Case studies for ClearWill with Testamentary Trusts

• Dying without a Will
• Dying without a properly drafted Will...
• Creating testamentary trusts including multiple trusts
• Quarantining superannuation benefits v not
• Adjusting entitlements of beneficiaries
• Benefit of appointments of an umpire or professional advisor
• Benefit of appointment of a trust position successor

Dying without a Will

"My wife knows what I want to happen with my estate".

"I am not old, I can sort this out later".

"I don't have time to think about this right now".

"If I make a Will, it will be a bad omen".

Do any of these statements sound familiar to you?

These are some of the most common statements made when a person is considering whether to make a Will. Making a Will can be a confronting process as it requires each of us to face our own mortality. However, not having a Will may have unforeseen consequences that exacerbate the grief that a family experiences following the loss of a loved one.

Phoebe and Marcus

This was the case for Phoebe and her adult daughter, Meredith, when her husband, Marcus, passed away. Phoebe and Marcus were married for 15 years. Phoebe, being a partner in a professional services firm, made sure her family home was held in Marcus' name for asset protection reasons. Phoebe herself had a Will. The problem was Marcus did not have a Will and unexpectedly passed away.

When someone dies without a Will, their estate is distributed in accordance with the laws of intestacy. Being in Victoria, the intestacy legislation required Marcus' estate to be divided as follows:

• personal chattels and the first $100,000 to Phoebe (as spouse) plus 4% per annum income generated from the estate from the date of death to distribution to Phoebe plus 1/3 of balance of estate to Phoebe; and
• the balance of Marcus' assets (including the family home) had to be distributed:
  • 1/3 to Phoebe; and
  • 2/3 to Meredith.

Phoebe and her daughter, Meredith, did not get on because Phoebe did not approve of Meredith's new boyfriend, so Meredith was not prepared to transfer her interest in the family home to Phoebe. (Even if she had been prepared to do this, it would likely have had a tax impact.)

Meredith was faced with the difficult decision of selling the family home and paying out Phoebe's share in the family home to her.

Dying without a properly drafted Will...

... can be expensive to fix.

Gerald... and his incomplete Will

Gerald bought a Will Kit from the local newsagent. He nominated who he wanted his executor to be, being his favourite brother, Stan. He did not speak to his other brother, Norm, following a falling out years ago.

In the Will Kit there was the ability to make specific gifts, which Gerald did. He made a specific gift to Stan of his house and his bank account. At that point, those were the only assets Gerald had. He left the section regarding 'residuary estate' blank in the Will as he did not know what that meant.

A few years later, Gerald received an unexpected and sizeable inheritance from an elderly neighbour. He did not update his Will. When he passed away he was partially intestate, as he had not provided any direction in his Will about how his residuary estate (of which the money he received from his elderly neighbour formed part of) was to be distributed.

Accordingly, as Gerald had no spouse and children, his residuary estate was paid (in accordance with the intestacy laws) equally between his 2 brothers; his favourite brother, Stan and his estranged brother, Norm.

Creating testamentary trusts including multiple trusts

The great fear for any willmaker is that assets that they leave to their beneficiaries will be attacked by a creditor, such as the 'rapacious spouse' following family law proceedings or the dreaded trustee in bankruptcy in the case of a spendthrift beneficiary.

Maryanne... and her testamentary trust

When Maryanne made her Will, her daughter, Stevie, was at risk of becoming bankrupt as a result of personally guaranteeing a loan on which the borrower defaulted (exposing Stevie to personal liability from the lender). Maryanne was concerned to better ensure that Stevie's 1/5 share in her estate (Stevie was the second of 5 children) was not attacked by any trustee in bankruptcy that may be appointed.

Accordingly, Maryanne established a testamentary trust for each of her children in her Will along with an independent executor and trustee being appointed for Stevie's testamentary trust, so that it would be more difficult for a trustee in bankruptcy to call on funds that were left to Stevie (and Stevie's family).

Key to this was the fact that Stevie was not in control of the testamentary trust herself and that whilst she was nominated as the Primary Beneficiary, she was within a discretionary class of beneficiaries (which also included her children, grandchildren, her husband, any entities which she or her family controlled or a charitable or religious organisation).

When Maryanne died, the trustee and appointor (being Stevie's sister, Sybil) was in control of the trust of which Stevie was the Primary Beneficiary and exercised her discretion to never make any distributions to Stevie. Instead, Sybil was able to make distributions for the maintenance, benefit and education of Stevie's children (payment of school fees etc).

Quarantining superannuation benefits v not

The Superannuation Industry (Supervision) Act 1993 (Cth) provides that only a limited category of people are entitled to receive benefits from a super fund. These persons are known as 'dependants', and are limited to:

• any spouse of the deceased member;
• any child of the deceased member; and
• any person in an interdependency relationship with the deceased member.

Often, by default, a person nominates that their super benefits go to their estate on death. This means that those super benefits are then distributed in accordance with the terms of the deceased member's Will.

The ITAA 1997 further restricts the category of persons who are considered 'death benefits dependants' in relation to whether any lump sum benefits paid to them will be payable tax free.

It provides that death benefits dependants will be:

• the deceased member's spouse or former spouse; or
• the deceased member's child, aged less than 18; or
• any other person that the deceased member has an interdependency relationship just before the member died; or
• any other person who was a dependant on the deceased member just before they died.

This can sometimes result in adverse tax consequences, depending on whether the beneficiaries in a deceased member's Will are considered dependants for the purposes of superannuation and tax legislation. If some beneficiaries are not dependants, then there may be tax payable on any lump sum benefits that are received by the estate.

So, it can be advantageous to 'quarantine' lump sum superannuation benefits to ensure that they are only accessible to persons that are considered dependants, such as a spouse, dependent children or persons with whom the deceased member was in an independent relationship.

Simon... and his super

Following the death of his wife, Charlotte, Simon did not get around to updating his binding death benefit nomination for his superannuation fund. Simon had 2 children that were under 18, and 3 children who were over 25 years who were not dependent upon him (therefore not dependants for the purposes of ITAA 1997).

The trustee of Simon's super fund decided to pay Simon's member entitlements to his estate, of which there was a mixture of death benefits dependants and non-dependants for the purposes of ITAA 1997. This meant that part of the member entitlements were taxable, which pushed the taxable income of the estate (which was at the second highest tax bracket based on its taxable income in the relevant financial year) into a highest marginal tax bracket (due to those non-dependants in the higher tax bracket).

Had Simon been able to quarantine his member entitlements to be exclusively for the benefit of his two children under 18 (with an equalisation clause allowing the trustee to take into account the tax impact on each child), the estate would have been able to reduce overall tax paid.

Adjusting entitlements of beneficiaries

Significant disputes between beneficiaries may be avoided, if the executors and trustees have a discretion to consider any benefits that may have been given by the deceased to any beneficiary during their lifetime and whether it is appropriate that an adjustment be made between beneficiaries.

Frank, the farmer

For example, during his lifetime, Frank gifted a number of parcels of farming land to his son, Adam, who was primarily responsible for working the farm. A dispute arose at the time of Frank's death whether it was appropriate for the balance of his estate to be distributed equally between, Adam, and his two sisters, Evelyn and Joanne, given the sizeable benefit Adam had already received during Frank's lifetime.

Adam was concerned to ensure that the farm was not broken up (which would have been likely had litigation been commenced by his sisters), so he was prepared to accept less than his 1/3 share from the estate provided he received the balance of the farming land in the estate with his 2 sisters receiving a sizeable share portfolio and bank balances.

Through ClearWill with Testamentary Trusts, you can elect to include a clause allowing the executor to take into consideration benefits made during the lifetime of the deceased willmaker.

In this instance, an amicable settlement was able to be achieved between Adam, Evelyn and Joanne with each child receiving approximately the same amount from Frank's estate (when the gifts of farming land made during Frank's lifetime were taken into consideration).

Benefit of appointments of an umpire or professional advisor

"My executors get on like a house on fire."

One of the most important considerations for your succession planning is who you would like to 'step into your shoes' to make decisions about your affairs when you are no longer here.

Accordingly, the role of executor and trustee is crucial as the person appointed is responsible for carrying out the terms of your Will. However, what is less understood is the value of having additional appointments included in your Will to better ensure the seamless management of your assets when you are no longer here.

Through ClearWill with Testamentary Trusts, you can elect to nominate an 'umpire' and a professional advisor to assist with administering the estate.

Rebecca

This was crucial in the case of Rebecca's estate where there was a dispute between her executors about the sale of a property. The executors could not agree about whether it was to be sold, so the umpire (the deceased's accountant) stepped in and decided that the property should be sold.

Had there not been an independent decision maker, there would have either been a stalemate between Rebecca's executors meaning that nothing would have been done or there could potentially have been expensive litigation to try and resolve the dispute between the executors.

Whilst there is the power in most Wills for an executor or trustee to engage the assistance of a professional advisor, there can be disagreement between executors or trustees as to who is appointed. Whilst non-binding, the ability for a willmaker to stipulate who they would like to appoint as a professional advisor can head off any such disputes.

Often, the most seamless transition from a deceased person to their executors and trustees can be achieved through retaining the deceased's professional advisors.

Benefit of appointment of a trust position successor

"My Will covers all my assets".

Not necessarily.

An often overlooked part of succession planning is review of any discretionary family trust deeds to ensure that control of the assets in a discretionary family trust passes to an appropriate person or persons.

The role of trustee and appointor are key. A trustee has many powers in respect of trust assets, however, the most significant power is having the discretion to make distributions (including being able to determine who distributions are to be made to, when they are made and how much). An appointor has the ability to appoint and remove a trustee.

Through ClearWill with Testamentary Trusts, you can elect to nominate who will succeed you in any trust positions you hold at the time of your death (such as trustee or appointor) provided the discretionary family trust deed permits you to do so (the Cleardocs Discretionary (Family) Trust deed allows you to do this).

If your family trust deed does not enable you to nominate a trust position successor by your Will, you may need to seek legal assistance to update your trust deed to permit this. You can call our lawyers at Maddocks to seek their assistance.

A widely reported case in the national media concerning a discretionary family trust demonstrates the importance and power wielded by a trustee of a trust.

ClearWill with Testamentary Trusts

$572.00

(inc. GST)

+ Optional printing, binding and delivery for $78.65

+ 50% off your subsequent orders of the same document package within 12 months