There’s more to estate planning than writing a will. Finance expert Noel Whittaker explains what you need to know to protect your assets that fall through the cracks.

Mostpeople realise the importance of having a will, but there is still a lot of misunderstanding about which assets are subject to the will and those that fall outside the will.

Two of the major assets that fall outside the will are property and shares held as joint tenants — on death of one owner, the asset automatically vests in the survivor irrespective of the terms of the will. This is why it may be better to hold them as tenants in common if there is a blended family with each partner wanting the assets they brought to the marriage to go to their own line.

Retirement income stream products like allocated pensions and annuities when there is a reversionary beneficiary fall outside the will. Insurance bonds are also excluded, as the proceeds vest in the nominated beneficiary on the death of the bond owner.

Superannuation is another asset that does not necessarily flow in terms of the will. The trustee of the fund has the final say as to who gets the proceeds, unless there is a current binding nomination requiring the trustee to pay the proceeds in the manner specified in the nomination document. Unless the paperwork for this is completed properly there could be unintended consequences, which may well not be what the deceased would have contemplated.

Superannuation is another asset that does not necessarily flow in terms of the will.

The extraordinary case of Katz v Grossman [2005] NSWSC 934 is a dramatic example of what can occur when things go wrong. In this case the father, Ervin Katz, had a self-managed superannuation fund with assets worth over $1 million and via a non-binding nomination had directed proceeds be shared equally between his son and his daughter when he died. The daughter and her father were the co-trustees of the fund.

When the father died, the daughter ignored his wishes and instead of appointing her brother as second trustee, gave the position to her husband instead. They then went about distributing all the proceeds of the fund to just the daughter, leaving the brother with nothing. The brother took the matter to court, but lost.

If the father had taken the trouble to have his trust deed reviewed, and then sought appropriate financial planning advice, it would have been a different outcome. For example, the deed could have been amended so that all children automatically became trustees on the father’s death.

At the very least, the father could have drawn up a binding nomination instead of a non-binding one. Then, the trustees would have been compelled to pay the proceeds to all the siblings in accordance with the wishes of the deceased.

Binding nominations are becoming quite popular and are simple to prepare. It is just a matter of filling out the form that the superannuation company gives to you and having it properly witnessed. But binding nominations should only be used after taking good advice, because they remove the flexibility to distribute the proceeds in the most tax-effective manner.

Binding nominations are becoming quite popular and are simple to prepare.

For example, if one child is a ‘dependant’ then they escape the non-dependant tax of 15 per cent plus Medicare Levy. If the other child is over 18 years of age and not being maintained by the deceased then they suffer the tax. This is unfair. To avoid this, the children could work together. The dependant could take 100 per cent of the parent’s superannuation and the non-dependant gets a top-up in the will — tax-free. To do this the trustee needs the flexibility a binding nomination would remove.

If you are considering making a binding death benefit nomination, first make sure you clearly understand the implications. A binding nomination can only be made to a dependant (as defined in superannuation law) or legal personal representative (your executor). Once a valid binding nomination is in place, the trustee must follow it, even if your circumstances have changed — so they lose the discretion to distribute the proceeds of your fund in the most tax-effective manner.

A couple went to a seminar where I was discussing potential family conflicts and the use of a death benefit nomination. Without taking advice, they promptly executed a binding death benefit nomination leaving half of their superannuation to each other, and the balance to be divided equally between their two children, who were high earning professionals.

The husband died suddenly, leaving $4 million in superannuation. If there had been no death benefit nomination, the whole $4 million could have been left to the widow tax-free. However, because of the binding nomination, the trustee was obliged to pay $2 million tax-free to the widow, and $1 million to each of the two children. The death tax on that was $170,000 to each child — a total of $340,000.

Another problem is that the binding nominations usually need to be reinstated every three years. If you suffer from Alzheimer’s disease for three years then your binding nomination fails — a power of attorney can’t be used to refresh the three-year period.

It’s important to tailor expert advice to individual circumstances. If a family has always got along famously and have total trust in each other, it may be better to avoid the binding nomination to maintain flexibility. However, if there is even a hint that there may be trouble in the future, a binding nomination may be an essential preventative mechanism.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. Seek advice from a professional before making any important financial decisions.