Table of Contents
Chapter 1: What is estate planning?Why is estate planning important?Features of estate planningEstate planning must be tailoredEstate planning needs to be flexibleEstate planning must be understood by youEstate planning must be reviewed regularlyEstate planning is the result of collaboration between professional advisersEstate planning relies on thorough data collectionChapter summaryChapter 2: Estate assetsWhat forms part of the estate?Estate assetsNon-estate assetsJoint tenants versus tenants in commonDealing with the succession of non-estate assetsChapter summaryChapter 3: IntestacyCommon reasons for not preparing a willHow does intestacy occur?Unwanted consequences of intestacyIntestacy rules are inflexibleUnintended distribution of personal chattels and heirloomsAbsence of appointed executorUnintended recipientFailure to deal with succession of non-estate assetsUnwanted tax consequencesAbsence of protective safeguardsChapter summary
Chapter 4: Planning your willPersonal circumstancesCircumstances of beneficiariesThe importance of flexibilityEstate-planning objectivesOwnership of assetsLegal requirements for the preparation of a willFormalitiesTestamentary capacityMental illness, delusions and testamentary capacityHomemade willsChapter summaryChapter 5: Appointment of executorsDuties of an executorLocating the willThe funeralLocation of assetsProtecting the assetsApplying for probatePayment of debts and liabilitiesDefending the will against a challengeTaxationDistribution of the estateNotifying relevant authoritiesAppointing more than one executorAppointing a professional executor and trusteeCosts of a professional executorAttributes of an executorAdministration where there is no willDeath of an executorRemoving an executorChapter summaryChapter 6: Contents of the willName and address of the will makerRevocation of previous willAppointment of executors and trusteesPayment of debts and testamentary expensesDistribution of residue estatePowers of executors and trusteesSpecial requestsWho gets whatGift of investment assetsAdemptionEncumbered assetsCapital gains tax consequences of specific giftsDistribution of personal chattelsAppointment of guardians for minor childrenGuardianship clausesTiming of giftsDisclaimer of an estate interestAdjusting beneficiary entitlementsTrust allocationsSuperannuationGifts and loansGifts to charityGifts to tax exempt organisationsGifts to tax deductible organisationsChapter summaryChapter 7: Updating, revoking and storing your willWill revocationRevocation by subsequent will or codicilRevocation by writing and declaration of intentionRevocation by destructionMissing will deemed to be revokedRevocation by marriageRevocation by divorceStoring your willChapter summaryChapter 8: Protecting your will from challengeChallenge to your will for lack of provisionGrounds for ordering further provisionDisentitling conductAgreements not to challengeStrategies for defeating a claimTime limits for bringing a claimMyths regarding claim for provisionInvalidity of a willUndue influenceFraudChallenging validityChapter summary
Chapter 9: An introduction to trustsWhy use a trust?Parties to a trustSettlorTrusteeBeneficiariesAppointorGuardianUnitholdersThe trust deedConstruction of the deedOther sources of powers of the trusteeElements of the trustIntentionSubject matterObjectsLifetime of a trustDetermining the vesting dateAmending a trust deedAvoiding a resettlementChapter summaryChapter 10: Types of trustsDiscretionary trustsAdvantages of discretionary trustsDisadvantages of discretionary trustsEstate-planning implications of discretionary trustsSuccession of the trust’s controlling rolesReview trust deedAppointing a substitute appointorConsent requirementsLoans and unpaid allocationsUnit trustsAdvantages of a unit trustDisadvantages of a unit trustHybrid trustsEstate-planning implications of unit trusts and hybrid trustsSuccessionLoans and unpaid entitlementsChapter summaryChapter 11: Testamentary trustsWhat is a testamentary trust?Considering the use of a testamentary trustBeneficiary-controlled testamentary trustsSimple will versus beneficiary-controlled testamentary trustTrust deed of discretionary will trustControl of a discretionary will trustIs the trust mandatory?Definition of beneficiaries of beneficiary-controlled testamentary trustsLifespan of a beneficiary-controlled testamentary trustCreation of multiple trustsSuccession of a beneficiary-controlled testamentary trustAdvantages of beneficiary-controlled testamentary trustsDisadvantages of beneficiary-controlled testamentary trustsChapter summaryChapter 12: Capital protected and protective trustsCapital-protected trustsThe ‘spendthrift’ beneficiaryThe blended familyMutual willsProtective trustsDisability and vulnerabilityFinancial needs and fundingTerms of the trustControl of the trustThe Centrelink treatment of all needs protective trustsSpecial disability trustsThe exemptionsThe parameters of a special disability trustReasonable care and accommodation needsSurplus income of trustArm’s-length and regulatory requirementsEstate-planning implicationsChapter summaryChapter 13: Proceeds trustsChild support trustsThe tax benefitFeatures of a child support trustEstate proceeds trustsThe tax benefitFeatures of an estate proceeds trustSuperannuation proceeds trustsDetermination by trustee of payment of superannuation benefitsDefinition of beneficiariesDistribution of incomeCapital requirementWhen to create a superannuation proceeds trustChapter summaryPart IV: Taxation and superannuationChapter 14: Taxation and deathWhat is capital gains tax?Calculating the cost baseCapital gains tax on the disposal of estate assetsDeath before 20 September 1985Death after 19 September 1985Main residence exemptionIncome taxIncome derived during the administration — who pays the tax?Income derived after administration is complete — who pays the tax?Chapter summaryChapter 15: Death and superannuationRecipients of death benefitsDependantsInterdependency relationshipsDetermining financial dependencyLegal personal representativeDetermining and locating dependants and the legal personal representativeThe decision to pay death benefitsTrustee discretionDeath benefit nominationsNon-binding death benefit nominationsBinding death benefit nominationsAdvantagesDisadvantagesThe trust deedTaxation of superannuation death benefitsComponents of a superannuation benefitPayments to death benefits dependants versus non-death benefits dependantsLump sum death benefitIncome streamsPayment to legal personal representativeThe relevance of your willDeath benefit challengesProcess for challengeFuture control of self-managed superannuation fundsChapter summaryPart V: Lifetime planningChapter 16: Powers of attorneyWhat is a power of attorney?Types of powers of attorneyLegal and financial decisionsEnduring vs general powers of attorneyJoint or several authorityMedical treatment decisionsAustralian Capital TerritoryNew South WalesNorthern TerritoryQueenslandSouth AustraliaTasmaniaVictoriaGuardianship/lifestyle decisionsLegal requirementsUse of a power of attorneySupervisionRevocationJurisdictional questionsWitnessing requirementsChapter summaryChapter 17: Cohabitation and financial agreementsCohabitation agreementsBinding financial agreementsChapter summaryChapter 18: Business succession and estate planningSurviving business partners and shareholdersForms of funded business succession agreementsInvoluntary departure agreementsVoluntary departure agreementsShareholder and unitholder agreementsOther issues to considerTreating the children equallyOwnership and disposal of your businessTaxation issuesChapter summaryChapter 19: Life insuranceWhy do I need life insurance?Don’t just insure the breadwinnerWhen should I consider life insurance?Life insurance and business proprietorsWill my superannuation cover me?How much life-insurance cover do I need?Income protection — policy definitionsChapter summaryChapter 20: Planning ahead — arranging your funeralRecord all personal detailsFuneral expensesContent of funeral servicePre-arranging your funeralChapter summaryPart VI: Estate planning and elder lawChapter 21: Centrelink and estate planningQualification for age pensionMarital statusIncome and assets testsOrdinary income testAssets testGranny flat interestsHow is a granny flat interest created?Documenting a granny flat interestMatters to be consideredSocial security rules and granny flat interestsValue of assetsChapter summaryChapter 22: Centrelink and the treatment of private trusts and companiesTreatment of private trusts and companiesIs the private trust or company considered an asset for Centrelink purposes?Is the entity a designated private trust or company?The control testThe source testIs the pensioner an attributable stakeholder?DefinitionsDetermining the value of assetsAllowable liabilitiesSurrender of controlApplication of provisions to testamentary trustsEstate-planning consequencesChapter summaryChapter 23: Reverse mortgagesWhat is a reverse mortgage?Absence of negative equity guaranteeDefinition of ‘default’How much will you owe?How will a reverse mortgage affect my Centrelink entitlements?Advantages of a reverse mortgageDisadvantages of a reverse mortgageOther alternativesDownsizeBorrow from a family memberDisposal of other investment assetsEstate-planning implicationsChapter summaryChapter 24: Aged careTransition into aged careAm I eligible for aged care?Aged Care Assessment Team assessmentTypes of care availableCommunity aged care packageExtended aged care at homeResidential careFees and chargesBasic daily care feeIncome-tested feeAccommodation chargeExtra service feesAccommodation bondsHow much is the bond?Is the family home included in asset assessment?Accommodation bond payment optionsAccommodation bonds and pension entitlementsRetention amountsGifting of assets prior to entering aged careEstate-planning implications of aged careChapter summaryChapter 25: It’s up to you nowAppendix A: state-by-state intestacy provisionsAppendix B: step-by-step estate planning guide
You can't take it with you
Wills and Estate Planning for Australians
First published 2009 by Wrightbooks
an imprint of John Wiley & Sons Australia, Ltd
42 McDougall Street, Milton Qld 4064
Office also in Melbourne
Typeset in Berkeley LT 11/14pt
© Andrew Simpson 2009
The moral rights of the author have been asserted
National Library of Australia Cataloguing-in-Publication data:
Author: Simpson, Andrew.
Title: You can’t take it with you: wills and estate planning for Australians/ Andrew Simpson.
Publisher: Richmond, Vic. : John Wiley & Sons, 2009.
ISBN: 9780731409860 (pbk.)
Notes: Includes index.
Subjects: Wills — Australia
Estate planning — Australia
Dewey Number: 346.054
All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.
Cover and internal image © iStockphoto/Mark Kolbe.
Legislation included throughout © Commonwealth of Australia 2008. All legislation herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation and judgements. In particular, section 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing. Requests should be addressed to Commonwealth Copyright Administration, Attorney-General’s Department, Robert Garran Offices, National Circuit, Barton ACT 2600, or posted at http://www.ag.gov.au/cca.
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Disclaimer
The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.
About the author
Andrew Simpson is a principal with Moores Legal in Melbourne and is head of its estate planning, structuring and superannuation department. Andrew holds a Bachelor of Arts and a Master of Laws. He has been practising in the area of estate planning, estate administration and elder law for 15 years.
Andrew is an adjunct lecturer in estate planning at Charles Sturt University and is the author of a chapter on estate planning in the Australian Master Financial Planning Guide.
In 2004 Andrew was awarded a Churchill Fellowship and spent time in the United States, Canada and the United Kingdom examining international approaches to estate planning and other aspects of elder law.
In addition to advising clients on the creation and implementation of an estate plan, Andrew also enjoys conducting workshops and information seminars for community groups on estate planning. The questions and comments that have arisen during these sessions have informed much of the book’s content.
Andrew is married to Jane and has four children.
Acknowledgements
This book is the result of the work of many. I gratefully acknowledge the contribution of my colleagues, Allan Swan, Peter Szabo, Suhanya Ponniah, Louise Barbaro and Narelle Mollet, all of who provided valuable input into some of the technical aspects of the subject matter.
I owe a debt of gratitude to Sarah Parker, who devoted countless hours to typing and proof reading the manuscript and for ensuring that the various deadlines were complied with. We got there!
To my wife Jane and children Oliver, Edward, Archer and Phoebe, thank you for granting me the indulgence of spending valuable family time on this project. The good news is that we no longer need to take the laptop on family holidays.
To my folks, John and Judith, and my brothers, Philip and Luke, and to Lara and Amalia. I hope you enjoy the references to you and your respective clans throughout the case studies.
Preface
When it comes to estate planning, and particularly the preparation of a will, there are a number of common themes. Firstly, most people have been planning to make a will for a number of years, but for one reason or another, they have struggled to get themselves organised. In many cases the ultimate call to action is prompted by circumstances: an imminent overseas trip, the death of a close friend or relative or a personal health scare. This is not ideal. In these examples there is usually a time pressure or other emotional challenge that makes the process of will creation more difficult and confronting.
The second theme is that at the end of the estate planning process, most people say ‘It wasn’t as hard as I thought it would be. I should have done it sooner’. This is coupled with a sense of relief that the process is complete and can finally be ticked off the ‘to-do list’.
In the last 15 years, I have spoken to hundreds of groups of people about estate planning. It has been an enjoyable and fascinating exercise. What I have discovered during these sessions is that while most people know what a will is, the process for its preparation is a mystery to many. It is also clear that the term ‘estate planning’ is not well understood. There is not a lot of information available that explains the process in detail. Therefore, many questions remain unanswered. For example:
• Where do I start?
• Who do I talk to?
• Do I need a lawyer, and if so, where do I find one with the necessary expertise?
• What documents do I need to prepare?
• Is it going to cost me thousands of dollars?
• Can I do my own estate planning?
• How long will it take?
• What information do I need to provide?
The purpose of this book is to help answer these questions and enable you to face your estate planning with confidence. The book is intended to be practical. Wherever possible, information is explained by the use of case studies, most of which are based on real examples. There are also references to other resources to enable you to take your research further if you wish.
If you have already completed your estate planning, you are to be congratulated. However, remember that estate planning is something that requires review on a regular basis. This book may help you identify areas that you need to revisit.
The book is not written for professionals working in the field. It has been written specifically for Australians with little or no knowledge or technical expertise in the area of estate planning. For this reason, technical language has been kept to a minimum, and a glossary is provided to explain legal terms where they are used.
The scope of the book is intentionally broad. This is because estate planning has many aspects to it and each set of family circumstances is different. There may also be more than one potential solution to your estate-planning issues. That being said, estate planning is relevant to people of all ages regardless of how simple or complicated their financial or family arrangements might be.
The good news is that estate planning is usually straightforward and can be completed in a matter of days if need be. However, a word of caution: the body of relevant law is vast and complex, and the consequences of getting it wrong are significant. The ill feelings and arguments caused by an invalid or ambiguous will can be permanently damaging to family relationships, and can also result in costly legal disputes.
This book is not intended as a substitute for legal advice; nor is it a ‘do it yourself’ guide. While it is comprehensive in its discussion, it does not attempt to deal with every possible estate-planning scenario. It is strongly recommended that you seek legal advice in implementing your estate plan.
One final word: if you have been contemplating your estate planning for a long time, remember the age-old proverb: ‘there is no time like the present.’
Andrew Simpson
Melbourne
December 2008
Part I: Understanding estate planning
Chapter 1: What is estate planning?
Many people despise wealth, but few know how to give it away.
Francois de La Rochefoucauld
While most of us would prefer not to think about it, we all face a number of inescapable truths:
1 Whether we like it or not, all of us will die.
2 The timing of our death is unknown.
3 We can’t take anything with us when we die!
We have a simple choice: Do we plan for this inevitable event, or do we choose to ignore it and hope that everything will somehow work out?
Estate planning is the process of planning and recording your wishes for the distribution of your wealth after death. This definition appears straightforward. For this reason it is often assumed that ‘estate planning’ refers only to the preparation of a will. In some cases, it is not this simple. There are aspects of estate planning that go beyond the will. For example, how are family trust assets to be dealt with? What happens to superannuation? How are jointly held assets treated?
In understanding estate planning, the term itself is helpful. It describes the two essential aspects:
1 ‘Estate’— indicates that the process is concerned with a period of time following your death. This aspect is guaranteed: we are all mortal.
2 ‘Planning’ —refers to the need to organise your affairs during your lifetime. This aspect is not inevitable. It requires action.
Why is estate planning important?
Wealth creation and wealth preservation tend to be popular pastimes. Most of us aspire to financial security and do what we can to achieve it. The enormous growth in the financial-planning industry in the last 20 years confirms this. However, the distribution of wealth after death has not held the same fascination. This has changed in the last decade or so. The importance of planning the distribution and succession of wealth is now an essential part of personal and financial planning. There are a number of possible reasons for this:
• Overall wealth has increased. This is due partly to the significant increase in superannuation contributions since the introduction of the superannuation guarantee in 1992. It can also be explained by the real estate boom that has occurred in most states of Australia that has seen the median house price in the capital cities increase significantly.
• Australia’s social fabric has changed enormously. The traditional family structure is now no longer the norm. The Australian Bureau of Statistics concluded in Australian Social Trends, 2003 that couple families with children are forming a smaller proportion of all families. These statistics also confirmed that in recent decades trends in divorce and remarriage have contributed to changing numbers of one-parent, step and blended families. As a result, more deliberate planning is required to deal with such diversity.
• The use of alternative investment structures such as trusts, companies and self-managed superannuation funds has increased. The Australian Taxation Office estimates that there are more than 360 000 self-managed super funds in existence in Australia, with more than 690 000 members.
• Australia’s population is ageing. Figures provided by the Australian Bureau of Statistics suggest that 12 per cent of the Australian population is currently aged 65 and over. By 2030 this will almost double to more than 22 per cent. The number of Australians aged 85 and over is expected to quadruple between 1999 and 2051. The life expectancy of Australians is also increasing. This changing demographic has brought with it novel estate-planning issues that tend to be age specific, such as the consequences of a reverse mortgage and the implications of a move into aged care. These and other related topics are discussed in part VI.
Features of estate planning
Thorough estate planning has a number of characteristics, outlined following.
Estate planning must be tailored
As every person and every family is different, an estate plan needs to be tailored to your specific circumstances. Your estate plan will not be the same as your neighbours’. The view that one plan suits all is a dangerous one. A detailed review of your circumstances will identify unique estate-planning issues that will need to be addressed. Examples of these issues may include:
• family members who require special treatment because of a disability, addiction or other health concern
• antiques, family heirlooms or collectables that need to be dealt with specifically
• business interests
• family circumstances, such as a second marriage or children from different relationships
• potential challenges to your will
• the existence of a self-managed superannuation fund or other trust structure.
Estate planning needs to be flexible
Your estate plan needs to be flexible enough to deal with a change to your circumstances and to the circumstances of your beneficiaries. Wherever possible, you should avoid locking future generations into arrangements that may become restrictive and unworkable. Examples of such arrangements include the creation of life interests, and binding directions requiring the indefinite retention of estate assets.
Case study
Constance leaves a will that directs that her family home is not to be sold until all her children have died. Her intention is to ensure that her children have a home to return to should they find themselves in financial difficulty or experience a relationship breakdown. At her death, none of her children want the house retained and would prefer it to be sold and the proceeds divided. The prospect of maintaining the property for the rest of their lives is not one that appeals to any of them.
Estate planning must be understood by you
It is important that you understand your estate plan, and that it can be understood by others, including your executor and family members who survive you. If you do not understand it, there is a very good chance that others will also have difficulty. Unnecessary complexity and ambiguity may serve to defeat your intentions. Remember, when your will is administered, you will not be present to explain what you intended; your intentions must be clear from the terms of the will. For example, if your will contains a specific gift of personal items such as jewellery or artwork, the description of the relevant item needs to be precise. For a further discussion of personal chattels see chapter 6.
Estate planning must be reviewed regularly
Your estate plan should be regularly reviewed. Estate planning is not a discipline that relies on the ‘set and forget’ principle. A five-yearly review at a minimum is recommended, however there may be circumstances that justify more regular reviews.
Following is a list of circumstances that would justify an estate-planning review and/or a meeting with your adviser to determine whether your estate plan requires amendment:
• marriage, separation or divorce
• entering into or ending a de-facto relationship
• having children (including adopted or foster children)
• the death of a proposed beneficiary
• other major events occurring in your family
• major events affecting your assets, including the disposal of an asset that is referred to in your will
• a change in the need to ensure a gift for spendthrift, intellectually disabled or bankrupt beneficiaries is protected under the will
• proposed beneficiary qualifying for a means-tested social security pension
• a change to the extent to which your beneficiaries will benefit from other sources, such as jointly held assets, superannuation and life-insurance proceeds and family trust distributions
• changes to the taxation laws
• the death, ageing or ill health of your proposed executor
• the establishment of a family trust or a new business venture
• the transfer of assets to a business or family trust
• the existence of trust income allocated to a beneficiary that has not been paid to or applied for the benefit of the beneficiary that may require adjustment. For a further explanation of this issue see chapter 6
• the desire to implement a plan for business succession. Business succession agreements are discussed in chapter 18.
Estate planning is the result of collaboration between professional advisers
Where you have existing professional advisers, thorough estate planning relies on the collaboration and cooperation of all of these advisers. The process is illustrated by figure 1.1:
Figure 1.1: the relationship between clients and advisers
Each person shown in figure 1.1 has specific knowledge and skills that are drawn on during the estate-planning process. These are outlined following:
• The client understands his or her personal circumstances, beliefs, values and long-term goals and objectives.
• The financial planner has financial and investment expertise and understands the nature of the client’s investment portfolio and risk profile.
• The accountant possesses knowledge of the client’s business structures such as trusts, companies and self-managed superannuation fund (if applicable).
• The lawyer understands the documentation and the legal requirements necessary to give effect to the estate plan and has expertise in drafting legal documents.
Estate planning relies on thorough data collection
Your legal adviser’s ability to advise you on your estate-planning needs depends almost entirely on the integrity of the data-collection process. Your adviser must understand your personal, investment and business circumstances. This can be a time-consuming process, but it is unavoidable if your adviser is to properly advise you. The kind of information that your adviser should be made aware of includes:
• your financial circumstances, including a summary of your assets and liabilities
• the circumstances of your children and other potential beneficiaries including marital status, occupation, business interests, disabilities or other factors that might affect their ability to manage money
• the existence of family trusts and companies and business interests
• the nature, extent and ownership of superannuation and life insurance cover
• the identity of people who are financially dependent on you.
Prior to your initial meeting with your legal adviser, you should prepare a personal profile document containing information such as:
• your personal details
• your marital status, including previous marriages (if applicable)
• the names, ages and correspondence details of all of your children and their proposed guardians (if applicable)
• any special needs your beneficiaries may have that will affect their ability to manage an inheritance
• the executors you wish to nominate
• the existence of enduring power of attorney
• your business structure, including details of your superannuation and life insurance.
The provision of this information will ensure that your adviser is fully informed about your circumstances and will make the process more cost effective. It is also a good idea to give your legal adviser permission to discuss your financial and business affairs with your other advisers.
Chapter summary
Estate planning is not just the domain of the asset rich; it affects everybody, regardless of their circumstances. Hopefully, this introduction has assisted you in understanding some of the fundamental principles behind the process. You should now be ready to consider some of the specifics. The purpose of chapter 2 is to assist you in identifying what assets form part of your estate and what assets do not.
Chapter 2: Estate assets
Nemo dat quod non habet.
No-one gives what they do not have.
Understanding what assets you own is the necessary first step in the estate-planning process. Without this knowledge, you will be unable to make decisions about who gets what after your death. Many of us assume that by preparing a will, we will be able to give away all of the assets that we own, control or have an interest in. For many of us this is not necessarily the case, and our ability to give away assets depends entirely on the nature of the asset and its precise ownership arrangements.
It is for this reason that your legal adviser will usually insist on reviewing copies of relevant documents such as trust deeds and titles, and will want to speak with your other advisers.
What forms part of the estate?
Following is an explanation of the assets that form part of your estate.
Estate assets
Generally, assets owned in your personal name form part of your estate, and can be disposed of by your will. These include:
• real estate
• personal chattels (including jewellery, antiques, furniture and clothing)
• shares, bonds and debentures
• cash investments
• loans made by you to the trustee of a trust
• income and capital allocated to you from a trust
• an interest in assets held with another person as tenants in common. The term ‘tenants in common’ is explained later in this chapter.
Non-estate assets
Assets that are controlled but not owned or wholly owned by you are referred to as ‘non-estate assets’. Non-estate assets cannot be disposed of by your will. They include:
• assets that are owned jointly with another person (usually described as ‘jointly held assets’) — most commonly, the family home
• the unallocated assets of a family trust
• superannuation, subject to member direction and trustee discretion
• life-insurance proceeds (depending on the ownership)
• account-based pensions or annuities that have a reversionary beneficiary
• business interests.
Case study
After years of procrastinating, Bert and Ethel have finally decided to attend to their estate planning. Their previous wills were made in 1971 when they were newlyweds. Circumstances are now very different. Their financial adviser has strongly suggested that it is time to review and update their estate planning. Bert and Ethel have three adult children and three major assets:
1 their family home
2 an investment unit
3 a beach house on the coast.
After much thought and deliberation, Bert and Ethel decide to draft wills leaving one property to each of their children.
What Bert and Ethel have forgotten is that when they purchased the investment unit and the holiday house, their accountant advised them to purchase both properties in a family trust for asset-protection purposes. It is not until their lawyer makes contact with the accountant and undertakes a title search of each of the properties that she realises that the only piece of real estate owned by Bert and Ethel is the family home. This caused Bert and Ethel to rethink their plans. As they don’t own the investment unit and the beach house, Bert and Ethel are unable to give them directly through the will.
Case study
Oliver is about to start a new business. As part of his preparations for the new venture, he creates a family trust and transfers substantial cash reserves from his own name to the trustee of his family trust. He prepares a short agreement documenting the transaction. The nature of this agreement has important asset ownership consequences. For example:
• If the document is a loan agreement, the transferred funds remain part of Oliver’s personal estate. The funds will be distributed as part of Oliver’s estate.
• If the agreement is a deed of gift, the funds cease to be owned by Oliver. In this instance, the funds are not governed by the terms of Oliver’s will. Like Bert and Ethel, Oliver will not be able to dispose of this particular asset through his will.
It is important to ensure that you fully understand your asset-ownership position. Do not rely solely on your memory — you must be precise about your ownership arrangements.
It is also important to provide copies of all relevant documents to your adviser for review and confirmation of asset ownership. This will ensure accurate advice and will make the process more cost effective. You should provide your adviser with the following documentation and information:
• copies of earlier wills
• trust deeds for trusts and superannuation funds
• trust balance sheets
• your last personal tax return
• superannuation death benefit nominations
• the constitution for private companies
• details of life-insurance cover and its ownership
• title searches for real-estate assets
• any other relevant documents, such as shareholder/unitholder agreements and buy/sell agreements.
Joint tenants versus tenants in common
Co-ownership of a property is divided into two categories:
1 joint tenancy
2 tenancy in common.
Understanding the difference between the two is essential. The defining features of a joint tenancy are as follows:
• All joint tenants have an interest in the whole asset.
• The surviving joint tenant has a right of survivorship. Upon the death of one joint tenant, the remaining joint tenant (or tenants) continues to hold the total ownership of the property.
• The interest of the deceased joint tenant dies with him or her (unless he or she is the last surviving joint tenant).
Joint tenant ownership is illustrated in figure 2.1.
Figure 2.1: joint tenant ownership
In contrast, tenants in common have a discrete share in the property. Upon the death of a tenant in common, his or her interest in the property does not automatically pass to the other tenants but rather passes in accordance with the deceased tenant’s will.
Tenants in common ownership is shown in figure 2.2.
Figure 2.2: tenants in common ownership
Joint tenancy is presumed in the absence of a contrary intention. Attention should be paid to the distinction between joint tenancy and tenants in common where you are:
• intending to make a specific gift of property to a beneficiary
• contemplating the preparation of a testamentary trust will. A jointly owned asset will pass immediately to the surviving joint tenant and will not form part of your estate. For this reason, it can’t pass into a testamentary trust. This may produce undesirable results, particularly where the expectation was that an asset would pass into a testamentary trust. For a detailed discussion of testamentary trusts, see chapters 11 and 12.
It is possible to rebut the presumption of joint tenancy by declaration. However, careful consideration of the capital gains tax and stamp duty implications of such a declaration should be taken into account.
It is also possible to sever a joint tenancy and alter it to a tenancy in common. Again, advice about the tax and stamp duty consequences should be sought before altering the way a property is owned. By rebutting the presumption or severing the joint tenancy, your interest in the asset will then form part of your estate and can be distributed hrough your will.
Case study
When Sandra’s husband Doug left her and moved out of the family home, she immediately decided to change her will to exclude Doug from any benefit from her estate. She visited her lawyer and gave instructions to prepare a will leaving everything to their adult daughters. Sandra told her lawyer that she wanted to protect her interest in the family home for the girls. Sandra also communicated her objectives to her daughters. Unfortunately, Sandra died shortly after signing her will. Both daughters were surprised when they received a telephone call from the lawyer advising that a title search had revealed that the family home was owned jointly by Sandra and Doug, and therefore passes to Doug by way of survivorship. The girls get nothing.
Dealing with the succession of non-estate assets
A will can’t dispose of non-estate assets; the succession of non-estate assets is dealt with elsewhere throughout this book. You should refer to the following:
• For trusts created during your lifetime such as family trusts and hybrid/unit trusts you should refer to chapters 9 and 10.
• For testamentary trusts, refer to chapter 11.
• For superannuation, refer to chapter 15.
• For life insurance, refer to chapter 19.
• For account-based pensions or annuities, refer to chapter 15.
• For business interests, refer to chapter 18.
Chapter summary
Before a will or other estate-planning documents are prepared, the assets to which they relate must be identified. The effectiveness of the estate plan relies on this step. Where the existence of non-estate assets is also identified, additional planning is necessary to ensure their smooth succession. The following chapter discusses the implications of intestacy, or dying without a will.