Archive

Category Archives for "Estate Planning"

Consider the remarriage Risk when doing a Will

When one spouse dies often the surviving spouse remarries. This will mean any inheritance received by the surviving spouse could be at risk of not ending up in the children’s hands.

Example

Homer and Marge are happily married and have 3 kids, they prepare their wills so that if one dies the survivor gets everything, if they both die the kids share everything equally. Sounds good so far.

Homer dies.

Marge inherits Homer’s assets which were 50% of the main residence, 50% of the investment property and 425 pens stolen from his employer over the years.

So far all is well.

A year after Homer’s death Marge gets on tinder and eventually marries a guy called Barney.

Marge’s will is now revoked by the marriage, marge dies and under the intestacy laws of NSW the assets of Marge get shared by Barney and the kids.

Even if Marge didn’t marry Barney, he might still be able to take a share because he is a de facto spouse. If the will was in place still, he could make a family provision claim. There is also the possibility that Marge will knowingly prepare a new will and leave Barney something – or everything.

So, when making a will consider that your spouse could enter a new relationship after your death and plan for it. Assume it will happen.

For a Discussion go to: https://www.propertychat.com.au/community/threads/legal-tip-197-consider-the-remarriage-risk-when-doing-a-will.38888/

Multiple Bucket Companies as an Estate Planning Strategy

A Bucket company is a company set up to receive profits from another entity – usually a discretionary trust. The bucket company usually does nothing else, except receive money and make loans or directly invest perhaps. Over time the value of the bucket company will rise as money is coming in but not going out. Therefore, it will become increasingly important to consider in regards to estate planning and asset protection.

One estate planning strategy is to set up one separate bucket company for each child so that when the controller of the companies dies each company’s control can be passed on rather than having multiple people inherit the control of one company.

Example

Homer has 3 kids. He wants to leave them approximately the same amount of his assets 1/3.

Homer has decided to set up a discretionary trust to use to invest in shares. He seeks legal advice on the difficulties with leaving the control of the trust to more than one person so has that covered. But after a while the dividends of the share investments are building up so Homer sets up 3 bucket companies with 3 separate discretionary trusts with one trust holding the shares in each bucket company.

When the dividends come in, he causes the trustee of the share trust to distribute 1/3 to each company. Over a period of time the companies end up with large amounts of retained earnings which and then lent back to the share trust.

Homer dies.

Each of the bucket companies is then passed to each child – actually nothing is passed but the control of the bucket companies is arranged so that Child A controls Trust A and Bucket Company A.

This way things will be easy to divide. There is no more than one child involved in one company so if they want to cause the company to make loans, invest, pay dividends or close down they can do so without the need to effect or even consult with their siblings.

For a Discussion go to:

https://www.propertychat.com.au/community/threads/legal-tip-195-multiple-bucket-companies-as-an-estate-planning-strategy.38768/

No attorney but Capacity already lost?

What do you do when a family member has lost capacity but there is no power of attorney appointment in place?

Example

Dad died a while back and mum is in hospital and it looks like she has dementia and needs full time care. You, the son or daughter, need to get mum’s property sold so you can raise the funds to help cover the care needed.

You go to mum’s lawyers wanting to sell mum’s property but they point out the obvious – it is not you property to sell so you cannot enter into a contract on your mum’s behalf and you cannot sign the transfer. Is there an enduring Power of Attorney they ask? The law firm indicates they recommended one to your mother years ago (is this a breach of client confidentiality?) but she did not do one – through that firm anyway.

Later you look through all mum’s papers – there is stuff everywhere – but you cannot find any power of attorney appointments. What do you do?

The only option may be to make an application to the Guardianship Tribunal, if in NSW, to ask to be appointed as mum’s financial manager (NSW). This will take time, money and stress to do.

Something similar could happen between spouses too.

Going to the tribunal or courts to be appointed an attorney or financial guardian is best avoided if possible because

  1. Complexity
  2. Cost
  3. Time, and
  4. Multiple people could apply in opposition to each other.

Making a POA when you don’t need one will be quick, easy and cheap. This is like insurance. You don’t need it until you need it and by then it is too late to get it.!

Tip: Appoint an attorney before you need one as once you do need one it will be too late.

Discussion at:

https://www.propertychat.com.au/community/threads/legal-tip-194-no-attorney-but-capacity-already-lost.38738/

Declaration of Trust

A declaration of trust happens when the legal owner of an asset declares that they now hold that asset on trust for another person or persons.

A more technical definition is found in legislation, for example in section 8(3) of the Duties Act 1997 NSW which has:

“declaration of trust” means any declaration (other than by a will or testamentary instrument) that any identified property vested or to be vested in the person making the declaration is or is to be held in trust for the person or persons, or the purpose or purposes, mentioned in the declaration although the beneficial owner of the property, or the person entitled to appoint the property, may not have joined in or assented to the declaration.

Example

Homer owns 123 Smith Street. He is the legal and beneficial owner. One day he decides he wants to begin holding that property but for the benefit of his son Bart. Homer makes a declaration of trust that from this day forward he holds the property as trustee for Bart.

Homer is still the legal owner, but now Bart is the beneficial owner of the property. If Homer goes bankrupt the property is, at face value, not his property and not available to creditors (but…). If Homer dies this property is not one that can pass via his will. If the property is rented out the income will be taxed in the hands of Bart etc.

There are also various tax and duty consequences to making a declaration of trust and I will cover these in a future post.

Can Children be Executors under a will?

Children are considered legally ‘disabled’ until they reach 18. They can be appointed as executors under a will, but if the testator dies while the child is under 18 the child cannot act as executor.

So what happens?

Usually their legal guardian will be executor in their place, or the courts can appoint someone else.

Under NSW law this would be s 70 of the Probate and Administration Act 1898

http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/nsw/consol_act/paaa1898259/s70.html

Example

Bart has divorced the mother of his sole child – Junior.

Bart makes a will while Junior is 11 and appoints Junior as the executor of his estate with no backup. Bart has no plans on dying but carks it in a skateboard accident when Junior is 16.

Junior’s guardian at this point is her mother. The mother applies for probate as guardian of the executor and this is granted by the courts.

Bart roles over in his grave when his ex-wife, whom he still hates, takes control of his estate.

Setting Up a Trust When You Have No Family

What is the point, you might ask, in setting up a discretionary trust to hold investment assets when you have no family?

A discretionary trust needs at least one beneficiary with the trustee having the option to retain income, or at least 2 beneficiaries where it doesn’t. However, most discretionary trusts will have hundreds of potential beneficiaries as they will be set up with one or two named persons as the primary beneficiary and then there will be secondary and, possibly, tertiary beneficiaries who are relations of the primary beneficiary.

So even though you are on your own now, you might have cousins or distant relatives who could be beneficiaries – this doesn’t mean they need to be recipients of trust income, but just that they could be. You never know when one of your cousins might invest in shares and lose the money and have carried forward income or capital losses.

There is also the issue that even though you may not have any family now, you may get a spouse at a future date. There may even be children and then grandchildren. All these people could and probably would be beneficiaries of the trust. This is generally the case even if they do not ‘exist’ at the time the trust was created.

Perhaps most importantly, a company could also be a beneficiary of the trust. This may allow for use of the bucket company strategy of diverting income to the company to cap the tax rate at 30%. Later on, the retained earnings in the company could be distributed to future family members (providing the shares of the bucket company are held by a different trust).

There are also the asset protection aspects to consider. Not having a spouse may mean holding all assets yourself and taking a risk of not ending up bankrupt. Where the assets are held on trust, the assets are generally much safer from attack should the controller of the trust become bankrupt at some point.

See the discussion at: https://www.propertychat.com.au/community/threads/legal-tip-190-setting-up-a-trust-when-you-have-no-family.36832/

Tax Strategy: Use Capital Losses Quickly – Recycle debt + death

Some people have carried forward capital losses. These losses can usually be carried forward until the taxpayer has a capital gain which can ‘soak up’ the capital loss.

I think it is a good idea to use up these losses as soon as possible.

The main reason being that losses are ‘lost’ at death. If the taxpayer dies their loss cannot be passed on to any other person who could utilise it. Don’t lose a loss!

Example

Bart bought a property in a mining town for $1,200,000. He ended up selling it for $700,000 and has a carried forward capital loss of $500,000.

Bart dies and leaves a rental property that he owns to his sister Lisa. The property has a $500,000 capital gain.

Unfortunately, Bart’s loss will not benefit anyone. Lisa will inherit the investment property pregnant with a $500,000 gain, yet she cannot benefit from the loss.

Had Bart sold the investment property before his death he might have made $500,000 tax free and this money could have been passed onto Lisa. He might have even sold the property to Lisa – perhaps with vendor finance if she couldn’t have afforded a loan. Also, if Bart had a flexible will his estate could have sold the property and possibly used up the gain.

Another reason to use up capital losses is their benefits with debt recycling. Making capital gains without needing to pay tax will mean there is more money with which the non-deductible debt can be reduced.


Example of Debt Recycling

Lisa has a $100,000 capital loss from some bad share investments many years ago. Because of this she has a large amount of debt still outstanding on her main residence. But this has not stopped her investing in shares again. She has learnt from her mistakes and is now making some good capital gains.

If Lisa’s shares increased in value by, say $20,000 in the first year, she could sell these shares, pay no tax, and use the proceeds to pay down the non-deductible debt, and then invest in more shares and repeat.

Doing this has 2 advantages

  1. It uses up the loss, and
  2. It produces tax free capital gains which can then be used to pay off the non-deductible debt quicker.

Speak to your tax lawyer or tax agent.

Being Both Executor of a Deceased Estate and Applying for Super Death Benefits

The executor of an estate has fiduciary duties to maximise the estate of the decreased. There can be conflicts of interest where someone is both executor and they apply, in their personal capacity, for the superannuation death benefits of the deceased, and this is because they are trying to avoid having the super death benefits paid into the estate, to benefit themselves.

Example

Mum and Dad divorce many years ago, son dies without a will. Son has about $40k in assets plus about $400,000 in super death benefits. Under the intestacy laws where a person dies without a spouse and children then both parents will benefit equally from the estate.

The issue here is that $40k is in the estate and will go to each parent in the share of $20k each.

If the superfund pays the death benefits to the estate the parents will get another $200,000 each.

If the superfund pays the mum, dad will miss out on $200k and similar if the superfund pays dad.

But, by mum applying for the benefit herself she is depriving the estate the money which means she is potentially breaching her duties as executor. As executor she should be asking the superfund to pay the money into the estate – it is her legal duty to do so.

 Moral of the story – seek legal advice before accepting the position of executor, especially if the deceased

Death and Wills with Assets Held in a Company

Company owned assets cannot be gifted by a person’s will. This is because they don’t own the assets, the company does. However, if the person owns the shares in the company these shares can be gifted, as long as not owned as trustee.

Example

Bart calls the property at 123 Smith street ‘his’property. But it is owned by a company of which Bart is the director and sole shareholder. Bart simply ignores the existence of the company in his thinking.

In Bart’s will he leaves 123 Smith street to his friend Millhouse and the rest of his assets to Barney. The property is worth $500,000 and the rest of Bart’s assets are worth $400,000.

What’s the issue?

  • Bart doesn’t own that property so the gift toMillhouse is invalid,
  • Millhouse gets nothing because of the way thewill is worded,
  • Barney gets the shares in the company which owns the property
  • If the executors sell the shares in the companythis will trigger CGT.
  • Millhouse gets nothing, but Barney gets about$900,000 worth of assets.
  • Millhouse might have grounds to challenge thewill.

Moral of the story – understand your ownership structure and act appropriately.

Written by Terryw, estate planning lawyer at www.structuringlawyers.com.au

Who will look after your minor children if you die?

What happens when both parents die early and minor children are left behind?

The children must come under the care of a guardian. You can appoint a guardian by your will. (for example in NSW s 14 Guardianship of Infants Act 1916 (NSW) gives a parent this power)

If there is no guardian appointed under a will, someone, perhaps grandparents, will need to apply to a tribunal to be appointed guardians

Often there may be a dispute about who will be guardians – two sides of a family fighting it out for example – and this would necessitate the tribunal or court to make a decision. In NSW the relevant legislation is Guardian of Infants Act 1916 (NSW)

 

Some of what to consider when appointing a guardian

  • Will they accept the role?
  • Where does the guardian live?
  • Should they be compensated (via your will)?
  • Is their accommodation suitable?
  • Should they be allowed to use some of the children’s money to extend their house? (a court has said yes in at least one case);
  • How old are they?
  • What If they die?
    • Before you, or
    • Before your kids become 18.
  • Do they get on with your children now?
  • Do they follow the wrong religion?
  • Are they connected with a circus?

This is another reason to consider a will even if you do not have any assets.

 

Written by Terryw of www.structuringlawyers.com.au

 

Contracts and Death

Generally, when a person dies their Legal Personal Representative will be bound by any contracts that the deceased person had entered.

When entering a contract for the sale of land consider this. If you are purchasing a property and the owner dies do you want the contract to continue? If most cases a buyer would still want the property. But a problem will arise where it can take around 3 to 6 months to get probate through.

Without a grant of probate nobody will have authority to sign a contract – which may not matter if the deceased had already entered it. But nobody will have authority to sign a transfer of land document. This could mean even though you have a valid contract you may not be able to settle on the purchase.

Now consider the other side you are the buyer and you die. Do you want your estate to go through with the purchase? If most cases the answer would be no as there will be difficulties on the side of the purchaser too – if loan documents not signed the estate will need to apply for a loan and this could only be done after probate.

Without being able to complete a purchase would lose their 10% deposit, and possibly more. The seller could sue the estate potentially.

Therefore, seek legal advice on whether to have a clause in your contract allowing either party to terminate the contract if either party dies.

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au

Financial Abuse of the Elderly

There are many instances of elderly being abused financially. Often the abusers are adult children or other family members of the elderly person. In many cases the perpetrator believes they are doing no wrong, but at other times their abuse is more blatant.

Some forms of elder abuse

  • Improper dealings under a power of attorney

This might include an adult child drawing on a parent’s bank account to help themselves, make loans or gifts to themselves or other family members. Sometimes they may ‘need’ the money temporarily and intend to give it back.

  • Bank account abuse

A family member may open a joint account with an elderly person to help them. The account may only contain the elderly person’s money. The elderly person’s health may deteriorate and the younger person may start thinking along the lines of ‘they couldn’t spend the money anyway’. This may also be a plan to inherit the money outside of the will as if the elderly person where to die the money may become the asset of the other account owner.

Sometimes the elderly will give their ATM and pin to another family member, who may then start taking extra funds out.

  • Stand over tactics

I have heard of one incident of an elderly great grandfather being stood over to chance his will. He immediately redid the will a few days later with a lawyer, but this sort of thing would make the will invalid – if it could be alleged.

  • Manipulated into being guarantors

There is many a budding developer or business owner who has talked one or both parents into letting the them use their property as security for a loan. Often the business fails, and the guarantee is enforced and the parents property sold. Luckily it is getting more difficult to use guarantees on parents main residences like this.

  • Under market value transfers

Buying a property from the elder person at less than market value – or even receiving property as a gift. Often this is done for Centrelink reasons too, but this usually doesn’t work anyway, or won’t increase the amount of pension received to 5 years after the transaction.

  • Sell and build a Granny Flat, on your land

This is where granny is encouraged to sell her main residence and to move into with one of her adult children. Often there is not enough space, so granny is encouraged to build a granny flat or otherwise improve the property of the child.

The trouble with this is often granny isn’t an owner of the property, yet she is improving the property with her money. If granny dies her estate is diminished. Many other legal issues to consider too such as bankruptcy or divorce of the child or disputes – granny may want to move out at some point but have no funds to do so.

  • Settlement of large amount of funds on trust

Sometimes a parent is encouraged to contribute funds to a trust controlled by someone else. The parent then has lost control of those funds.

 

If you want to do any of the above, legitimately, then you need to make sure you can rebut any potential allegations of elder abuse. This can be done by various methods (for some of the above) in consultation with a lawyer. For example, the ability to make gifts to family members could be built into the enduring power of attorney document if the principal agrees.

Written by Terry Waugh, Solicitor at www.structuringlawyers.com.au

The Need to Consider Assets Owned as a Joint Tenant in your Will

When two or more people own one asset, such as a property, as Joint Tenants if one dies the asset passes to the survivor automatically bypassing the will. Many people therefore don’t consider the issues of passing the asset in their will because it doesn’t – but this is only the case if you die first.

What if the property passes to you, and then you die shortly after without updating your will?

Example
Dave owns his house with his wife Betty, as Joint Tenants.
Dave dies. Betty inherits automatically. But Betty dies 6 months later without updating her will. Dave hadn’t considered his house in his will – and it would have had no effect if he did. Betty didn’t consider it either, but now the whole house will pass via her will, or the intestacy laws if she has no will.

Solution – assume you will solely own joint tenant assets when making a will.
r more people own one asset, such as a property, as Joint Tenants if one dies the asset passes to the survivor automatically bypassing the will. Many people therefore don’t consider the issues of passing the asset in their will because it doesn’t – but this is only the case if you die first.

What if the property passes to you, and then you die shortly after without updating your will?

Example
Dave owns his house with his wife Betty, as Joint Tenants.
Dave dies. Betty inherits automatically. But Betty dies 6 months later without updating her will. Dave hadn’t considered his house in his will – and it would have had no effect if he did. Betty didn’t consider it either, but now the whole house will pass via her will, or the intestacy laws if she has no will.

The Solution? – assume you will solely own joint tenant assets when making a will; How many people will do so? Without proper legal advice, unfortunate very few.

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au

>