Estate planning for young adults: Why it matters more than you expect

For many young adults, estate planning feels premature – it is something on the list to do later, once life is more ‘settled’. This belief tends to come from the idea that a young adult has not yet accumulated significant assets or may not yet have a partner or children and therefore has no reason to consider their succession planning.

The reality is that even a simple estate plan can greatly improve outcomes for your loved ones if something were to happen to you unexpectedly. An estate plan shows your family and friends that you have considered what you would want to happen, provides them with certainty about your wishes and reduces the risk of litigation and the cost of administering your estate.

Intestacy is not what you think

If you die without a will, your estate will be distributed in accordance with the rules of intestacy. This means that legislation decides who should receive your estate after you die, and the outcome may not be what you expect.

Intestacy legislation differs by state. In Queensland:

1. If you have a spouse but no children, your spouse receives everything;
2. If you have a spouse and children:
   1. Your spouse receives the first $150,000 and your household chattels;
   2. The remainder of your estate is divided between your spouse and your children in varying proportions depending on how many children you have;
3. If you have children but no spouse, your estate is divided between your children;
4. If you have no spouse and no children, your estate is distributed in order of priority:
   1. to your parents;
   2. to your brothers and sisters (or, if they have died before you, to their children);
   3. to your grandparents;
   4. to your uncles and aunts (or, if they have died before you, to their children).

The reality of the intestacy laws is that they were created some time ago to suit a “nuclear family” and they rarely reflect modern family dynamics. It is not uncommon for children to be raised by a parent and/or step-parent, or to be estranged from a biological parent. Often people will have a “found family” or close friends whom they would prefer to benefit from their estate over biological family members.

Your will also serves some practical functions beyond distributing your estate. For example, a named executor will often have priority to decide how your body is dealt with – whether you are cremated or buried (and where). Disputes commonly arise following an unexpected death, as family members, friends and spouses can disagree about what you would have wanted. Without an executor, it is much less clear who has the right to make that decision.

Superannuation as a substantial asset

While you may not yet have acquired substantial assets, one asset most young people usually do have is superannuation. Even if your superannuation balance is relatively modest, many young people have a life insurance component as part of their superannuation, and this can be a substantial sum.

When you die, your superannuation benefits are paid out of your superannuation fund as a death benefit. You can direct the payment of your superannuation by making a nomination. Critically, nominations can be ‘non-binding’ or ‘binding’. A non-binding nomination is simply a suggestion to the trustee of the superannuation fund about who should receive your benefit. A binding nomination, by contrast, requires the trustee to pay the benefit in a particular way.

A non-binding nomination can (and often is) be disregarded by the trustee where policy dictates that they should pay the benefits to someone else. For example, if you have a non-binding nomination that directs payments to your parents or siblings, the trustee may disregard it if they consider that you have a spouse or other dependant who should more appropriately receive the payment.

A binding nomination binds the trustee to a particular course of action, but only certain types of beneficiaries can be nominated in a binding death benefit nomination to certain classes of beneficiaries:

• your spouse (including a de facto partner);
• your children;
• a person in an ‘interdependent relationship’ with you (being someone you live with, share a close relationship with and where you provide financial and domestic support to each other);
• someone who is financially dependent on you; or
• your legal personal representative (the executor of your estate).

If you wish to benefit someone who does not fall within one of the above categories, you should prepare a will that provides for that person and then direct that your superannuation be paid to the executor of the estate.

This becomes particularly important when you consider the various definitions of ‘spouse’ under legislation in Australia.

What is a spouse?

De facto relationships are widely recognised as being equivalent to married spouses. However, they can be problematic for two key reasons.

1. Marriages are easily defined – the parties have entered into a legal relationship which arose at a particular point in time, and they end upon the occurrence of a particular and easily identifiable event. De facto relationships, on the other hand, are defined by a range of characteristics that the law considers typical of such a relationship. As a result, it can be more difficult to pinpoint when a relationship evolved from something more casual to a de facto relationship that satisfies the criteria.
2. The legislation is not consistent. While there are common threads across areas of law, nuances mean that it is possible to be considered a ‘spouse’ for one purpose but not for another.

This is particularly relevant for young adults when comparing superannuation law and succession law. For succession law purposes, a de facto partner will only be considered a ‘spouse’ if:

1. you were in a de facto relationship (as ordinarily defined); and
2. you lived together as a couple “on a genuine domestic basis … for a continuous period of at least 2 years ending on the deceased’s death”.

This criteria must be met for a person to inherit on intestacy or to bring a claim against your estate for further provision.

Superannuation law takes a different approach. There is no minimum time requirement for a de facto relationship. Provided the criteria for a de facto relationship are met, it does not matter whether you have lived together for one week or ten years – that person may be eligible to receive your superannuation benefit. In practice, trustees will often prioritise payment to a spouse over other potential beneficiaries if there is no binding nomination in place.

As with intestacy, the law around de facto relationships assumes that all relationships can be neatly defined by a particular set of criteria. In reality, relationships are often more nuanced. Some couples may choose not to live together for a long period but would still want their estates to pass to each other once they do. Other couples may intend to continue benefiting their respective families until a future event, such as buying a property together or having a child.

Economic realities also mean that couples often move in together sooner than they might otherwise choose, simply to share expenses and reduce the cost of living. This means that satisfying one of the critical indicators of a de facto relationship (living together on a genuine domestic basis) may occur due to external pressure rather than a deliberate intention to change the nature of the relationship.

Because de facto relationships are assessed by reference to various factors, there is also scope for disagreement. If you were to die, family members may disagree with a partner about the seriousness or status of the relationship.

Loss of capacity

Proper estate planning also deals with who should make decisions for you if you lose capacity. If you become unwell or incapacitated due to accident or illness, the law does not automatically give someone authority to access your accounts or pay your bills.

The law does allow someone to make urgent health decisions for you if no appointment has been made, but that role is limited and can be subject to dispute. For example, a ‘spouse’ has first priority, and issues often arise as to whether a relationship should properly be characterised as a de facto relationship.

In relation to financial matters, if you do not have an enduring power of attorney in place, your family would need to apply to a court or tribunal to have someone appointed to make decisions on your behalf. That process is time‑consuming and can place an additional burden on loved ones during what is already a difficult time.