Estate planning and incapacity

What is Missing from Your Estate Plan?

© 2024 First Samuel Limited

This is Part One of a series exploring the serious conversations within wealth management: incapacity, family estate planning, and deceased estates.

Controlling what you can control

In an ongoing period of uncertainty brought on by the Covid pandemic it has become clear just how much in life is out of our control.

It has also driven home the responsibility to control that which you can control – your estate plan.

Most people who are conscientious about the management of their wealth have taken care of the basic elements of their estate plan: having an up-to-date will, nominating beneficiaries to their superannuation fund (be that a binding or non-binding nomination) and putting an Enduring Power of Attorney in place.

However, it’s important to make sure there are no missing links or surprises lurking in your plan.

In our experience, there are aspects that are often overlooked in an estate plan relating to both incapacity1 and death.

  • Appointments of Medical Treatment Decisions Maker (MTDM)
  • Advanced Care Directive (ACD)
  • Testamentary Trusts
  • Private Ancillary Funds (PAF)

At First Samuel we strongly believe that these aspects need to be considered and carefully understood. Let’s have a brief look at each of them.

1Incapacity is when an individual has lost the ability to make decisions for themselves. That is he or she is unable to comprehend communications, or express his or her will, with respect to his or her property or affairs.

The legal view that ‘adults have the capacity to make decisions for themselves unless it is proven otherwise’ becomes further nuanced as it is accepted that incapacity can be total or partial, permanent, or temporary.

Appointment of Medical Treatment Decision Maker (MTDM) and Advanced Care Directives (ACD)

MTDMs and ACDs relate to decision making in respect of medical treatment and medical research. These are different to an Enduring Power of Attorney (EPoA), which is to allow your “attorney” to act on your behalf relating to your personal, legal and financial affairs.

Both these documents, like an EPoA, are most useful in circumstances of incapacity, be they temporary or permanent.

When you appoint an MTDM, you give him or her the ability to make decisions on your behalf in relation to medical treatments (e.g. medications, surgery, treatments, etc) and medical research.

An ACD is a step removed from an MTDM. As compared to empowering your appointed MTDM to make decisions on your behalf, it allows you to prescribe your own directions regarding future potential medical treatments to be followed in the event of your incapacity.

It is important to note that an ACD takes precedence over an MTDM, in that the “decision maker” under a valid MTDM must follow the directions within the ACD, other than in limited circumstances.

Whilst each alternative has its advantages and disadvantages, not having them in place leads to the risk of sub-optimal decisions that can materially impact your quality of life.

Without these documents, family members and loved ones may have to take bureaucratic steps to legally obtain the power to manage your affairs or have orders made in respect to medical treatment or care. These steps include making an application to the appropriate State Administrative Tribunal.

Testamentary trusts

Testamentary Trusts are discretionary trusts established under a Will, which allow for all or some of the deceased assets to pass to the Testamentary Trust from the estate for the benefit of the beneficiaries.

Testamentary Trusts provide flexibility, allowing for the tax-effective distribution of capital and income of the assets, whilst offering a greater degree of asset protection compared to assets being held by the beneficiaries in their personal capacity.

The main benefits of a Testamentary trust, in addition to tax efficiency and asset protection, are that of control and longevity. The deceased may prescribe the distribution entitlements, or set preconditions surrounding such, which can survive for up to 80 years (or under predetermined circumstances). This allows for future generations to later become beneficiaries of the Testamentary Trust.

Private Ancillary Funds

PAFs are a type of personal charitable trust that can be established under a Will or by a Trust Deed at any time. It enables an individual, family or organisation to put money aside to support charities over the long term.

Primary advantages of a PAF include control as well as tax efficiency. The latter is because the ATO allows a PAF to qualify as a ‘deductible gift recipient’ in certain circumstances. This means that contributions are tax deductible.

In effect, a PAF allows you or your family to create a legacy of an enduring nature.

Next Steps

As always, before determining whether such instruments and structures are appropriate, there needs to be a case-by-case consideration of each alternative. The first step in the path to greater certainty comes with improving your awareness.

Thereafter, we suggest making the time to speak with one of our Private Client Advisers; he or she can assist you to navigate through the complexities of this aspect of wealth management. The aim is to better secure your and your loved one’s futures – financially and otherwise.

Please note that this article has been prepared with reference to current Victorian legislation. Similar principles apply in other jurisdictions however the legislation in each state or territory will have its own nuances and terminology may differ. The information provided is general in nature and has not taken into consideration your personal circumstances or requirements. You should seek independent legal advice prior to acting these matters.

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