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.

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Strategy: Take a Wage Haircut and Move to a cheaper area

If you moved to a cheaper area to live and took a haircut on your wage, it might not be as bad as you think. This is can speed up financial independence and reduce stress and give you a better quality life.

Example of a $20,000 wage reduction

After tax income on $100,000 would be $73,883 (2018-19 tax year)

After tax income on $80,000 would be $61,383

So, a $20,000 reduction in gross income means only a $12,500 reduction in real terms

Try working it out yourself at https://www.taxcalc.com.au/

But the real benefit may be the savings with home ownership.

An equivalent house costing say $1mil in Sydney v $600,000 in Adelaide (for example)

Repayments on $1mil at 4% pa are          

  • $4,774 per month for 30 years with Total interest payable $718,695

Repayments on $600k at 4% pa are         

  • $2,864 per month for 30 years with Total interest payable $431,217

The repayments on the smaller loan mean a cash flow saving of $22,920 per year – which more than makes up for the lower wage income.

Furthermore, if you consider commuting times – you might be saving 1 or 2 hours per day living outside of Sydney.

Living costs may also be generally cheaper. Consumer prices are supposedly about 12.75% higher in Sydney than Adelaide:

https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Australia&country2=Australia&city1=Adelaide&city2=Sydney
https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Australia&country2=Australia&city1=Adelaide&city2=Sydney

Consider also the quality of life.

Conclusion

It can be worth moving out of Sydney and living elsewhere and this can be the case even if you were to take a substantial haircut on your income.

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/

Don’t listen to the Armchair experts on Family Law

On various internet forums where family law issues are discussed, it is interesting to see how the non-law trained persons become the instant experts in Family Law. They will know more than lawyers instantly, often citing the experience of friends or friend’s friends or media reports.

The non-expert opinions that I have heard recently are:

  • Binding Financial Agreements (BFA) are a waste of time and money because the courts just overturn them. This is not true.
  • Women get more than men in property settlements – “they come with a handbag and leave with a property” is one quote that I have heard. There is no legal basis for this.
  • The courts favour women over men.
  • A short relationship can see you (if you’re a man) lose 50% of your assets.
  • You can just transfer your property to your sister to avoid your spouse ‘taking’ it.
  • Trusts provide asset protection on divorce or relationship breakdowns.
  • You should charge your girlfriend $1 per week rent so that she cannot make a claim on your property (seen a guy who actually issued receipts to his girlfriend – not sure if she actually paid him).
  • You can only sign BFA before getting married. You can actually enter into a BFA before, during or after a relationship.
  • You are not de-facto if you maintain a separate residence – knew a guy who lived with a girl but kept his own house unrented. He told me this was to prove he lived separately from her.
  • There is a do it yourself BFA option – I have heard of persons who have written out their own agreements. These are probably worded poorly, but they will also not comply with the Family Law Act if they are not explained by a lawyer.

It seems to me that the area of family law brings out more armchair experts than any other area of law and I am not sure what, but it could be because it is an emotional area of law.

My suggestion is if you want to know about family law issues disregard absolutely everything anyone says unless they are a practicing lawyer with a family law focus.

Moving out of the Main Residence – When can you claim Interest on loans?

There are 2 major issues when taxpayers want to claim the interest on a loan relating to a former main residence:

  1. Redrawn amounts
  2. Timing

Redrawn amounts and Mixed Loans

Interest is only deductible if the loan it is incurred on was used to purchase the property, or for improvements etc. Where any amounts have ever been redrawn from a loan the interest would need to be apportioned.

Example 1

Tyrell borrowed $500,000 to buy a main residence. Along the way she paid it down to $450,000 and then redrew $50,000 to buy a yacht (which is actually a small boat, but sounds better if he calls it a yatch).

This loan no longer relates solely to the property but is a mixed purpose loan so only 450/500 or 90% of any interest on the loan could be deductible once the property is available for rent.

Example 2

David used a LOC for his loan to purchase his main residence and borrowed $500,000 initially. Every week he deposited his salary and then redrew amounts to live on. The amount of the loan relating to the property will decrease each week and at the end of 5 years the loan would be extremely mixed.

He would have to spend hours to work out the portion of the loan relating to the property and might find that this might only be 10% of the loan amount.

(this is why you should never use a LOC as the main loan, but only to ‘access’ equity)

Timing

The other issue is timing. A person cannot start claiming interest until the property is available for rent. This is generally only after you have moved out and have advertised the property for rent at market rates. While you are living in the property and advertising it the property wouldn’t be available for rent, so you could not claim interest during this period.

There are also timing issues on when interest is incurred and debited to an account because interest is generally incurred daily but added monthly to the loan.

Example 3Let’s say someone moves out on the 30th and immediately advertises the property for rent and on 1st of the following month they are charged $1,000 in interest. Can they claim that interest? No, well not in full because interest is charged in arrears and added to the account monthly. So, 29 days of that interest related to the period you would living in the property. So, in the first month only 1/30th of that $1,000 should be claimed.

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

Loan Tip: Overcoming Cash out Restrictions When Buying Main Residence

This strategy is simple yet often overlooked.

Strategy: When buying a new main residence borrow 80% to acquire it, whether you need to or not.

Example

Bart has $400,000 cash and wants to buy a new main residence for $500,000. He plans to borrow $100,000 and then later set up a LOC to invest.

He borrows $100,000 and settles on the purchase. Then he asks for a $100,000 LOC and the bank starts asking questions. Eventually, after giving a DNA sample Bart is approved, but they want a statement of advice from a financial planner saying that Bart will invest in shares.

Lisa is in the exact same situation. Lisa gets some credit and tax advice and borrows $400,000 to buy her main residence. At application stage she splits the loan appropriately so that at settlement she can pay down 2 loan splits and is left with one split with $100,000 outstanding.

  • Lisa had no questions asked about future investment plans,
  • Lisa got the lower main residence rates for all of her splits (prob paying 1% less than Bart),
  • Lisa isn’t incurring any extra interest or costs, and won’t until she draws on the splits, and
  • Lisa has split the loans for tax purposes already.
  • Lisa has saved by not needing to pay a financial planner tosatisfy the lender.

In summary, Lisa has overcome the cash out restrictions and gotten a lower interest rate.

Tax Tip: The effect of Taking a Year off Work to Save CGT

If someone sells a property and has a large capital gain is it worthwhile taking a whole year off work to save tax? In my view it is always great to take a year off work, but it might not actually save you that much tax.

Example

Richie Rich is about to sell an investment property with a $200,000 capital gain. He is sick of it under performing and draining him with land taxand has a low yield. Richie is toying with the idea of taking a whole year off work to save CGT. Is it worth it?

Let’s assume Richie earns $100,000 in his job, and the sale will happen in the 2018-2019 financial year.

If he sells the $200,000 gain will be reduced to $100,000(due to holding it longer than 12 months) and added to his other income for the tax year. The result is an annual income of $200,000

Tax on $100,000                   $26,117          Net income   $73,883

Tax on $200,000                   $67,097          Net income   $132,903

Difference                              $40,980          Difference      $59,020

The Capital Gain will mean $40,980 in extra tax payable for the year.

This means by giving up a year’s income from work Richie would only earn $100,000 from the capital gain. Therefore, he will save $40,980 in tax by not working.

But not working means he has less income, working the full year in which the sale occurs will net him only $59,020 as opposed to his normal $73,883 (a difference of $14,863).

He would need to determine if the effort of working is worth the pay cut of $14,863 which is about $286 per week.

He should also factor in transport costs to work and other work-related costs – clothing, lunches etc.  and there are also heaps of non-financial things to consider. There would be time to do other things such as:

  • Start a business
  • Travel
  • Study
  • relax

Written by Terry Waugh of www.structuringlawyers.com.au

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

Loan Tip: Using Cash as Security for a loan

It is best not to use cash as deposit for an investment property, especially if you will have a main residence loan. Using cash on an investment reduces your deductions and increases your non-deductible interest.

But what do you do if you don’t have a main residence at the moment, but at looking to acquire one soon?

It is possible to use cash as security for a loan. Normally you may not want to or need to do this, but it is possible, and it can assist with maintaining high interest deductions in some situations.

Generally, the security used for a loan does not affect the deductibility of interest. This means anything can be used as security for a loan without effecting the deductibility of interest. The security could be shares, cash or even a car.

The beauty of cash is that it doesn’t need to be valued or sold for the lender to recover its money so the potential LVR on a loan secured by cash is 100%.

Example 1

Tom has $100,000 cash and wants to buy an investment property for $500,000 before he buys his Main Residence. He might be doing this because he has found a ‘bargain’.

Normally Tom would pay a $100,000 deposit and then borrow $400,000 for the $500,000 property. But doing this would mean that going forward Tom would have $100,000 less for the future main residence. He may be able to access it and borrow against the investment property, but this will have some bad tax consequences:

$100,000 x 5% = $5,000 less per year in tax deductions for the next x years (life of the loan).

So instead using the cash as a deposit Tom could use the $100,000 cash as security and borrow $500,000. Ideally this would be done in the form of 2 loans

Loan A $400,000 secured by a $500,000 property. LVR 80%

Loan B $100,000 secured by a $100,000 term deposit. LVR 100%.

Tom could wait for capital growth (from natural market increase and/or a quick reno) and then release the cash, or if Tom quickly buys the new main residence the cash could be released, and the main residence used as security for the investment loan.

This could happen like this:

Loan A $400,000 secured by the IP. interest deductible against the IP

Loan B $100,000 now secured by the main residence. Interest is deductible against theIP

Loan C $400,000 secured by the main residence. Interest not deductible. The $100,000 term deposit is released and used at settlement to pay for $100,000 of the purchase price of the main residence.

Overall 90% LVR.

Example 2

As above. $500,000 property with a $500,000 loan secured by both the property and the cash.

After 2 years the property is now worth $625,000. Tom applies to remove the cash as security and the bank agrees as the LVR is now 80% based on the property value alone.

$100,000 cash is then used as deposit for the main residence. Tom has an extra $5,000 per year in tax deductions for the next 30 years plus.

Example 3

Tom has 2 properties securing 2 loans at ABC Bank.

Tom sells his main residence and will buy a replacement main residence in a few months. The trouble is Tom didn’t realise that his investment property was also secured by the main residence. The investment property is relatively new and hasn’t grown in value so the bank is insisting that $100,000 of the proceeds of the sale of the main residence be used to reduce the loan on the investment property.

Tom refuses and the bank refuses to discharge the mortgage on his main residence so his sale cannot settle.

Luckily there is a solution. Tom lets the bank keep $100,000 from the sale in a term deposit and to use this as security for the investment property (as well as the investment property mortgage itself).

Then when Tom finds his new main residence he will offer this as security for the investment property and the $100,000 will be released.

The 3rd example is probably the more common situation in which the cash as security is used.

There is a cost to doing this – When cash is used as security it will be in the form of a term deposit with an interest rate much lower than what the bank is charging. So, Tom may lose 3% in rate – get charged 5% for the loan, but receive 2% interest for the term deposit. There are tax consequences of this too as this would not be deductible.

But hopefully the use of a term deposit will be brief, and the benefits can last many years to come.

Only authorised deposit taking institutions will allow for cash to be used as security.

Written by Terryw broker at www.loanstructuring.com.au

Discussion at https://www.propertychat.com.au/community/threads/loan-tip-using-cash-as-security-for-a-loan.36038/

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An Example of the Unfairness of QLD Land Tax to Non-Resident Citizens

There are recent amendments to the laws relating to land tax on properties located in QLD and they can oppressively burden Australian citizens living overseas. Many Aussies have invested in property in QLD and then gone and lived overseas for lifestyle and or living costs hoping to enjoy their retirement by living in their rental incomes. But they are now being taxed so high that many will either need to come back to Australia or sell their properties.

QLD is the only state that taxes Australian Citizens like this.

The issue is that there are different land tax rates for ‘absentees’. Australian citizens who are outside of Australian for more than 6 months canfall into the definition on ‘absentee’. The absentee doesn’t get the $600,000 threshold like non-absentees – their threshold is just $350,000. Plus the rate they pay is higher too. On land worth $1mil the absented rate is 1.7%but the non-absentee individual rate is just 1%.

Now there is also an ‘absentee surcharge’ that goes on top of the absentee rate. For land valued at more than $350,000 the rate is 1.5%.

This means on land worth $1mil the land tax rate would be 3.2% – every year.

Here is an example of how harsh in can be:

John is retired and has a property worth $800,000 with a land value of $500,000 in QLD.

He is getting $500 pw rent, or $400pw after costs. It is fully paid off and this would be John’s only source of income when he quits his job.

John goes and lives in Myanmar where it is cheap to live as he can live like a king on $400 per week.

Poor John didn’t factor in land tax.

Before leaving Australia there was no land tax payable.

Now, since he is living overseas he will be classed as an ‘absentee’ owner as he is not ordinarily residing in Australian.

Section 31 Land Tax Act 2010 QLD.

http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/qld/consol_act/lta201090/s31.html

Because John is an ‘absentee’ Schedule 3 of the Land Tax Act applies to determine the rate of land tax John will pay.

Part 1 is the general rate and it is charged at $1,450 plus 1.7 cents for each $1 in value more than $350,000.

This equates to $4,000

Ouch!

But it gets worse, because Schedule 3 has a Part 2 which imposes a Surcharge Rate.

Therefore there is an additional 1.5 cents payable for each $1 in value more than $349,999.

In John’s situation this will be $2,250.

John’s total land tax went from $0 to $6,250 per year.

Poor John is now living on $280 per week. His income has been cut in half almost.

And this is before we even consider the Commonwealth tax issues of him living overseas and possibly being a non-resident for income tax. This could leave John was extra income tax of about $4,728 per year.

This would mean his annual post tax income has gone from around $20,000 to $9,821 or $188 per week.

Next year there could be a jump in values which may result in even more land tax (but possibly no increase in rents).

Poor bastard!

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Offset in the name of the lower income earner

Once you have paid off your main residence you will probably want an offset account on one of your investment properties. This will be a useful place to store cash from rents and wages and also to save up a buffer for emergencies.

Where you have used the strategy of buying properties in sole names, some in the name of Spouse A and some in Spouse B, you can move money around to create tax savings.

You would generally want the cash in the name of the lower income earner as this spouse would generally be the one paying the least tax. Where there are several lenders involved (with that spouse) you would choose the lender with the highest rate as this will produce the highest return.

Money in an offset means less interest is incurred which means more income from the property.

Example

Homer is on the top marginal tax rate and his wife Marg has a taxable income of $0. They each own 2 rental properties. They have just paid off their home and old man Simpson has died and left them with $200,000 cash.

Where should they put it?

The answer, from a tax perspective, would be in an offset account attached to Marg’s loans.

Loan A is at 5% pa and Loan B at 5.5% pa. Both have offset accounts.

In this situation if $200,000 is deposited in:

Loan A the savings would be $10,000 per year. Marg would pay no tax on this

Loan B, the savings would be $11,000 per year. Marg would pay no tax on this.

There would no extra tax to pay as Marg’s income is $0 before this, and after depositing her income would be either $10,000 or $11,000 both of which are under the tax free threshold.

Let’s say Homer had 2 loans with each at 6% pa. If the $200,000 was deposited into either of Homer’s offset accounts the interest savings would be

$12,000 per year.

But as Homer’s interest decreases by $12,000 his income increases by this amount and because he is on the 47% tax rate 47% or $5,640 would be lost in extra tax.

Thus after considering tax the funds would be better placed into the offset account on Loan B belonging to Marg.

Keep in mind the legal consequences of ownership in different names too:

  • asset protection
  • estate planning on death
  • effect on spousal loan strategies

Perhaps a private loan agreement, even at nil%, can assist in legal planning.

This is also another reason to consider purchasing in sole names.

 

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

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