Why your tax plan deserves more attention than your will
While most people review their will every few years, a tax plan can become outdated far more quickly as assets, legislation and life circumstances evolve.
Most people are comfortable with the idea of reviewing their will every five years, sometimes longer. Unless there is a marriage, divorce, birth, death or some other major life event, a will can sit quietly in the background waiting for the day it is needed.
That makes sense because a will is fundamentally a document of ownership. Its role is to determine who receives your assets and who is responsible for administering your estate.
A tax plan serves a very different purpose.
While a will focuses on ownership, a tax plan focuses on strategy, timing and intent. Unlike ownership, strategy rarely remains unchanged for five years at a time.
Tax plans more fluid than wills
When I work with clients, my preference is to review a tax plan annually, or at least every two years where circumstances remain relatively stable. Beyond that, any material change in circumstances should trigger a conversation about whether the existing strategy still reflects the client’s objectives and current position.
Material changes occur far more frequently than many people realise. A property may be sold, a new investment acquired, an inheritance received or a business started, expanded or sold. Children become financially independent; retirement plans evolve and tax legislation changes.
While some of these events may not necessarily require a new will, they can have a significant impact on the assumptions that underpin an existing tax strategy.
A strategy that made perfect sense three years ago may no longer be the most effective approach today.
This becomes particularly relevant whenever assets are liquidated. Once capital is released, new decisions inevitably follow. Should debt be reduced? Should capital be reinvested? Should superannuation be increased? Equally, when new assets are acquired, tax exposures can increase immediately through capital gains tax, land tax, trust distributions or estate planning considerations.
A tax plan that does not reflect these changes can become outdated surprisingly quickly.
I often explain the distinction this way: a will answers the question of who gets what, whereas a tax plan answers the question of what was intended to happen next.
That distinction becomes particularly important when life takes an unexpected turn.
Surviving the tax maze
If the most recent tax plan is five or six years old, it may no longer reflect the client’s current assets, current objectives or even the current tax law. Family members, executors and advisers can find themselves trying to interpret decisions that were made under very different circumstances. In many cases, this is where unintended and often costly decisions are made.
By contrast, a tax plan reviewed within the last year or two becomes something far more valuable. It provides context. It explains the reasoning behind previous decisions, documents the intended sequencing of future events and gives family members and advisers a clearer understanding of the direction that was being pursued.
This can be particularly important in households where one partner has traditionally taken the lead in the strategic planning. Often one person has a detailed understanding of the capital gains position, superannuation opportunities, trust structures and long-term modelling, while the other understands the broad objectives without necessarily being involved in every technical detail.
If that person is suddenly no longer there, the surviving partner is left navigating not only grief but also a series of significant financial decisions. Banks require instructions, accountants need information and executors seek guidance. Decisions often need to be made at a time when clarity is at its lowest.
A recent tax plan cannot remove that burden, but it can provide valuable guidance. More importantly, it provides a starting point for professional advisers to assess whether the existing strategy remains appropriate or whether it needs to adapt to a new set of circumstances.
For that reason, I see a will and a tax plan as complementary documents, each serving a different purpose. A will can often be reviewed every five years without issue. An active and potentially complex tax strategy generally should not.
If you have spent years building assets, implementing structures and making deliberate financial decisions, documenting ownership is only part of the responsibility. Documenting intent, and ensuring that intent remains current, is equally important.
Your will protects ownership. A current tax plan can help protect intended outcomes.
