Estate Funding with a Focus on People with a Disability

Hello, my name is Mike Sayer.

When talking about how insurance can help in planning for the future security of a person with a disability I often ask the audience “who has got a Will”?  The answer to that question might reveal that many of you do have a Will, however, do you have an estate plan that will work for you in the event of your death or disability?

Estate planning is more than a Will and that is why we are talking about insurance and what I refer to as leveraging your estate.  Estate planning is more than just a Will and accompanying legal documentation.

I want to emphasise how insurance can leverage the value of an estate and how assets that you put into your estate can be distributed to a Testamentary Trust including a Vulnerable Beneficiary Trust (VBT) and a Special Disability Trust (SDT).  Whilst a Will can be seen as the cornerstone of estate planning it only partly supports the creating of what I call an “Effective Legacy” – one that achieves your purpose, if in fact your purpose and your estate vision has been defined.  What would you prefer to leave behind and what are you actually going to leave behind – that is really the critical issue?

Statistics tell us that some 45% of eligible people in Western Australia have a Will.  I would suggest that a much smaller proportion have a Will that really reflects their estate vision and an estate plan: a plan that includes comprehensive Wills with relevant protective trusts, Enduring Power of Attorney and Living Wills with appropriate estate funding and protection.  Estate funding and protection is where insurances play a vital part for many people.

Hopefully at the end of this session you will see that there are still things that you can do to improve your situation by having not only a Will that works for you but other important documentation and supportive strategies. 

Something that I want to make clear from the start is that estate planning is a process not an event.  People often expect to meet an estate planning professional, get something in writing, sign and it and move on.  For a variety of reasons they may procrastinate.  Fear of the unknown, cost, complexity and the inability to agree on vital parts of a Will (including for example, guardianship of minor children and the distribution to children) all enable “doing it later”. 

I don’t think I’d be wrong in saying that a lot of you here have been meaning to implement Wills and possibly accompanying documentation but have procrastinated in doing this.  You have probably thought about it years ago but you haven’t actually done it.  One of the most important things to do is get started, get something in place and then improve upon it.  As the well-known saying goes “beginning is halfway there” but you won’t begin until you are committed and have the courage to get started.  Don’t expect perfection: that is when procrastination occurs, things don’t get done and then something happens to somebody when appropriate planning isn’t in place.  Always seek progress over perfection.

So how can insurance help?

There are many things that insurance can do, however, there is a degree of apathy and a lack of motivation in the Australian community to recognise the risks that confront us in life and to take steps to protect against these risks.  It would be fair to say that none of us “like” insurance because you pay for something that may never pay you.  Given my extensive experience in this area I can confidently say that there is an abundance of people who are very thankful that they have had some form of life insurance funding in place when they or their families needed it most.  People don’t like insurance until they need it desperately and then they love it.

So what does insurance do?

Firstly, it bridges the gap: 

What do we mean by the gap? Lets look at what you really need.  For example what is the average mortgage in Australia?  In 2019 it was around $400,000. 

What’s the average income in Australia? In 2019 it was close to $90,000 per annum.

If something happens to you, what do you want to leave behind – do you want to leave behind a mortgage and reliance on Centrelink to make ends meet or do you want to leave behind security for your loved ones and particularly for your child or children with a disability? 

Lets say that Emma is my child with a disability and my wife is Kate and I am the breadwinner earning an average wage of $90,000 per year or thereabouts.  If something happens to me, is the mortgage resolved or is Kate left with a debt that she can’t manage.  Kate is looking after our child with a disability, she is looking after Emma and I am gone, where does her income come from?  Given her circumstances can she go to work? Can she find work? Is she qualified in terms of both health and skills to get work?

Whether or not I am the breadwinner and Kate is carer or vice versa, one of us is going to be in a difficult or crisis position if there isn’t adequate funding in the estate in the event of the death of either of us to provide for debt resolution and future income to the survivor. 

What you have to think about is what income we are going to provide through life insurance and what funds will be available to pay the mortgage.  $1,000,000 capital might produce between $30,000 and $40,000 a year giving us an indication of the sort of funds we need to leave behind if we want to provide appropriate certainty and choices.

What would you think it costs every year to care for a person with a disability in terms of accommodation, pharmaceuticals, general care and so on?

The answer I get to this question if very often around $200,000 or even $300,000 per annum.  Just think about this when you are planning your estate; how much are you going to leave behind for Emma as well as others that are dependent on you?

If I die where is Kate going to get adequate funding from? If Kate dies where am I going to get adequate funding to replace Kate as carer, especially when her loss is likely to have a negative impact on my ability to continue to earn an adequate income.

How does the death or disability of one affect the other and those who are casualties of our death or disability?

If Kate and I being mum and dad both die in an accident, where is the required funding for Emma and other children in the family going to come from? It’s not only about the person with a disability.  if that person is 23 years of age the other children are 16 and 19 or younger, what happens to them?  What do we leave behind for their needs as well?

This is where insurances play a major part in planning your estate by bridging the gap between what is required and what actually exists.  It avoids Kate having to put a “for sale” sign outside the house and for the children to have to cease their normal sporting or other recreational activities.  It prevents the need to move house, move schools and away from our friends when there is already significant grief in the family.

Appropriate insurances can boost your savings or investment at a critical time and this is where “lifetime” insurances such as Total and Permanent Disablement (TPD) cover, Income Protection cover and Trauma insurance play a vital part.  Many of you here may have Income Protection cover which is so valuable if you can’t work due to accident or illness.  Income Protection is tax deductable and pays you an income when you cannot work, normally through to age 65.  When you are looking after a family and especially a person with special needs, this insurance is even more important.

So what responsibility are we really accepting for looking after that person with a disability and the people we leave behind if we don’t have the right cover in place?

By planning ahead and anticipating the risks we may face in life we can complete our plan for security when the need to do so comes prematurely and we don’t have time to accumulate the funds we need during our lifetime or that are required for those we leave behind in the event of our death.

Review your situation

Reviewing your situation is vital.  How much in terms of estate funding do you have?

How many of you really know how much you have in insurance to fund your estate and achieve your estate vision?

How much is in your superannuation in terms of fund accumulation and life insurance?

It concerns me how many people don’t really know how much life insurance they have through their Industry fund or other superannuation arrangements.  They don’t know if they have TPD cover and often don’t really understand where their insurance will go in the event of their death.

Who does your super go to when you die?

What’s it governed by?

Assets in superannuation are non-estate (non-Will) assets and unless specific plans are made they are not distributed in accordance with the provisions of a Will.  So something we need to know is “do we have a beneficiary nomination which sends our super to the people or person we want to send it to”?

If you have a non-binding nomination it can be valuable because it allows the trustees to pay benefits in the direction that they think suitable taking into account Centrelink pensions for example.  We find though that in planning for families with children or people with a disability it is more important to send funds it to the estate so that appropriate Testamentary Trusts can be used to protect assets.

It is likely that I would want to leave my superannuation to Kate and that she would leave hers to me but then we want to make sure that in the event of us both leaving the planet our superannuation assets are distributed in accordance with our Wills.  If we have no Wills then what? It’s up to the Rules of Intestacy and they are unlikely to lead to a result in accordance with your wishes.

A binding nomination means that the discretion of the trustee is removed and what you say goes providing it is within certain guidelines. 

It is very important to think about your Beneficiary Nomination and not all about your Wills.  It’s about how effective your estate planning arrangements are.  It’s about making sure that in the event of the death of both Kate and I, funding goes into protective trusts for Emma to ensure that where appropriate her disability pension is not affected.

What type of cover is needed?

Most of us know what life insurance is and its pretty straightforward, if you are not here tomorrow life insurance pays a lump sum.  It is likely that your life insurance will include a terminal illness benefit.  This sounds awful I know but it means that if you are not going to survive for either 6 or 12 months, depending upon the policy, life insurance will be paid out.

Most of you would have heard of Total and Permanent Disablement (TPD) cover, however, you may not realise that there are two types of Total and Permanent Disablement.  One is “any” occupation and one is “own” occupation.  Only any occupation cover can be provided under superannuation arrangements.  If you have TPD under your superannuation it is any occupation by virtue of Government legislation.  Any occupation cover means that you would get a lump sum payment if you are unable to work again at anything you are suited to by training or experience, so basically you have to be in a pretty bad way.  Having said that any occupation cover can be very valuable and we have many case studies to support the benefit of this cover.

It is important to recognise that if you have TPD cover only through your superannuation then it is based on any occupation and there is a comparatively remote possibility of it being paid.  You need to be aware of that.

Own occupation cover means that you get paid out if you can’t work at the occupation that you were engaged in prior to an event.  This makes a big difference.  Imagine a surgeon if he loses two fingers or three fingers, can he be a surgeon? Probably not but he could still act as a Doctor and he wouldn’t get paid under any occupation.  Under own occupation if he loses those fingers he would most likely receive a benefit.

There may be doubts about the value of TPD cover and I understand that, however, I have many stories that are evidence of the value of TPD under certain circumstances.

It is a surprise to me when I stand in a room and ask if anyone has Trauma insurance – how few people have this very valuable cover.  Why is it so valuable? Because it pays out a lump sum on diagnosis of numerous conditions including heart attack, stroke, quadriplegia and paraplegia.  The list is extensive and compared to the original five or so conditions that were covered when trauma was first created by Marius Barnard there are well over thirty conditions covered under trauma insurance.  A significant feature of trauma cover is that it is not work related.

Trauma or critical illness is where we see most claims and where many peoples’ financial lives have been saved as a result of a tax free sum payable in the event of the diagnosis of a condition covered under the policy.  It is a very powerful financial resource providing certainty and choices at the time of need.  For those of you at an eligible stage of life I urge you to look at trauma insurance at some level. 

Certainty/Choices/Conflict

Almost everybody we speak to in our estate planning meetings is informed of the value of “The 3C’s of Succession” and most of our clients will remember the 3C’s because we go back to it every time we face doubt or difficulty in formulating a comprehensive plan – when the critical issues are being avoided!  Certainty is needed in terms of what you have in place.  If there is an ineffective plan in place what certainty is there for Emma or Kate in the event of death or disability? 

What certainty is there in place to ensure that things that you want to happen will happen?  If an appropriate estate plan is not in place then there is no certainty.  Insurance can be a key contribution to that certainty.

In terms of choices what choices does Emma have if there is not a really good estate plan in place?  Will more tax than necessary be paid? Will she lose some of her pension or all of her pension? Will Kate have enough choices to retain the home and keep the education going? Will the children stay in dancing classes or whatever recreational activities they are involved in?  Will Emma as a vulnerable beneficiary lose her assets to a predator?

All of those things, what choices are we leaving behind?

The more choices we leave behind the better and more effective is the estate plan and the legacy.

We find that possibly the most significant value or issue for most people is avoiding conflict and leaving behind the value of harmony.  For example at what age would you want your child to inherit? With a child without a disability, for example, what age would you want them to inherit an average estate?

An average estate we see is somewhere around $1,500,000 taking into account the house, superannuation and life insurance.  It could be $700,000 or could it be $1,500,000 or it could be more.  At what age would you want your children to inherit a significant sum?

Many people choose the age of 25, this is what we called an Age of Entitlement but interestingly some prefer a later age even 35.  The older you go the more chance there is that there will be a challenge from a beneficiary denied access to their inheritance.  That is unless there is a vulnerability which means that a Court would be unlikely to rule in their favour and when I talk about vulnerability I am not only taking about intellectual disability but also an addiction to drugs or alcohol.  The average age we find is 25 or 30 or staggered with say 50% being given to the child at age 25 and the remaining amount at age 30.  It is key to look at an appropriate age of entitlement.

Who have you appointed as the executors of your estate?

You might appoint your children or relatives to work together, however, it is important to consider their ability to work together collaboratively.  Will they get on with each other?

If you leave different amounts to your children you may have as you see it good reason for varying amounts, however, be aware that you may be inviting a challenge under the Family Provision Act.  Many of you may have heard of Mark Twain who said “you really never know someone until you have shared an inheritance with them”.

Right Funds

When we talk about estate funding we talk about the right funds to the right people at the right time and in respect of the right funds it is about sufficient funds.

As discussed before in the event of our death what funds do we need to leave behind for Kate and what funds do we want to leave behind for Emma in the event of the death of both of us?  Lets say Emma is 24 and she has a severe disability and she would qualify for a Special Disability Trust.  We have two other children who are 16 and 19.  What difficulty do you as parents have in terms of making decisions about distribution of your estate?

What challenge do you have to resolve when you have one child with a severe disability who is not going to be able to earn an income and is dependent on the continuity of funding through their life from NDIS and you have two other children who do not have a disability.  What’s the difficulty you face?

In practice we have found over the years that the concept of “fair is not always equal” offers significant assistance to the quandary faced due to a belief that there needs to be equality to be fair.  I urge you to consider this concept of “fair is not always equal”.  It may well be fair that the person with a disability receives the larger proportion of the estate if not the total amount available where the estate has a low value.

I’ve found that in mediating between families it is of significance that the children that don’t have a disability in many cases say thank you.  Why do they say thank you if Emma is going to get the larger part of the estate?  Most children in accordance with their personal values see that Emma needs funds more than they do.  They see that adequate funding to that person with a disability reduces or nullifies the responsibility that they have to find necessary funds for their sibling.  They are not burdened (for want of a better word) with the responsibility of looking after Emma’s financial needs.  So a key issue is “fair isn’t always equal”.  

How much is enough?

It is really important for you to sit down and plan and to appreciate what you have and what you haven’t got in terms of assets to fund your estate objectives.  It might not be possible to leave behind what you would prefer to leave behind but at least you will know this and you can plan around what you can leave behind.

Your superannuation can include life insurance which can be relatively cheap and tax deductable.  Even if you implement life insurance only and you don’t buy income protection insurance, TPD or trauma cover you are improving your legacy; you are achieving progress rather than striving for perfection.

Inadequate Funds?

In terms of addressing the problem later or now, addressing the problem later means that you rely on savings only and it may not be easy to put the sort of money away required to achieve our legacy.  Addressing the problem now involves addressing the insurance issues and implementing insurance that will help you to achieve your estate objectives at some level.  The extent to which you accept a risk of being uninsured or transfer some or all of the risk to an insurer is a matter of balance and your priorities as to the amount that you are prepared to spend on insurances.

Leveraging an Estate

In terms of leveraging your estate it is helpful to examine what can be seen as a strategic way of looking at things.  It asks that we look at our estate vision, “where do we want to be” and our realitywhere am now” revealing the gap between the two. 

The vision aspect is very important and in the workshops that we run from time to time we focus on “dreaming” about our ideal legacy.  In this society dreaming seems to be something attached to the impossible, however, its ok to dream.  It is good to dream.  What did Martin Luther King do? Nelson Mandela?

The first step in your plan needs to be a dream of what you want for those you leave behind i.e Emma and Kate.  Dream, allow yourself to have an imaginative dream about what it really looks like and then focus that dream until it becomes a vision which then becomes more realistic especially when you commit this to paper.

From Vision to Reality

How many of you have thought about what you want for the likes of Emma? How many of you have spoken about it? How many of you have actually advanced to writing it down? Thinking and talking about your legacy and estate vision is really only what I call mental or verbal spaghetti – its all over the place and doesn’t come to much without something more!  Until you have committed to writing it does not become a commitment; a commitment combined with courage leads to capability.  Once you commit to writing things will happen and remember – it’s a process not an event.

The gap between vision and reality includes the things I have talked about.  Insurances and reaching agreement on important estate issues is a key part of the gap analysis.  One of the things people often don’t move forward on or easily can agree on is guardianship of minor children.  You may not find the perfect person to be guardian of your children but finding somebody is important and your decisions are not locked in concrete.  You can review your Wills and other documentation from time to time to ensure that your reality is as close as possible to your vision.  The journey from vision to reality is one of the heart primarily and then the head.  Don’t let the head and thinking get in the way too much.  It not all about logic its more about your emotions.

The vision provides the path for moving forward.  Its like a magnet which pulls you towards completion.

Bringing it all together

In terms of bringing it all together your insurances combined with your assets and superannuation fund your vision and particularly a safe and secure future for your child or relative with a disability. 

In closing I suggest that you don’t be too concerned about whether your child qualifies for a SDT funded by insurance and other funds at this moment.  The SDT rules have changed significantly since it was brought into being in 2006 and legislation has been softened.  For example since its inception a beneficiary of a SDT can work up to seven hours a week at or above the relevant minimum wage and the trust can spend up to $10,000 in a financial year on discretionary items not related to the care and accommodation needs of the beneficiary of the trust.  There is a possibility if not a likelihood that the requirements will be softened even more in the future which means that a child unable to qualify now might qualify for a SDT at some stage in the future.  It is worth including this trust in your Wills to provide for future flexibility and choices.

The cost of planning Finally to the cost of planning.  I prefer to call it an investment.  Over the years I have done many seminars for people investing in property who might be putting considerably more into their mortgage monthly than it would cost for them to implement an estate plan which ensures that their assets are distributed in accordance with their wishes and that their child with a disability has a secure future.  John F Kennedy said “there are risks and costs to every action.  But they are far less than the long range risks of comfortable inaction”.

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