Advice For Life
A modern effective Will needs to deal specifically with life insurance proceeds, superannuation, guardianship of children, business assets or family trusts, matters almost never covered by “simple wills”. A modern Will should also offer taxation and other protections to your beneficiaries through employing discretionary testamentary trusts to shield inheritances from the impact of divorce, bankruptcy and other disabilities.
If it is your intention to leave your estate to more than one child our Will gives your Executor power to ensure that all beneficiaries are treated equally. There is no guarantee under a simple will, that this outcome will be achieved because some assets are not covered by a Will, including superannuation, life insurance proceeds, family trust interests etc.
While a “simple will” may work, in most cases it will almost certainly result in more costly and time consuming outcomes, with potentially unhappy and frustrated beneficiaries, particularly those who realise too late how differently the process might have been managed.
So what’s covered by a two or three page Will?
Typically Wills involving married couples start with the appointment of the spouse as the executor of their estate, authorising the executor to pay all debts etc.
The next provision leaves the estate to the spouse.
The Will then normally provides that should the spouse predecease the Will maker, the estate is to be divided equally between named children or other beneficiaries. There may also be a clause giving specific gifts or legacies to friends, relatives or charities.
Often there is a list of powers that are given to the executor in the role of trustee for the purpose of distributing the estate. Such powers give the executor/trustee some flexibility in terms of dealing with the estate during the administration period, but little real direction. Essentially, that is as far as most two or three page standard Wills go.
What can go wrong with such Wills?
Its clear to us that these Wills have been the result of either the person drafting the Will not asking the right questions, or the client not being frank about their personal and financial affairs. Issues that can be overlooked or not covered include:
· Excluding potential beneficiaries. A common problem is the either accidental or intentional leaving out of the Will of someone who may be entitled in law to be provided for. This arises most often where one or both of a couple have been married previously and there are children of previous marriages. Too often such couples only want to include children they may have had together in their Wills. In other families, there are “the black sheep” no one mentions, so they too are overlooked.
· Assets – owned or controlled. A lack of understanding about what people “own” besides the family home and other assets in their joint names, or in their individual names is common. Their Wills often include assets owned by entities such as super funds, trusts, companies etc which they think they own and so try to leave via their Will.
· Agreements. These may include binding death benefit nominations regarding their superannuation or, in some instances, where businesses are owned, there can be business succession agreements in place. Both of these can impact on the estate.
· Lack of certainty. While the nature of the various entities or super may mean that, between spouses, the deceased spouse’s wishes within the terms of the current Will may be able to be met, there is no certainty that will be the case, and it will almost certainly not be the case if and when the children inherit on the death of the last parent.
· Lack of authority to the executor. Overall the standard or two or three page Will does not deal adequately with the personal or financial circumstances of the typical client referred by a financial planner. This usually means that the executor is not given adequate authority or direction in respect to entities or achieving equality of distribution. One can readily anticipate that they will be leaving their executor and beneficiaries considerable uncertainty and confusion, together with a high risk of litigation over their estate.
What can these shortcomings lead to?
· Costly litigation. The failure of many standard Wills to acknowledge and make some provision for children of prior relationships more than likely will expose the surviving spouse, and almost certainly the children of the marriage, unnecessarily to the risk of claims by the previous children under the Family Provisions Act. Such court action not only will erode the value of the estate, but will mean that payment of inheritances will be held up, possibly for years. In the case of the claim being against the surviving spouse, this could be devastating. This should have been anticipated when the Will was drawn up and steps taken to guard against this eventuality.
· Uncertainty as to entities. While the family home and some other jointly owned assets will pass automatically to the surviving spouse and superannuation benefits would normally pass to the surviving spouse, there would be less certainty with assets held in other entities under a simple Will. This is because control of such entities passes in accordance with the documentation establishing them. In most family situations, the control would usually pass to the surviving spouse or children, but not necessarily, as the governing documentation may provide otherwise.
· No equality of distribution. The lack of direction about who might end up with any residue of super, or ownership of assets in entities is likely to frustrate the intentions of those with simple Wills to achieve equality between children.
· Paying unnecessary income tax. Beneficiaries who inherit their share of their estate in their own names will end up paying high levels of income tax on income received from inheritances. In many instances, nearly 50% of the income can be lost in income tax.
· No asset protection. Another major shortcoming of receiving an inheritance in a beneficiary’s own name is the risk of those assets being exposed to claims by others. The most common is where there is a marriage breakdown and the Family Court treats the beneficiary’s inherited assets as part of their family assets. Inherited assets are also exposed if the beneficiary is in business and it falls on hard times. In those circumstances, the assets are liable be claimed entirely by creditors or t he bankruptcy trustee.
Issues that should be covered by a modern estate planning Will.
Having a modern estate planning Will prepared would address all the various shortcomings outlined in the previous edition issues while increasing the certainty that the Will-maker’s wishes are fulfilled as well as offering other major advantages to all beneficiaries. These include:
· Meeting obligations to children of prior relationships. Ignoring this issue is may lead to court challenges to your Will which can be readily avoided with good advice tailored to your situation.
· Owned and controlled assets. Modern estate planning Wills also provide the executor with the authority to take control of both the assets directly owned by the Will maker as well as the assets controlled by him or her via other entities. This power ensures that all assets whether owned or controlled can be used to meet the intentions as expressed by the Will particularly when the estate is being distributed to the Will maker’s children.
· Equality of distribution. As mentioned previously the common intention in many families is to see estates distributed equally and another key provision found in modern estate planning Wills enables this to happen. There is a direction to the executor to take into account payments or benefits that individual beneficiaries may have received from other sources.
To achieve proper equality the executor needs to be able to take into account such things as loans to particular beneficiaries which were made and documented by the Will maker and which have not been repaid; any superannuation death benefits received by some but not all beneficiaries usually because some are tax dependants (i.e. under 18) and some are not; insurance payments received by some but not all beneficiaries; interests in family businesses entities that some beneficiaries might have received during the Will maker’s lifetime etc.
· Testamentary Trusts. Modern estate planning Wills contain provisions that allow executors to offer nominated beneficiaries the option of holding their inheritance via optional discretionary testamentary trusts. Some Wills in the past only created trusts where the nominated beneficiaries received capital and income at the discretion of the trustee or on other conditions created by the Will. However, current estate planning practice has moved away from the disadvantages of such a restricted approaches and freedom to control and manage their own trusts. Some Wills go further and offer a range of trust structures that can be utilised if the beneficiary has particular need for such provides each beneficiary the structures.
· Optional trust structures. One recent option included in modern estate planning Wills following CGT and Land Tax concessions is a right of occupancy of the Will maker’s family home which means a beneficiary can now inherit and live in the family home while holding it in a testamentary trust without capital gains or land tax disadvantages.
· Trust flexibility. Of course, in this modern era beneficiaries under some estate planning Wills are given the option of not holding assets in a testamentary trust but in their own name – an option few are likely to take but it avoids the claim that the Will maker is attempting to rule from the grave!
· Protected Trusts. Another important advantage of testamentary trusts is the ability of a Will maker to make provision for beneficiaries who may be vulnerable because of disability, being a spendthrift or suffering from some addiction eg alcoholism, drugs or gambling. Properly drafted such protected trusts can offer the beneficiary controlled support, however, consideration needs to be given, where a beneficiary receives government benefits, as to ways to reduce the risk of such benefits being lost or minimised.
· Special Disability Trust. Such trusts were introduced by the Federal Government in September 2006 to provide for a family member with significant permanent disability and who receives a Disability Support Pension. The provision is made via a trust and is to be applied solely for the care and accommodation of the beneficiary. Such trusts can be established during the benefactor’s lifetime or via their Will. We have included such provisions in a number of Wills but we also provide flexibility by giving trustee the capacity to meet other normal expenses which cannot be paid out of the Special Disability Trust.
· We believe that such trusts will be very welcome by families with a member who qualifies for such support.
· Tax and asset protection. Mention has been made of the substantial tax and asset protection disadvantages that flow from beneficiaries inheriting assets directly in their own name. These disadvantages can be avoided if the Will offers beneficiaries the option of inheriting via testamentary trusts established by the Will. However, a further often overlooked, advantage is, that such trusts can pass down through the generations for 80 years from the death of the Will maker.
· Wider powers for executors. Modern estate planning Wills should also ensure the executor has the authority to take into account specific arrangements the Will maker entered into that could impact on the estate. These include business succession agreements, binding death benefit nominations and superannuation residues.
· Inclusion of trust rules in the Will. Finally, a well constructed modern estate planning Will should offer those beneficiaries who wish to inherit via such trusts a comprehensive set of rules under which the trust can be operated so that they have flexibility as well as a clear understanding of the parameters they need to operate under. Such provisions are very important as the Will is a beneficiary’s trust deed. No other documentation is required or allowed, so the quality of the provisions will dictate how much use and enjoyment a beneficiary receives from their trust with minimum operating cost.
Essential estate planning steps for those with young children.
Many young couples take out considerable life insurance cover to provide funds to the estate to pay out mortgages etc. While clients with young families have enough life cover is vital that advisers ensure that it is complemented by a Will with a number of essential provisions the impact of the good work could be severely diluted.
The following are issues that Wills of parents of young children should include to avoid such an outcome.
· Specify that the children inherit via Testamentary Trusts. The Will should provide that a separate beneficiary testamentary trust is created for each surviving child.
By creating separate trusts, 2 or more children do not have to share control of a single testamentary trust, thereby reducing the potential for tension and conflict between them.
Each child will then ultimately have control of their own trust which will offer them significant benefits. These include tax minimisation later in life, as well as protection from the inheritance being accessed by the Family Court or creditors.
· Nominate a “Qualifying” age at which child beneficiaries inherit. To avoid the possibility that young beneficiaries can inherit substantial funds and assets when they turn 18, it is important the Will specify an age that the parents would feel confident beneficiaries had the maturity to manage their inheritance.
· Provide for a Maintenance Trust for children under the qualifying age. If one or more of the children were under the qualifying age at the time of the death of the surviving parent, t here is need for a clause imposing positive obligations on the executors to ensure that any infant children are properly housed and maintained until they reach the nominated qualifying age.
Under such a clause the executors are obliged to review children’s circumstances at least every 6 months and to consider any recommendations made by the children’s guardian. The executor is required to comply with the prudent person rule set out in the Trustee Act in respect of the investment of funds for minor children.
· Nominate Guardians of Infant Children. While it is not possible to leave custody of infant children via a Will, it is good estate planning practice for a Will maker who has young children to appoint a guardian to take care of such children should the Will maker die prior to the children attaining their majority.
It is the guardian’s responsibility to make the important “life decisions” on behalf of the child. The guardian must ensure that the child is adequately housed, clothed and educated. The guardianship of minor children is a responsible task and the Will maker should think carefully about the appointment of a guardian
There should also be a direction to executors in the Will to ensure that the children’s lifestyle is maintained.
Such a provision would give wide powers to executors to allow funds to be made available for education, development and advancement to a standard applicable at the date of the death.
· Consider establishing a “Special Needs Fund” for the Children. Such a provision would only apply if one or more orphan children were left who had not attained the qualifying age.
The purpose of this clause is to establish a fund (say 20% of the estate) if necessary to help even up any inequality between the children arising from the fact that a child is younger than other siblings or is in need of extra or special help because of ill health, physical or mental handicap or other special need.
Wide powers are given to the executor as to how the fund is to be applied but the clause limits the application of the fund to the children under the qualifying age.
When all the children have reached the qualifying age set in the Will any remaining monies held in the special needs trust is distributed equally between all the surviving children.
· Ensuring equality among beneficiaries. Where the Will maker has two or more children and the goal is to ensure absolute equality of inheritances received by the children, a clause is needed requiring the executors to “even up” inequalities. These may be caused by the manner of distribution of non-estate assets.
Most commonly, the issue that causes an adjustment to be made is the death benefits to be paid from the Will maker’s superannuation fund or funds. The Will maker’s children may be entitled to claim, may have received, or may receive after the Will maker’s death, unequal distributions from or by virtue of:
o Superannuation and pension death benefit payments (particularly where one of the children is a dependant and another who is not a dependant);
o Balances in the investment reserves of self managed superannuation funds – a particularly important issue when the Will maker has been in receipt of a complying lifetime or term pension;
o Life insurance policy ownership; eg death benefits paid to a particular child nominated as policy owner or beneficiary;
o Discretionary trust allocations (it may appropriate to provide that the discretionary trust become a restricted, fixed or discretionary trust for a beneficiary unlikely to have children or grandchildren);
Having an equalisation or adjustment clause gives the executor the power to divide the Will maker’s estate so that the right overall division of the estate and non-estate assets is, as far as is possible, achieved. The absence of such a clause from a Will may mean that a Will maker’s wishes to divide overall “wealth” equally, or in set proportions almost certainly not eventuate.
· Dependants and Superannuation Death Benefits. The Will must provide for the situation where there are dependants for income tax purposes, eg: a surviving spouse, children under 18 or any person who is financially dependant at the time of the Will maker’s death.
Superannuation death benefits paid to a spouse or dependants attract significant taxation concessions but death benefits paid to adult children will be liable to tax-referred to in the press as a “death tax”.
Where parents of young children have superannuation the executor must have the authority to ensure that all or part of any superannuation death benefits received by the estate be held or distributed on terms that satisfy the requirements for tax exemption on the payment from the trustee of the superannuation fund. The terms of any superannuation death benefits distribution or testamentary trust are specified in our Will.
· Superannuation Death Benefits Trust. Where there are dependant children, the executor should have the option of placing all or part of any death benefits paid to the estate in a special superannuation death benefits testamentary trust. To prevent unnecessary tax being payable, beneficiaries of a superannuation death benefits testamentary trusts are usually confined to “tax dependants” for death benefit eligible termination payment purposes, thereby preserving the income tax exemption. A superannuation death benefits testamentary trust is essentially an alternative to the beneficiaries of the trust receiving a pension from the superannuation fund.
Are your affairs in order?
As you can see the stakes are high and the pitfalls are many. Contact us at Dollar Growth Estate Planning now, (Terry Purcell or Philip Enger), to make sure all you have worked for will be passed on to your loved ones in the way you always wanted, in the most effective way.
Dollar Growth Estate Planning Pty Ltd
Terry Purcell (02) 9970 0800
Philip Enger (02) 9554 8555
www.dollargrowth.com.au
