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Estate planning made simple, Part I

This is an edited extract from Noel's new book, 'Wills, death & taxes made simple'. We'll feature a second extract in next week's newsletter.

It's a sad indictment of our attitude to this important topic that almost 50% of Australians still die without a will. But it gets worse - apparently for those who do have a will, 70% of them don't know where it is, couldn't locate it easily if asked to, and haven't reviewed it in the past 20 years. This means it's most likely to be outdated and no longer reflect their current circumstances. There's also a common misconception that people don't need to make a will because their wife, husband, or partner will automatically get everything. This is not true.

An effective will minimises the risk of challenges and considers what the beneficiaries will receive after taxes and duties, and makes things as simple as possible for your executor. That's not as easy as you might think, so let's look at key issues to be aware of before you draw up your will.

These include:

  • the relevance of asset ownership
  • which assets will be distributed as part of the estate and which separately
  • the characteristics of different types of assets
  • the various types of trusts that may be relevant to inheritances
  • Centrelink issues, particularly relevant to anyone receiving the age pension
  • property considerations
  • extra needs for your will if you have dependent children

Today we'll focus on the relevance of asset ownership.

Understanding asset ownership

When preparing your will it’s important to appreciate which assets form part of your estate and can be disposed of via your will, and which assets are not part of your estate and therefore cannot be bequeathed by the will. You must understand the nature of those assets because they may well have different characteristics that could be very important when your will is being prepared.

Usually, one of the first questions a solicitor will ask you at your appointment for a new will is whether you own any property as joint tenants or tenants in common. I am told that a blank look is the typical response; most people just do not know, and if they do know, don't understand why it matters. So let's look at why asset ownership is so important when drawing up your will.

Estate assets are assets held:

  • in your name only
  • as tenants in common.

Non-estate assets are assets held:

  • as joint tenants
  • in discretionary trusts
  • in superannuation.

Estate assets

Items that you own in your own name are bequeathed through your will. These may range from household goods to a share portfolio.

Anything you own as a tenant in common has a fixed treatment upon death of one of the owners: the survivor/s continue with their present holding, and the deceased person's share passes to their beneficiaries following the terms of their will.

Tenants in common is the usual way that brothers and sisters or friends hold property. In this modern age where divorce and remarriage is commonplace, we find more and more couples are holding all their property as tenants in common, to allow their own children to have their share. If you want your surviving spouse to continue to live in a home you held as tenants in common, you could take advice about inserting a provision in your will that would enable it, and avoid the children of an earlier marriage forcing your new husband or wife out of their home.

Non-estate assets

Anything you own as a joint tenant, in a trust, or in superannuation (which is technically in a trust) cannot be bequeathed via the will. Life insurance is also disposed of according to its own rules, and not through the will.

If a couple hold assets joint tenants, and one dies, the entire asset automatically passes to the other holder irrespective of the terms of any will. This is called the “right of survivorship". This is the usual way that a husband and wife hold the family home. Obviously, you should not hold an asset as joint tenants unless you wish the other holder to have your share if you die first.

It's important to think about the ownership if you are considering making a bequest of a specific property or proposing a testamentary trust in your will. Because a jointly owned property automatically goes to the surviving owner and is not part of your estate, it cannot pass to a testamentary trust. This could produce unwanted results. You can change joint tenancy to tenants in common, just make sure you take advice about the tax and stamp duty consequences of doing this before you act.

Case study

David and Susan have both been married before. He has two children from a previous marriage, and she has four. As they don't intend to have any more children, they hold assets as tenants in common. This enables David's children to have half the proceeds when he dies and Susan's children to have half the proceeds when she dies. The position would be different if the assets were held as joint tenants and David died. David's half would pass directly to Susan and how much she then gave to David's children would be at her discretion.

When David and Susan are preparing their wills, they need to think about what should happen when one of them dies. Is the intention for the survivor to remain in the house as long as it's convenient for him or her, or is the preference for the property to be sold and the proceeds split between the beneficiaries? A life tenancy is seldom a good option for reasons I'll discuss later, but the survivor could be given the right to buy the property on the death of their partner, or even occupy it for a specified time. This is a complex area, and you’ll need expert advice.

In addition, most older couples have joint bank accounts, which can save a lot of hassle when one of the partners dies, because the account continues as normal. You just need to take evidence of their death to the bank and then the account will revert to the survivor. It's also becoming common, as Australia's population ages, for an older person to have a joint account with one of their children. This can be invaluable when the older person passes away and there are ongoing bills to pay for the deceased's estate.

Such a joint account provides ease of access, but if other siblings do not even know of the existence of this account, there could be some tension if the older person dies and the bank account—which may have a considerable balance — passes automatically to the joint-owner sibling. Therefore, make sure there is full disclosure within the family: that all the children know of this joint account and its ultimate purpose of paying expenses such as probate costs, solicitor fees, rates and the other bills that keep coming after a person away. Keep in mind that the more transparent you keep the finances, the less chance there is of squabbles later.

If property is held in a trust it is also a non-estate asset, and the trust deed should be carefully considered before drafting your will. The succession plans in the trust deed need to line up with your will and your wishes. Assets held in a trust cannot be bequeathed in your will because it's not you personally who owns them, but the trustee of the trust fund. Your wishes could be carried out by either amending the trust deed or inserting a clause in your will — but only if the trust deed permits. Again, this is a complex area and you should consult a specialist succession lawyer about it.

 

Noel Whittaker is the author of 'Retirement Made Simple' and numerous other books on personal finance. See noelwhittaker.com.au. This is an extract from Noel's book, Wills, death & taxes made simple, and is for general information only.

 

6 Comments
Peter
May 14, 2024

Thanks Noel and others. All very important comments. I think another relevant point that I have seen is the absence of a per stirpes provision in wills. Inclusion of this provision should ensure that the beneficiary's family is not deprived.

Wildcat
May 12, 2024

The other big trap to watch out for is capacity. If there are any doubts when a will is being made about the possible capacity of the testator additional steps to prove capacity at the time of making the will are a good defensive step to assist in defeating a challenge.

Of course the easy way to prevent a challenge is to empty the estate. This is hard to do with the primary residence or if you live in NSW (notional estate) however reducing the size of the estate by "in life" giving can also make sure a testators' wishes are carried out and not challenged.

Sarah
May 11, 2024

Noel, does your book have advice on how to put together the records your Executor will need?

Johns
May 09, 2024

What would happen to trust assets, if the trust is controlled by a corporate trustee in which the will maker is the only shareholder (and director). Would having in the will that the shares in the corporate trustee passes to the intended beneficiary of the will maker effectively transfer the assets to the beneficiary, as they would have control of the trustee company, and could direct assets of the trust go to the beneficiary?

Simon
May 09, 2024

Passing on the shares in the trustee company to the intended beneficiary may work but would need to check Trust Deed to see if there is an appointer (power to replace the trustee), guardian (power over distributions and deed amendments), etc, and whether these are also the will maker. If there are such roles then need to consider what happens with those roles. If the will maker has these roles they can usually pass these roles on through their will, subject to the terms of the trust deed. If will maker is not the appointer then passing on shares in trustee is ineffective to pass control of the trust as trustee can be replaced by whoever is the appointer.

Wildcat
May 12, 2024

Agreed Simon, very good points. Not enough attention is paid to deeds, even by some lawyers doing estate planning. I have seen shares in a corporate trustee passed to three children thinking that would control the assets. The executor could become the appointor and then appointed themselves. This may create a fiduciary conflict depending on how the will is drafted but we are back in court to resolve it.

 

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