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Estate Planning – Wills and Powers of Attorney .

Is Your Estate Planning Protected from Golddiggers Such as the ATO or Greedy Daughter or Son In Laws???

What do we mean by “estate planning”?

With your estate planning, we examine the following:

  1. Wills. Many people die without a will, which can have terrible consequences. And even if you do have a will, your will may not properly protect you against the taxman or the family court.
  1. Powers of Attorney. Powers of Attorney allow you to sign documents on behalf of another (or someone to sign documents on behalf of you). A Power of Attorney can be valuable for efficiency in your financial affairs, or more importantly, in the event of a serious accident.

Let’s look at these issues in more detail.

(For more information on the technicalities, such as executors, guardians, specific gifts, and the like, see the Appendix, where there are a series of “Frequently Asked Questions”.)

 

1. Wills

Let’s Look Firstly at Your Wills!

Do YOU have a will in place?

This is an important issue for you in protecting your loved ones. Dying intestate (ie. without a will) can have terrible consequences for your loved ones, as can be illustrated in the example below (based on a true scenario with one of our clients).

EXAMPLE.

Sandy came to see us. Her husband had just died. Her husband’s sole asset (apart from a small amount of cash in the bank) was a house worth $250,000. Sandy and her husband were on a pension. Her husband had not made a will. Sandy asked us to finalise her husband’s estate so that the house could be transferred to her. We advised Sandy that under intestacy laws in Western Australia, Sandy was only entitled to 75% of the estate. The remaining 25% went to her deceased husband’s 2 brothers. (Her deceased husband had not seen his 2 brothers for over 20 years because of a family dispute.) It can be safely assumed that this was NOT the result that Sandy’s deceased husband would have intended.

At the least, without a legally enforceable will, you do not decide who gets your assets after you die. That decision is made by the government. Is that what you want?

What type of Wills are Available?

You can have two types of wills:

  1. Standard Will.
  2. Three Generational Testamentary Trust Will.

Let’s look at each will separately.

1. Standard Wills

Most people have standard wills. In the most basic form, you go to the Post Office, buy a Will Kit, and prepare a will. Or you go to the Public Trustee and they prepare you a 1 page will.

After all a will is just a will is it not?

A standard will is better than having no will at all. You have control over who gets your assets when you die, not the government. It specifies the percentages for your loved ones, and ensures that you choose your own executors. With careful planning, it can be set up to ensure that your estate will survive a will challenge.

But there are other important issues to consider when doing a will. In particular, you need to consider taxation and family court issues if you are doing a will. Especially if you have a substantial estate.

This is where you should consider a three generational testamentary trust will.

2. Three Generational Testamentary Trust Wills

A three generational testamentary trust will ensures that your estate remains protected and tax-free to the maximum level permitted by the law.

There are THREE main benefits of a three generational testamentary trust will as compared to a standard will.

(I)      Taxation benefits (ie. lower tax)

(II)     Family Court and Marriage Breakdown (ie. protected from the family court)

(III)    Bankruptcy Protection

Let us examine each benefit separately.

(I) Taxation Issues

There are two taxation issues that come up when dealing with a will.

(I)      Capital Gains Tax and Stamp Duty

(II)     Tax Treatment of Lump Sums from Life Insurance or Superannuation (or otherwise)

CAPITAL GAINS TAX

A standard will can result in unintended capital gains tax and stamp duty consequences.

Your loved ones can end up with a nasty shock. Let me illustrate this by an example.

EXAMPLE.

Fred and Mary have 3 children, Alex, Bertha and Christopher. Fred and Mary own 3 investment properties, being 3 townhouses in a lovely complex near the beach.Fred and Mary die in a tragic car accident. The grieving children, Alex, Bertha and Christopher, discuss whether to sell all the townhouses and take the cash, or take one townhouse each. They agree to take one townhouse each as they all like the location, and see strong capital growth potential.

 

 

 

The 3 children, Alex, Bertha and Christopher, have no idea as to the nasty shock that awaits them.

Let me explain.

Before they died, Fred and Mary made a standard Will, stating that the 3 children shared the assets equally. That is, each child has a 1/3 interest in each asset. This creates two problems for them:

1. The Stamp Duties Office says because they decided to take one property each, each child has effectively transferred their 1/3 interest in the property to the other child. The result? Stamp duty will be payable on effectively 2/3 of the value of each of the 3 properties. Because each townhouse worth $500,000, stamp duty for each townhouse is almost $10,000 in Western Australia (total of $30,000).

(Not only that, but if Fred and Mary lived in NSW, their children may be subject to vendor stamp duty on investment properties.)

2. While the children are picking themselves up from the floor in shock, they are told that the ATO takes the same view. The ATO says that there has been a transfer of the properties by the 3 children to each other for capital gains tax purposes. Because their parents only paid $200,000 for each townhouse, each child is liable to pay capital gains tax of approximately $30,000 – $50,000 each (depending on their marginal tax rate).

Total tax, stamp duty and capital gains tax combined, comes to over $150,000.

Could this problem have been avoided?

The answer is YES. It can be very easily avoided by a 3 generational testamentary trust will.

In the above example, a 3 generational testamentary trust will would have saved Fred and Mary’s 3 children over $150,000 in tax. Tax would have reduced from over $150,000 to NIL. Yes you heard correctly. NIL.

Under the law as it presently stands, a 3 generational testamentary trust will reduce, and in many circumstances, eliminate, stamp duty and capital gains tax. Your children are free to enjoy their inheritance without interference or plundering by the government.

You pay enough taxes in your lifetime. You don’t want your loved ones to be paying taxes on your estate after you die.

LIFE INSURANCE AND SUPERANNUATION

Not only that, but if Fred and Mary have superannuation and life insurance, by having a 3 generational testamentary trust will, Fred and Mary can elect to have their superannuation and life insurance paid through the estate rather than to each other.

How is this beneficial you ask?

EXAMPLE.

Fred dies in a tragic car accident. Under his superannuation policy, in the usual course of events, the trustee of the superannuation fund would pay Mary the superannuation and life insurance (assuming Fred has made her the nominated beneficiary of his policy). Mary would invest the money, and pay tax at normal rates on her investment income. She could not distribute the investment income to her children without significant tax penalties due to Division 6AA (which stops parents splitting income with their under-age children).With a 3 generational testamentary trust will, if Fred had nominated the estate as the beneficiary through a 3 generational testamentary trust will, and made Mary the sole beneficiary of his superannuation, Mary can save a substantial amount of tax. She would not only receive the funds tax-free as a dependant, but could also distribute the investment income earned on her superannuation to her under-age children without penalty.

 

 

 

For example, assume Mary earned $80,000 per annum the year after Fred’s death. Her marginal tax rate would be 40% (+ 1.5% medicare levy). We will assume that Mary has 3 children under 18.

If Mary’s income from investing her superannuation was $30,000, in the usual course of events, and if her 3 children were under the age of 18, she couldn’t distribute the money to the children without paying penalty tax (apart from $1,325 per child). Her tax bill would end up at approximately $10,500. However, if she had a 3 generational testamentary trust will, she could distribute the first $18,000 to her children tax –free. The balance could be distributed to her children at 15%. The result? Total tax payable would be less than $2,000.

A significant saving!!

Using properly and carefully thought out estate planning can save significant amounts of tax.

(II) Family Court and Marriage Breakdown

Another important issue is marriage breakdown.

Statistics show that approximately 50% of marriages end up in separation or divorce. Divorce must be considered in all estate planning, especially to ensure that your estate does not end up in the hands of undesired parties.

EXAMPLE

Fred and Mary’s 28 year old son Alex has a nasty marriage break up. Shortly after the marriage breakdown, Fred and Mary die from the stress of it. Under Fred and Mary’s will, their son Alex is entitled to $1 million of their assets.Alex’s ex-spouse decides to go for everything that Alex has. In a standard will, in deciding how much goes to the ex-spouse, and how much goes to Alex, the Family Court takes all the family assets into account, INCLUDING THE ASSETS that Fred and Mary left to Alex in the will. In that situation, therefore, some of Fred and Mary’s assets will probably end up with the nasty ex-spouse. Is that what Fred and Mary would have wanted?

The above example shows what can happen.

It is certainly not what you would have intended for your children!

By contrast, if you have a 3 generational testamentary trust will, your assets will usually be protected against the Family Court in relation to your child. We say usually because the Family Court does have a discretionary power to break a 3 generational testamentary trust. In practice, however, they rarely use this power, and in cases where they have used it, it has been in situations where your child has done something they shouldn’t have done, eg. shifted family assets to hide them from the ex-spouse.

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(III) Bankruptcy

Finally, a critical issue is bankruptcy.

Most wills provide no protection for loved ones against bankruptcy. That is, if they are bankrupt at the time they receive assets or money from your estate, they will not end up with the money.

EXAMPLE

Assuming that Fred and Mary’s son Alex goes bankrupt. Shortly afterwards, Fred and Mary are killed in a car crash.Fred and Mary have an estate of $3 million, and under the will, Albert is entitled to $1 million. To his horror, Albert discovers that because he is bankrupt, and Fred and Mary did a simple will, his entire $1 million is going to the Trustee in Bankruptcy because he still owes $850,000 to his creditors. After the Trustee in Bankruptcy has taken their fees, Albert is left with virtually nothing …

A 3 generational testamentary trust will would avoid this result. Albert’s share would be held on trust for him and he wouldn’t be allowed to touch it until he was out of bankruptcy (apart from the ability of the trust to make a contribution towards his living expenses from time to time).

This lets Albert decide whether he wants to pay the creditors or not, not the government!

 

2. Powers of Attorney

Let’s also look at Powers of Attorney …

A power of attorney is a very important document to properly protect your financial affairs. It deals with your financial affairs while you are alive. A will deals with them after you die.

Using our example of Fred and Mary, if Fred is overseas and has to sign an urgent document, if he has given Mary a power of attorney over his affairs, Mary can sign on his behalf.

More importantly, if Fred has a car crash, and is incapacitated, if he doesn’t have a power of attorney, who will look after Fred’s financial affairs? Will it be Mary? Or an 18 year old government employee? It is not his choice; it is the choice of a government authority. By contrast, if Fred has a Power of Attorney, Fred and Mary can ensure that Mary can look after Fred's affairs until Fred recovers. And vice versa if Mary has given Fred a reciprical Power of Attorney.

On day Fred collapses at work with a brain tumour. He is raced to hospital in a coma. A frantic Mary comes to the hospital and anxiously awaits his fate by the bedside.She is given some important documents to sign on Fred’s behalf. Horror of horrors! She cannot sign them. She has no Power of Attorney with respect to Fred’s affairs. She races down to the Guardianship Board to go through an emergency hearing for a few hours, leaving Fred in the hospital, not knowing whether he will still be alive when she comes back from the hearing … (This is a real live example that happened to a client not long ago.)

 

 

 

Mary also realizes she has to sell the house to put Fred in a home. Problem is they own it 50/50. She can’t sell Fred’s share of the house without Guardianship Board approval. And the Board have said they don’t want to give it.

Further, what if both Fred and Mary have a car crash or become of unsound mind? Do Fred and Mary want an 18 year old government clerk looking after their finances? Or would they rather have their children, or their siblings?

Fred and Mary are seriously injured in a car accident. A big argument arises between the 3 children (who loathe each other) as to who will take care of mum and dad’s affairs. In disgust the Guardianship Board give the power to the Public Trustee, who start charging fees for each document they sign and every time they breathe …

By having a back up power of attorney, Fred and Mary can appoint up to 2 people (in Western Australia; see us if you live in another State or Territory) whom they trust to look after their finances and their children. In the above example, Fred and Mary could have appointed a trusted friend or sibling to take care of their affairs.

Summary

You can have a simple will or a 3 generational testamentary trust will.

There are 3 major benefits from a 3 generational testamentary trust wills:

  1. Tax savings when shifting family assets.
  2. Family court protection in the event of marriage breakdown with respect to your loved ones.
  3. Bankruptcy protection for your loved ones

To ensure your financial affairs are properly handled while you are still living, you should consider an enduring power of attorney. If you have a partner, you should consider a back up power of attorney.

If you want more information on estate planning, like frequently asked questions, go to our blog, or else, for frequently asked questions, Click Here.

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