in passing on to people, especially where you are earmarking specific assets to particular beneficiaries. Is there a principal place of residence that can be sold within two years so it's CDT free versus another child getting an investment property that has a lot of latent capital gains in there? Have we got shares that we need to deal with? Is there cash or superannuation? Understanding the tax costs that could lower the value of that asset. We talk about equalisation a lot in the TT Precedents Club, and I'm not a fan of earmarking particular assets for particular beneficiaries unless there's real sentimental or practical reasons to do that, especially...
(22:53):
I know a lot of people, and bless them, because they're thinking about their succession plan and they might buy a particular property that they think each particular child should have. But at the end of the day, it's really messy equalising that because property values go up and down. It depends on the location. The tax bill can be different, and so you really can't. It's very challenging to equalise those. So anyway, we won't get into that can of worms, but thinking about that. And then yeah, the last thing probably is the support needs, and is there enough money to actually hire the right people to support the family left behind? I know in my scenario, I think I would need a lot of support to get through that time of life with two crazy little kids. So just making sure you've sort of asked those questions, and especially when you are working with younger families, if they're in their 30s, usually it's not expensive to get extra death or life cover, especially through their superannuation.
(23:57):
Their fund can pay the premium, and that injection can actually smooth out so many challenges in an estate plan. Obviously, it's more complex when they're older and it may be that insurance funding is not a straightforward solution, but a lot of people have never even been told about insurance funding or that they need it. So unless you're in professional services, it might have never ever crossed their mind and they don't know what they've got in their super fund or what it would cost to get there. So obviously we wouldn't be providing financial advice on that, but you can do a referral to a financial advisor. And there are some financial advisors who just do insurance only advice. There's others who do full service, but identifying that and just planting the seed can be really important. So one more example actually, which comes up all the time that I think stress testing is so important for is when you have a blended family and there's a lot of the equity and assets are in a single property and they want to gift their share of the property to their own children and have their spouse who is not a biological parent of those children with a right to occupy and owning the other half.
(25:22):
So what you end up with is a stepparent and stepchildren managing a property and stress testing that kind of scenario is so important because who's paying the rates, who's paying the upkeep if the hot water system's broken, who's responsible for paying that? And it can actually be so messy because you are leaving your children with an asset that is not producing any income because their stepparent is living in it and they might be waiting 20, 30, 40 years for that stepparent to ultimately die and they have the burden of maintaining and funding that property or half of the property. And you have got to think, is that actually a reasonable gift to them or are you putting any chance of that relationship being maintained and on a good footing? Are you actually eroding that opportunity on the relationship because everyone's going to be really bitter and sour about the finances involved?
(26:30):
So people come in with these great ideas, but stress testing it and actually getting them to think it through can make all the difference. So how do you go about stress testing? I think there's multiple ways and it can be just gently asking questions, leading or follow up questions. I definitely wouldn't go in and say, if you have been in our TT Presidents Club hot seat when it's just us lawyers talking, we're pretty blunt. We're like, "This is wrong, this is wrong, this is wrong, that won't work." But I definitely wouldn't do that in a client setting. I think a little bit of coaching and gentle questions and sort of leading them to the conclusion can really help. I think some visualisation exercise, not getting woo necessarily, but to just say, "Okay, so I put Tara under the bus, Jared, tell me, I want you to just think about a normal week or a normal work day and how you would have to manage that without Tara here.
(27:34):
And what time would you pick the kids up? How many hours would you have to work? Would you need support in that type of thing to just try and get them thinking and change that mindset? Or yeah, what do you think it would look like in the home where if you're both not here, the guardians are living there, where are they going to school? What would a normal week look like for them? How would they manage this particular scenario? So a few leading questions. I also like, especially if you've got the financial advisor or accountant involved to do some actual calculations. Now, just rough numbers obviously, but looking at, okay, we've paid this off, this money's come in here. Where is this money sitting? Is it in shares? Is it in cash? Is it just being totally wiped out by the mortgage? What are they going to live on?
(28:30):
Let's assume your income earning capacity has reduced for the first four years, all of that kind of stuff. And if they can actually do some numbers about how are we managing the debt, what is left over after the debt, what type of return can we expect to get, would this realistically be invested or would it be held in a capital asset that's not producing income like the home? I also love diagrams, and I mentioned this in episode 107, but I just think the estate planning flow chart diagrams are so powerful to visually show everyone and map out where things are going so we can see who's getting what, what's left. Okay, there's this large sum in the super proceeds trust and there may not actually be that much money in the testamentary trust. So we've got to make sure our main testamentary trust is optional or okay, we've got property going into this testamentary trust over here.
(29:33):
If we've got residential property going into the testamentary trust, we have to exclude foreign persons. So actually what about that side of the family or that child and their bloodline? They will actually miss out on that. So have we got enough to top them up with the non-property assets? All of these things, mapping it out, visualising and doing calculations can just go a bit further to Helping your clients see things. I'm not expecting us to know the intimate details of our client's lives. I think the point of the stress testing exercise is to cut through the legal jargon, the overwhelm, the intimidation, so your clients can see exactly what would happen in the plan without them having to read pages and pages. And they can tell you, "I think this will work. I don't think this will work." And then they can get their thought process ticking over around their letter of wishes and their kinds of instructions and wishes.
(30:40):
And we can ask a question and they might have a gut reaction, "No, not necessary." Well, at least we've ruled that out or they can document that wish versus a lot of people, they just get wills and they go, "We've got our wills sorted and no one's thought about the practical detail." So there's no real rhyme or reason to this. There's no checklist. It's more just a philosophy or approach to think about. And I know that there will be some of you listening who do this inherently and you just naturally bring this element of care to the way that you approach your wills. I have to say for me, it is not something that I used to do in my early career days or even probably the first 10 years of practise. I wasn't taught to think about the estate plan like this. It was all extremely technical, the background that I had.
(31:36):
And I've learned this from the TT Precedents Club members and our discussions in our hot seats. So I just wanted to share these thoughts. If you have other things you do, if you think I've missed a really substantial aspect, I would love to hear and keep this conversation going because you won't find this in a textbook. It is just something that comes from experience and hearing about how other people go about things. So I hope this has given you some food for thought. Thank you so much for tuning in and I will see you next week.
