Why what you own, what your beneficiaries inherit and the money your family can access when they need it are three very different things.
By George Kolbe, Head of Marketing and Enablement at Momentum Life Insurance
Most people think of estate planning as a question of ownership: What do I have, and who do I want to leave it to? But there is another question that can be just as important: How much money will my family actually be able to access when they need it?
For many people, the starting point is a Will, and rightly so. A valid Will helps record your wishes, enables you to nominate a guardian for minor children, and sets out how you would like your assets to be distributed.
However, having a Will is only one part of the picture. A Will can tell your loved ones who should receive what, but it does not automatically make money available to your family in the days and weeks after your death. This is an important part of estate planning that can sometimes be overlooked.
If you were to die tomorrow, would there be enough accessible cash to help your family keep things going while your estate is being administered?
You can leave your family wealth and still leave them financially vulnerable
The death of a family member brings emotional upheaval, but it can also create immediate financial pressure. Once a bank is notified of a person’s death, accounts held in the deceased’s name are generally frozen and dealt with as part of the estate-administration process.
Meanwhile, everyday life continues. There are still groceries to buy, children to care for and household expenses to pay.
There may also be funeral costs and medical costs, ongoing financial commitments and debts that must be settled by the estate, such as a home loan, vehicle finance, credit card debt or personal loans. In addition, there are costs associated with administering an estate. These may include executor’s fees, legal and administrative fees, property-related costs, outstanding taxes and other liabilities. Executor’s fees may be charged at up to 3.5% of the gross value of the estate’s assets, plus VAT, as well as up to 6% of certain income collected after death.
The challenge is not necessarily whether a family has assets. It is whether there is enough cash available when it is needed. A person may, for example, leave behind a home, investments or other valuable assets, but those assets cannot always be converted into cash quickly or easily. If there is not enough liquidity in the estate to meet its obligations, assets may need to be sold to raise the necessary funds. For a family, that could mean making difficult decisions at an already difficult time.
Where life insurance fits into the picture
This is where life insurance can play an important role alongside a Will. A Will and life cover perform different functions, but together they can form part of a more complete estate plan.
Where valid beneficiaries have been nominated on a life insurance policy, the proceeds can generally be paid directly to them, subject to the policy terms and completion of the insurer’s claims process. Because these proceeds generally do not form part of the deceased estate for estate-administration purposes, they can provide beneficiaries with much-needed financial support while the estate is being administered. This money could help cover everyday living expenses and provide breathing room during a period when financial uncertainty is often the last thing a family needs.
Life cover can also form part of an estate liquidity strategy. However, cover intended to provide money directly to family members and cover intended to meet debts, taxes and other costs within the estate may need to be structured differently. It is therefore important that the structure of the cover and the beneficiary nominations support the intended outcome. A financial adviser or estate-planning specialist can help ensure that the different elements of the plan work together appropriately. The aim is to reduce financial pressure on both the family and the estate and, where possible, avoid having to sell assets simply to raise cash.
Looking beyond the Will
Drafting a Will is one of the most important things you can do for the people you leave behind. But estate planning should also consider what happens between the time a person dies and the time it takes to wind up an estate.
Who will pay the immediate expenses? How will the household continue to function? Are there enough readily available funds to settle debts and costs without placing pressure on the assets you intended your beneficiaries to inherit? These are not always easy questions to consider, but they are important ones.
Drafting or updating a Will is an opportunity to take a broader look at your financial arrangements. A conversation with a financial adviser can help you understand how your Will, assets, debts and life cover work together.
Ultimately, estate planning is about more than deciding who gets what. It is about making things as manageable as possible for the people you leave behind. A Will records your wishes. The right financial planning can help give your family the means to carry them through.
