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Wills and Estate Planning

Thu, 02/07/2013 - 11:20 -- alexr

Testamentary Trusts - Tax Minimisation and Asset Protection for your Beneficiaries

Estate planning is more than just making a will. It involves a careful analysis of your personal relationships, financial structures and business interests and consideration of your intentions for the disposal of your estate.

Careful thought also needs to be given to the current taxation and superannuation laws and other relevant legislation such as the Succession Act 2006 (NSW), which could adversely impact on the size of an estate and the entitlements of the named beneficiaries.

A “simple” will leaves the estate to particular beneficiaries in their personal capacities. Whilst such a will may be simple to administer, it does not recognise the potential opportunities to provide significant tax savings for beneficiaries and the potential to protect a beneficiary’s inheritance from bankruptcy or family law claims or from vulnerable beneficiaries.

So what is it?

A testamentary trust is a trust established by a will. A testamentary trust can be optional (the beneficiary can choose not to use it), discretionary (the beneficiary decides who will benefit) or fixed or a combination of these. Optional, discretionary testamentary trusts are widely recommended for use in modern wills because of the taxation and asset protection advantages they can offer when compared to a “simple” will.

Why have a testamentary trust?

The use of a testamentary trust in a will provides beneficiaries with maximum flexibility in dealing with their inheritance. The effectiveness of a testamentary trust will depend upon the specific needs and circumstances of the beneficiaries. It is important that the terms of the testamentary trust are sufficiently wide to offer beneficiaries as many options as possible so as to provide freedom and flexibility. Two of the many advantages include asset protection measures and income splitting opportunities.

Asset protection for the benefit of beneficiaries

Testamentary trusts are recommended in estates where there is a need to protect a beneficiary from claims from others (such as a former spouse with divorce or property proceedings either expected to be filed or on foot; or a personal insolvency situation where the trustee in bankruptcy will take any inheritance to distribute to creditors; or even where there may be a child or beneficiary with specific needs, such as a special disability who will need to be taken care of after you pass away). There is little point in distributing an estate by a simple will when the beneficiaries in fact need the benefits and asset protection measures offered by a testamentary trust.

Income splitting / tax minimisation opportunities

Testamentary trusts can also allow income splitting such as where there is an investment property or a share portfolio that is providing income. If the income that would otherwise be coming to a beneficiary who may already have an investment or a job and is paying tax could be ‘split’ to that person’s spouse and/or children, the tax savings could be significant – year after year.

Why Us?

We can assist you with establishing wills incorporating testamentary trusts to assist in minimizing the prospects of successful claims against your estate and protecting your estate’s assets from family law or creditor claims for the benefit of your beneficiaries whilst allowing the use of tax minimisation strategies.

Structuring and Asset Protection Advice / Business Succession Planning

A real concern of many people, particularly business owners, is protecting assets from creditors.

At some stage during its life, a business will be indebted to numerous creditors and the business owner may have signed a guarantee in respect of those debts.

There are several methods of protecting personal assets from creditors if debts cannot be repaid. The following list is not comprehensive but highlights several possibilities that business owners may want to consider in order to protect assets from creditors. They include:

Placing assets in a spouses’ name or in a discretionary trust

In most circumstances, creditors will not be able to make a claim upon assets owned by a spouse or held by a discretionary trust, provided that you are not the trustee (or the appointor of the trustee). If your spouse is the trustee, then he or she is the person who will usually decide how to divide up the income or capital of a trust (or not to). Stamp duty and capital gains tax issues need to be considered.

Encumber assets if you cannot transfer them

An asset that is mortgaged to its value is not as attractive to a creditor. The mortgagee in such a case is the only entity that will benefit from the subsequent sale of the asset.

Business structuring / single director companies.

It is possible to establish a company with a single director / single shareholder. In doing so, the law creates a “veil of incorporation” by which members and directors of the company have liabilities only to the amounts unpaid (if any) on any issued share capital. This liability is usually only $1.00 or so.

Only in limited circumstances can the corporate veil be lifted. The courts may be prepared to lift the veil where:

  • where the company has traded while insolvent;
  • there has been fraud or deception;
  • there has been avoidance of contractual obligations;
  • where there are good public policy reasons;
  • where associated companies or groups of companies are involved; or
  • under certain provisions of the Family Law Act 1975 (Cth.)

Registering fixed and floating charges over company assets to secure loans to your company

Before making a loan of money to your business (for example, an individual loaning money to a company in respect of which he / she is a director and member), a charge should be created to secure repayment of that money (in preference to unsecured creditors) in the unfortunate event that the business fails.

A fixed charge is one that fastens on ascertained and definite property or property capable of being ascertained and defined (for example a mortgage over a property).

A floating charge, on the other hand, is shifting in its nature, hovering over and so to speak “floating” over the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten (usually called “crystallisation”) on the subject of the charge. Most charges are both fixed and floating.

Avoiding Personal Guarantees

A guarantee is a contract whereby the “guarantor” promises to answer the default or miscarriage of another person’s debt to a third party. The most common example involves a bank. The guarantor usually promises to fulfil the loan between the bank and a borrower if the borrower defaults.

Becoming a guarantor can be extremely risky, particularly when guaranteeing large debts. A common example is where parents provide a guarantee to assist children to obtain a mortgage.

Under most contracts of guarantee, the guarantor becomes immediately liable to repay the defaulted debt (that is, the guarantor is primarily liable to the banker for the debt and the bank does not have to wait for the borrower’s default before calling on the guarantee).

As a practical matter, many businesses cannot obtain finance unless a personal guarantee is provided. If this is the case, whenever the loan is repaid, the guarantee should be discharged so that the guarantor cannot continue to rely on it at a later date concerning subsequent transactions.

Superannuation contributions

In many circumstances, superannuation entitlements can be protected from bankruptcy trustees. This can be a useful protective tool so you may wish to consider discussing this with your lawyer and/or accountant. One issue with putting funds into superannuation is the restriction on accessing those funds until retirement.

Wills and powers of attorney in succession planning

What happens to a business upon the death of its principal or upon the principal losing mental capacity? The answer can be determined before these events by having a will or power of attorney.

Wills contain provisions dealing with what is to happen with your house, car and personal items however, it can also deal with the succession of your business. The type of entity which you choose to run the business (for example a company, partnership, sole trader or trust) will determine the clauses needed to effect transmission of the business in your will. Therefore it is important to seek legal advice in drafting a will to meet the object of transmitting the business. A standard form of will is normally insufficient.

A power of attorney has the effect of giving the legal powers of an individual (for example, the power to enter into a contract to sell land or obtain money from a bank account) to other persons. In this way, if the principal loses mental capacity, the business can still be operated provided the document is appropriately drafted. If the business is a company, that company may need a separate power of attorney (as the director cannot delegate his duties as a director to an attorney personally).

In addition to the above, an important personal matter than people often overlook is the appointment of an enduring guardian to make medical and lifestyle choices for you should you lose capacity. A power of attorney does not normally assist in this regard.

Why Us?

We can assist you in relation to the establishment, amendment to or termination of any business structure (whether a company, partnership, sole trader, joint venture or trading trust) so as to best protect your assets from creditor claims and can liaise with your accountant, tax advisor and/or financial planner to implement any tax minimisation strategies and estate planning measures.

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Structuring and Asset Protection Advice / Business Succession Planning

A real concern of many people, particularly business owners, is protecting assets from creditors.

At some stage during its life, a business will be indebted to numerous creditors and the business owner may have signed a guarantee in respect of those debts.

There are several methods of protecting personal assets from creditors if debts cannot be repaid. The following list is not comprehensive but highlights several possibilities that business owners may want to consider in order to protect assets from creditors. They include:

Placing assets in a spouses’ name or in a discretionary trust

In most circumstances, creditors will not be able to make a claim upon assets owned by a spouse or held by a discretionary trust, provided that you are not the trustee (or the appointor of the trustee). If your spouse is the trustee, then he or she is the person who will usually decide how to divide up the income or capital of a trust (or not to). Stamp duty and capital gains tax issues need to be considered.

Encumber assets if you cannot transfer them

An asset that is mortgaged to its value is not as attractive to a creditor. The mortgagee in such a case is the only entity that will benefit from the subsequent sale of the asset.

Business structuring / single director companies

It is possible to establish a company with a single director / single shareholder. In doing so, the law creates a “veil of incorporation” by which members and directors of the company have liabilities only to the amounts unpaid (if any) on any issued share capital. This liability is usually only $1.00 or so.

Only in limited circumstances can the corporate veil be lifted. The courts may be prepared to lift the veil where:

  • where the company has traded while insolvent;
  • there has been fraud or deception;
  • there has been avoidance of contractual obligations;
  • where there are good public policy reasons;
  • where associated companies or groups of companies are involved; or
  • under certain provisions of the Family Law Act 1975 (Cth.)

Registering fixed and floating charges over company assets to secure loans to your company

Before making a loan of money to your business (for example, an individual loaning money to a company in respect of which he / she is a director and member), a charge should be created to secure repayment of that money (in preference to unsecured creditors) in the unfortunate event that the business fails.

A fixed charge is one that fastens on ascertained and definite property or property capable of being ascertained and defined (for example a mortgage over a property).

A floating charge, on the other hand, is shifting in its nature, hovering over and so to speak “floating” over the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten (usually called “crystallisation”) on the subject of the charge. Most charges are both fixed and floating.

Avoiding Personal Guarantees

A guarantee is a contract whereby the “guarantor” promises to answer the default or miscarriage of another person’s debt to a third party. The most common example involves a bank. The guarantor usually promises to fulfil the loan between the bank and a borrower if the borrower defaults.

Becoming a guarantor can be extremely risky, particularly when guaranteeing large debts. A common example is where parents provide a guarantee to assist children to obtain a mortgage.

Under most contracts of guarantee, the guarantor becomes immediately liable to repay the defaulted debt (that is, the guarantor is primarily liable to the banker for the debt and the bank does not have to wait for the borrower’s default before calling on the guarantee).

As a practical matter, many businesses cannot obtain finance unless a personal guarantee is provided. If this is the case, whenever the loan is repaid, the guarantee should be discharged so that the guarantor cannot continue to rely on it at a later date concerning subsequent transactions.

Superannuation contributions

In many circumstances, superannuation entitlements can be protected from bankruptcy trustees. This can be a useful protective tool so you may wish to consider discussing this with your lawyer and/or accountant. One issue with putting funds into superannuation is the restriction on accessing those funds until retirement.

Wills and powers of attorney in succession planning

What happens to a business upon the death of its principal or upon the principal losing mental capacity? The answer can be determined before these events by having a will or power of attorney.

Wills contain provisions dealing with what is to happen with your house, car and personal items however, it can also deal with the succession of your business. The type of entity which you choose to run the business (for example a company, partnership, sole trader or trust) will determine the clauses needed to effect transmission of the business in your will. Therefore it is important to seek legal advice in drafting a will to meet the object of transmitting the business. A standard form of will is normally insufficient.

A power of attorney has the effect of giving the legal powers of an individual (for example, the power to enter into a contract to sell land or obtain money from a bank account) to other persons. In this way, if the principal loses mental capacity, the business can still be operated provided the document is appropriately drafted. If the business is a company, that company may need a separate power of attorney (as the director cannot delegate his duties as a director to an attorney personally).

In addition to the above, an important personal matter than people often overlook is the appointment of an enduring guardian to make medical and lifestyle choices for you should you lose capacity. A power of attorney does not normally assist in this regard.

Why Us?

We can assist you in relation to the establishment, amendment to or termination of any business structure (whether a company, partnership, sole trader, joint venture or trading trust) so as to best protect your assets from creditor claims and can liaise with your accountant, tax advisor and/or financial planner to implement any tax minimisation strategies and estate planning measures.

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Wills, Codicils and Statements of Testamentary Intention

A will is a written statement of the way in which a person wishes to have his or her property distributed after their death. A codicil is an amendment to a will. Anyone over the age of 18 years who has the necessary capacity (is of sound mind) may make a will. Nearly everybody owns some property and would like to pass it on to relatives or friends after death. Accordingly, it is advisable for everybody to make a will

What if I don’t have a Will?

If a person dies without making a will (they die “intestate”) then their estate will be distributed according to a statutory chain of inheritance contained in the Succession Act 2006 (NSW). This effectively assumes that the deceased person would have intended to benefit their next of kin – their spouse and children however, the proportions are not what most people wish or expect to happen with their assets.

The statutory scheme does not provide for specific items to be given to particular persons, the for the situation where the deceased person wanted to give a larger share to one relative or another or did not wish to make a gift to a certain relative at all. To ensure that your property is passed to the people you choose, you should take the time to make a will.

When should I make a new will?

A person should make a new will if they marry, as marriage revokes a will, unless it is stated to be in contemplation of marriage. A new will should also be made if the testator divorces or experiences a major change in circumstances which would make the provisions of a previous will no longer suitable. It is a good idea to revise a will on a regular basis, say every 5 years, to make sure that it still represents your wishes.

What is an executor?

An executor is a person or persons appointed to handle the estate after the testator (the person making the will) dies and ensure their wishes are carried out. When choosing an executor, you should be sure that the person concerned is prepared to be executor and has the ability to deal with the matters which arise. It is a good idea to appoint 2 executors or alternate executors so that if one, for some reason, is not available, the other one can act.

What property can be left in a Will?

Some testators wish to leave specific items to particular people. There is no problem with this, so long as the items are clearly described and the beneficiaries are clearly identified.

Care must be exercised if the property concerned is a car or boat or some other item which the testator is likely to change from time to time. Real estate (houses and land) can be left by a will provided that the testator is the sole owner or owns the property with another person as “tenants in common”. If a house is owned as joint tenants, as is the case with many properties owned by married people, when one dies, it will automatically go to the survivor (and does not form part of the estate, so the will in respect of such assets is not relevant).

Benefits under life insurance policies and superannuation are not usually distributed by will. These policies will be paid to beneficiaries nominated by the owner. Some nominations are binding and others are not. If the estate is nominated as the beneficiary or there is no nomination at all, the proceeds will be distributed as set out in the deceased’s will.

Why have a Statement of Testamentary Intention?

Where beneficiaries are being left significantly smaller or larger gifts than other beneficiaries, such as children having unequal benefits given by the Will, some testators wish to have a Statement of Testamentary Intention prepared which is effectively a statement by the testator as to why a beneficiary got more or less than may have been expected. In some cases, they are used in evidence if there is a claim on the estate.

Why Us?

We can assist you with drawing up a will to have your estate distributed in accordance with your wishes and so as to best position your estate to defend any claim made against your estate after your death under the Succession Act 2006 (NSW).

We can also draft wills incorporating testamentary trusts to assist in minimizing the prospects of successful claims against your estate and protecting your estate’s assets from family law or creditor claims for the benefit of your beneficiaries whilst allowing the use of tax minimisation strategies.

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Superannuation and Binding Nominations

Benefits under superannuation policies do not necessarily form part of a deceased person’s estate. Many people choose to nominate a beneficiary such as a spouse or children, and nominate the percentage split or monetary amounts to go to those nominated persons. If there is a binding nomination made, on death the superannuation benefit will be paid to the beneficiaries nominated by the owner of the policy.

Some nominations are binding and others are not, some are lapsing (having to be renewed every 3 years or so) and others are non-lapsing. Each policy should be reviewed carefully as part of an overall estate plan.

If the estate is nominated as the beneficiary or there is no nomination made, the proceeds will generally either (in the trustee’s discretion) be paid:

  • to your dependants (your spouse, children and people with whom you had an 'interdependent' relationship, including same-sex and de facto partners, or those who depend on you); or
  • into the estate and distributed according to the will,

however where there is a claim on an estate, the beneficiaries stated on the Will may not share in the estate in the way that the testator (the person who made the will) wanted them to.

One benefit of nominating a beneficiary of a superannuation benefit is that that asset does not form part of your estate and is therefore not open to challenge under the Succession Act 2006 (NSW) in the same way as assets that do form part of your estate.

Many life insurance policies are held in superannuation funds so that the premiums can be deductible as contributions to super. In the same way as standard death benefits can be paid by way of binding nominations, the beneficiaries of those super life policies can also be named by way of binding nominations.

Why Us?

We can assist you in relation to any superannuation issue from binding and non-binding nominations and implementing estate planning measures to the establishment of Self Managed Superannuation Funds and amendments to Superannuation Fund Deeds and can liaise with your accountant, tax advisor and/or financial planner to seek to ensure every issue has been considered.

We can also draft Property Custodian Trust Deeds (also known as “Security Trust Deeds” and “Asset Trust Deeds”) for people who wish to invest in property using funds held in super and liaise with lenders in relation to the implementation of the arrangements as well as dealing with all conveyancing issues for you.

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Personal Insurances – Life Insurance, Income Protection and TPD/Critical Illness Insurances

As part of the estate planning process, in addition to considering wills, powers of attorney, appointments of enduring guardians, superannuation nominations, testamentary trusts and the like, it may be appropriate to consider insurance in the event of a death or major illness.

In addition to the trauma of having to cope with your death or serious illness, your family is likely to have some difficulty in meeting liabilities such as mortgage repayments. If you have an insurance policy in place however, you may be able to minimise that risk.

We can provide referrals to various financial planners and insurance intermediaries to provide advice and quotes in relation to general insurances (for homes, contents, motor vehicles, trailers, boats and the like) as well as the personal insurances such as:

  • Life Insurance
  • Income Protection Insurance
  • Total and Permanent Disablement (TPD) insurance
  • Critical Illness Insurance
  • Key Man Insurance

Many life insurance policies are held in superannuation funds so that the premiums payable can be deductible as contributions to super. In the same way as standard death benefits in superannuation funds can be paid by way of binding nominations, the beneficiaries of those super life policies can also be named by way of binding nominations. This can also provide an estate planning benefit in that the superannuation asset does not form part of an estate and is therefore not subject to any claims made on a deceased’s estate.

Income protection insuranceis available to ensure that you maintain some level of income in the event that you have injuries or suffer from an illness that prevents you from performing your job or any job (depending on the terms of the policy. Generally up to 75% of your income can be protected by such a policy and the premiums payable are generally tax deductible for this type of insurance.

TPD and Critical Illness Insurance are also available and generally provide a defined benefit if the insured is diagnosed with having one or more of a list of illnesses, injuries and sicknesses.

Key Man Insurance is effectively another version of life insurance that is obtained by businesses that rely heavily on a particular person’s experience or expertise. That person is insured against death or serious illness which would prevent them working for the business. The business (whether a company or that person’s business partners or an individual employer) owns the policy in that situation.

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