Your Will cannot direct what happens to your super

Superannuation is held in trust for its members until a condition of release is met. Death is a condition of release so the trustee can pay the super death benefits of the deceased out.

However, under the SIS Act the death benefits can only be paid to certain people who are classed as “SIS Act dependants” or to the estate:

A SIS Act Dependant includes

– A spouse (married or de facto)

– Any child

– Any person with whom the deceased had an interdependency relationship

Or to the estate:

– The deceased’s legal personal representative (executor or administrator of estate)

Who the benefits are paid to amount the above is determined solely by the trustee of the fund, subject to the trust deed or a valid binding death benefit nomination (BDBN).

Under trust law a trustee cannot be directed by others – a trustee’s discretion cannot be vetted. To get around this trust deeds can direct that the trustee must follow a written direction such as a BDBN.

Some funds only allow a 3 year BDBN which then lapses. If you don’t or cannot renew then the BDBN expires and won’t be effective.

Without a valid BDBN the trustee will decide where your super goes. If you have your super in an industry fund strangers will decide. If you have 2 children and one is a member of your SMSF then this child will decide where your super goes – to themselves only possibly.

People’s super balances are increasing and together with life insurance proceeds it wouldn’t be unusual for an average person’s super balance to be over $1mil on death.

Tip – make sure you understand where your super will go when you die and do something about it if there is a chance it could end up somewhere you don’t want it to go.

Originally posted at

https://propertychat.com.au/community/threads/legal-tip-3-superannuation.275

12 Months Imprisonment with withdrawing from a Loan – Contempt of Court

Not complying with court orders can lead a person to get into serious trouble.

In a recent case relating to a family law property settlement the husband was sentenced to 12 months imprisonment because:

– he withdrew $231,807 from a loan account, and then

– failed to make 48 months of repayments as required

The wife was to receive the house unencumbered (and the husband other assets) and the 48 monthly repayments were required to pay out the loan and discharge the mortgage.

The husband blamed his failing business for his need to breach the court orders.

The wife was the one who brought proceedings to court.

See:

Parrish & Gallejo (No.2) [2018] FCCA 2851

http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCCA/2018/2851.html

How do you feel about your spouse remarrying after your death?

When preparing a will for a client I had to ask the question ‘what if your wife remarried?’

He started yelling “I will kill the bastard, who is he! He doesn’t even exist yet, but I hate him” – jokingly of course. Then I said ‘what if your wife died first and you entered a new relationship” – oh that is different he said

But it is a serious question. Spouses often remarry or enter into new relationships and this will affect the family assets that you leave behind – their owns assets plus assets they inherited from you.

Example

Homer and Marge are happily married and have a few assets in each name. Homer dies and leaves everything to Marge. Nothing to the children and nothing on trust.

A short time after the funeral Marge enters into a dalliance with neighbour and widower Ned – who is renting and has no assets. Pretty soon Ned is staying over 4 nights per week and then moves in.

Marge then dies of a heart attack during a vigorous love making session.

Her will leaves everything to her kids. But Ned has grown accustomed to living in style on the money Homer left Marge. Ned also likes the bed Homer purchased and wears Homer’s dressing gown in the morning. He also feeds Homer’s dog!

Ned makes a family provision claim. He is an eligible person as he is now a ‘spouse’ of Marge – or was on her death. His new girlfriend has moved into the house too.

Ned gets awarded 30% of Marge’s estate and they live happily ever after.

If Homer had considered this in his will he could have taken evasive action to prevent or reduce the financial effect of a new spouse on the family.

See Discussion at:

https://www.propertychat.com.au/community/threads/tax-tip-233-the-6-year-rule-when-moving-into-an-ip-and-then-out-again.40843/

Loan Tip: Outgoing Lenders Deliberately Delaying Refinances

When a person refinances their loan from one lender to another the mortgage must be discharged with the outgoing lender – the one they are moving away from. This means a ‘mortgage discharge’ form needs to be signed and submitted to the outgoing lender.

In the old days faxes went missing and forms were never received and this allowed the outgoing lender to delay the settlement.

These days it seems forms still go missing even though they are emailed in. But recently we have had one where the client’s signature on the discharge form apparently did not match the signature on the banks records. The client had to go into a branch to show ID and prove it was them to submit the discharge form.

Another, actually the same lender, wanted the spouse to sign the discharge form too, but she was not on title and could not have given a mortgage, but she was a borrower.

In both cases it was the day of the proposed settlement that this happened.

Another non-bank lender – but under a company owned by the same bank above, they have developed their own special discharge form which is not available online. The client must ring them up to get the form sent to them. This allows the lender a last attempt at discouraging them from leaving by making further offers of discounts etc.

These tactics appear to be

a) delaying tactics to allow the outgoing banks to get more interest, and

b) making it hard to leave discourages people from leaving, and

c) it is a form of punishment for leaving

When refinancing where funds are needed for settlement of another property, I suggest you get in early, send the discharge form even before your new loan is approved.

If there are any delaying tactics ring the lender’s complaints section, and threaten reporting them to the AFCA Home – Australian Financial Complaints Authority (AFCA)

I should add one way around this is to use a ‘fast refi’ type process where the new loan settles without the discharge of the old mortgage. A few lenders offer this, and the first thing the old lender knows about it is the repayment of the loan by the new lender, then the discharge of mortgage.

See discussion at

https://www.propertychat.com.au/community/threads/loan-tip-outgoing-lenders-deliberately-delaying-refinances.41658/

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The Tax Issues of Buying a Main Residence which is initially tenanted

Imagine you buy a property with the intention of moving in, but there is a tenant whose lease doesn’t expire for another 6 months so you keep renting and wait for them to move out so you can move in.

What are the CGT consequences of this?

Well, that property will always be subject to CGT as you did not move in straight after purchase.

But all is not lost because CGT will be minimal to almost nil where you remain living in the property for a number of years. Furthermore 3rd element cost base expenses can be used to reduce CGT even further.

Example

Homer buys 123 Smith Street, but the contract indicates it is not vacant possession. It will come with a tenant with 6 months left on the lease.

Contracts signed on 1 July 2019, but Homer doesn’t move in until 1 Jan 2020, with a hangover.

Let’s say Homer sells that property in 2030, signing contracts on 1 July.

Will he pay CGT?

He might, but it may be a very small amount.

The first thing to consider is work out the time period it was rented as a percentage of the total ownership period.

6 months/132 months = 4.5%.

So, at the most the capital gain would be 4.5% x 50% x the gain or 2.27% of the gains on the property. Bugger all – note the 50% is the 50% CGT discount applied for holding the property more than 12 months.

But before this is done, the cost base has to be worked out. The capital gains is the sale proceeds less the cost base.

The cost base expenses include buying and selling costs and, importantly, the interest, rates, repairs and costs while living in the property can be taken into account here and they will further reduce any CGT, potentially bring it down to nil as over 11 years these costs would add up.

Getting your wage deposited into a trust Bank Account and the risks

A client has advised they were ‘advised’, on an expensive course, to deposit their wage into a bank account of the trustee of a trust rather than into their own personal bank account..

This is for asset protection supposedly.

The idea is that the money never touches your account so it cannot fall into the hands of creditors.

How silly!

In situations such as this, the trustee would be holding the money for you as bare trustee. There is no asset protection if you were to go bankrupt, die or go through a family law property settlement as it is still your money.

Furthermore, you have additional issues to consider such as what if the trustee

  1. Dies
  2. Goes bankrupt
  3. Loses capacity
  4. Gets divorced
  5. steals

You would probably have worse asset protection issues.

If you did end up bankrupt the money could easily be clawed back.

Tip: Don’t do this without proper legal advice tailored to your situation.

Discuss at https://www.propertychat.com.au/community/threads/legal-tip-232-getting-your-wage-deposited-into-a-trust-bank-account.40643/

Indefeasibility and the Torrens System

I don’t advise on property law, but this topic is relevant to asset protection.

The Torrens system of registration of title for real property was first introduced in the late 1800 and it has slowly been replacing the existing system since then. The existing system of title is known as ‘old system title’ and it was complex and cumbersome.

In old system title when a property was sold the ownership had to be proved by both the physical title and locating all the previous transfers relating to that title. Sometimes documents went missing and it was a real pain in the arse being both time consuming and costly.

Torrens was introduced as a system of registration to replace all of this. The name registered on title was the legal owner. This is enough proof.

Indefeasibility refers to the fact that what is registered on title is proof. So, a registered owner is proof of legal ownership. A registered mortgage is proof of the legal mortgage. It is said to be a ‘system of title by registration’.

But this doesn’t mean registered ownership takes priority in all cases.

An example is fraud. Where title to a property is fraudulently transferred to someone else then them being registered owner does not mean it is indefeasible. This can happen with mortgages too. There is a recent case where one spouse mortgaged a jointly owned property to borrow money by forging the signature of their spouse. Since this was fraudulent the lending bank could only recover half of their money.

Keep in mind that there are also unregistered or equitable interests. The legal owner may not be the beneficial owner of a property. This happens where they are acting as trustee under an express trust, such as a discretionary trust, or where a trust is implied such as a resulting trust. In these cases the courts will enforce transfer of title based on equitable grounds.

Then there claw back provisions in various legislation such as

  • S 37A of the Conveyancing Act NSW (and other state equivalents)
  • S 120 to s121 of the Bankruptcy Act
  • Family Law Act
  • Succession Acts

Title of a property might be held by person A but the courts can reverse this and transfer it to person B and then to creditors, spouses, missed out beneficiaries etc.

So, in summary, indefeasibility does not mean a property dealing cannot be attacked, but it is evidence of the current legal ownership of property.

Discuss at https://www.phttps://www.propertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/ ropertychat.com.au/community/threads/legal-tip-223-indefeasibility-and-the-torrens-system.40248/

Electronic Signing of Deeds – Don’t!

I have recently come across a client who had their trust deed signed by the settlor, electronically. The settlor had inserted a jpeg of her signature in the deed and emailed it to the client for signing. There was no original copy. It was also electronically signed by the witness of the settlor. It is not known if the witness was present with the settlor when it was signed, or if they signed the same document.

This deed would fail. It is not executed.

Another client had their deed signed by the accountant who set the trust up, but it was also witnessed electronically – one of the accountant’s witnessed the client’s signature. Interestingly signatures were ‘witnessed’ from afar!

This deed also fails.

Deeds cannot be signed electronically in any state of Australia. There is one exception now due to recent amendments to the Conveyancing Act, s 38A, in NSW. This new legislation does allow for deeds to be signed electronically, from 2019, but the legislation does not cover side issues such as how can an electronically signed deed be witnessed? When 2 people sign a document on different computers they are not signing the same document so will this be valid?

Can companies sign electronically?

What happens when someone dealing with the trustee wants to see the original deed? If you were to print it out would it be original? How could a certified copy of the deed be made?

My tip: Do not sign any deed electronically, even if you are an individual based in NSW. Print out the deeds and sign with a pen.

If you have signed a deed electronically seek legal advice on how to rectify this problem, even if located in NSW. And don’t go back to the same firm that caused the problem in the first place as they are likely to not know about the issue or how to fix it.

Discuss at:

https://www.propertychat.com.au/community/threads/legal-tip-222-electronic-signing-of-deeds-dont.40226/

A Strategy to increase the Pension when Have Too much in assets

The assets test can prevent someone from getting a full or part aged pension. A way around this might be to ‘double dip’ by spending up to reduce your assets. But that is wasteful. Spending $150k wastefully just to get an extra $10k doesn’t seem to be wise (yet people actually do this!).

A better way would be to upgrade the main residence. But this is also wasteful in terms of suffering stamp duty and other costs – you will lose roughly 10% of the value in selling one house to acquire another.

Another solution is to build a granny flat or second dwelling in the existing house. This will use up a chuck of cash, but also add value to the property.

As long as the granny flat is not rented out, or family stay there it will be treated as a part of the main residence and there will be no income taken into account.

This could help a person both get the pension as well as help family out by allowing them cheap accommodation.

Section 11A(1) of the Social Security Act

As of July 2019 the assets test for a single pensioner is $258,500 for a home owner. That is a single pensioner can have assets of $258,500 or less, other than their home, and still get the full pension.

Example

Homer’s wife Marge just died and he is on a single pension. He has a $400,000 house on a large block as well as $400,000 in the bank. Homer could get a part pension only with his assets exceeding the assets test level.

His pension would be $12,836 per year

If he used $141,500 to build a granny flat the pension would jump to $22,509 pa

Using this great calculator: http://yourpension.com.au/APCalc/index.html#CalcForm

Homer uses $141,500 to build a granny flat in the back yard.

His pension increases by almost $10k per year.

He let’s his son Bart stay there and Bart helps around the home. Bart is now saving $300 per week on rent – so he is $15,000 per year better off.

If Bart moves out or if Homer ever needs more money he can always rent the granny flat out, but this would reduce his pension. If he rented the flat out for $300 pw he would get $15,000 pa rent plus $16,377 for the pension. $31,377 pa

He could also sell the property by about $180,000 more with the granny flat

So, all up building the granny flat has benefitted Homer in at least 4 ways:

  1. Larger pension
  2. Family close by
  3. Potential rental income plus part pension making more cashflow than doing nothing – more than $31,377 compared to $12,836
  4. Greater tax free capital asset for him and his family (if rented won’t be tax free completely)

SMSFs Negative Gearing

Not many realise but a SMSF can negative gear property, and even shares potentially.

It works the same way inside a SMSF as outside. Any loss from an investment can reduce the taxable income of the fund which saves tax on that income.

Example

A SMSF has a property with a $15,000 loss after all expenses are taken into account.

The member of the fund contributes $20,000 into the fund in the form of compulsory employer contributions. This is normally taxed at 15% which would be about $3,000 in tax.

But with the loss from the property the income of the fund becomes $5,000 (-$15,000 + $20,000 = $5,000).

The tax on $5,000 would be $750.

So, having the property would be saving the fund $2,250 in tax in that year.

Note that I am not suggesting that I think property in a SMSF is a good investment.

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