COVID-19 crisis means getting affairs in order can’t ‘wait till tomorrow’
While some Australians have been rushing to stockpile toilet paper and other essentials in response to the COVID-19 pandemic, others have been turning their minds to their will and other estate planning arrangements.
A proper estate plan includes a lot more than simply doing a will. For those in business or who control family trusts, self-managed super funds and other entities, there are a number of issues that must be considered.
We acknowledge that the COVID-19 pandemic is a particularly stressful time for many people. James Dimond and Amelia Nowosilskyj from the Private Wealth and Succession Team at Davies Collison Cave are meeting with clients through video conferencing and other technologies to discuss their estate planning requirements and can advise on arrangements to execute wills and other legal documents where face-to-face meetings are not possible.
Some of the key areas to be considered in a comprehensive estate plan are discussed below.
1. Exercise caution with DIY will kits
DIY will kits often cause more problems than they solve, and can result in protracted litigation. Problems we commonly see with do-it-yourself will kits include:
(a) witnessing requirements and other formalities are often not complied with;
(b) attempts to give assets that the will maker cannot give through their will (such as superannuation and trust assets) fail, meaning beneficiaries miss out; and
(c) court applications are required to determine the meaning of unclear wording and bequests.
2. Testamentary trusts provide protection in uncertain times
Testamentary trusts can be a valuable tool in protecting your beneficiaries’ financial future.
With a testamentary trust arrangement, the inheritance will be held in a trust that the beneficiary does not legally own, although in some cases, may control for the benefit of themselves and immediate family members
Leaving an inheritance through a testamentary trust will, rather than a ‘standard will’, can offer a range of benefits, particularly for protecting your beneficiaries’ inheritance at a time of economic downturn when the risk of personal insolvency is higher. Some advantages of testamentary trusts include the following:
(a) where a bankrupt beneficiary receives an inheritance in their own name under a ‘standard will’, that inheritance will generally be ‘on the table’ to meet creditor claims. This need not be the case when testamentary trusts are used. Testamentary trusts can also provide beneficiaries with a measure of protection from matrimonial property disputes and other claims.
(b) testamentary trusts are given unique tax treatment. In particular, income distributed to minors is taxed at usual ordinary adult tax rates, which means, in the case of the ‘primary beneficiary’ having four children or grandchildren under 18 years, the ability to distribute almost $80,000 of trust income tax-free every year.
3. Even ‘basic’ estate planning is more than just a will
An effective basic estate plan will usually also include:
(a) superannuation death benefit nomination and/or pension nomination to nominate where your super will go on death. Advice on the taxation treatment of death benefit payments is important to avoid beneficiaries inheriting an unexpected tax liability;
(b) the preparation of enduring power of attorney documents so that someone you trust can make financial and lifestyle decisions on your behalf if you cannot (and avoiding the need for a court to appoint someone);
(c) the appointment of a person to make medical treatment decisions if you cannot make it yourself, and sometimes also an Advanced Care Directive to set out end-of-life treatment wishes.
For people who operates businesses or hold wealth through other structures, there are other important considerations.
4. Control and succession of family trusts and SMSFs is very important
Many Australians now hold more wealth in family trusts and Self-Managed Superannuation Funds (SMSFs) than they do in their own name, so planning the succession of these entities is important.
(a) As you do not own assets in a trust and may merely control it, you cannot give the assets through your will. However, it is usually possible to pass control of the trust through your will or through other stand-alone documents to the people you wish to benefit.
(b) Where control of a trust will pass to the next generation, special consideration needs to be given to the children’s own personal and financial positions and to whether they will be able to work effectively together to keep the trust intact for the next generation or be capable of negotiating and agreeing to a plan to bring it to an end (or come to some other arrangement).
(c) You cannot use your will to direct how your superannuation should be distributed; there are specific legal documents (such as binding death benefit nominations and reversionary pension nominations) that you can use to specify the beneficiaries of your superannuation. If no nomination is made (or it has been left to expire) the trustee of the superannuation fund will decide where to pay your superannuation benefit.
(d) A member’s superannuation account needs to be paid out within six months of death. If your SMSF is ‘real-estate rich’, this may mean that property owned by the fund needs to be sold or transferred out of the fund. Planning for this is suggested where, for example, the fund owns commercial property that is leased to a related business at arm’s length, to avoid business disruption and unexpected consequences.
5. Business owners need business succession plans to protect their families and business partners
If you are in business with others, business succession plans ensure that the equity you have created in your business will benefit your family at the right time and in the right way. These ‘business wills’ can take many forms, including buy/sell agreements, equity holder agreements or partnership agreements, and are sometimes self-funded and other times funded through insurance policies. Careful consideration needs to be paid to whether the business succession plan is in harmony with the personal estate plan, and to the tax consequences of the arrangements.
6. Enduring Powers of Attorney (Financial and/or Personal)
(a) A properly drafted Enduring Power of Attorney will appoint a substitute decision maker or decision makers (the attorney/s), but may also need to address other matters, such as whether the attorney:
· can use your money to benefit your spouse or children;
· is authorised to make certain decisions regarding your superannuation (for instance, whether they take it out to avoid your adult children facing a large tax bill when they receive it after your death);
· is able to stand in your shoes and take over any position of control you held for a family trust or SMSF (if the trust rules permit this).
(b) If there is no Enduring Power of Attorney in place, then it falls to VCAT or equivalent state and territory tribunals to appoint substitute decisions makers on your behalf, which can lead to family disputes.
(c) An Enduring Power of Attorney may assist in the current COVID-19 pandemic. For example, if you are self-isolating for any reason and cannot carry out your personal and legal affairs, your attorney can act on your behalf in relation to financial, property or other legal matters you cannot physically attend to yourself.
If you have any questions about the adequacy of your own estate planning arrangements, please contact James Dimond and Amelia Nowosilskyj. Their contact details are listed below.
Please also get in touch if you would like us to publish any further information about any of the areas we have mentioned in this article.
TEP, Senior Associate
Accredited Wills and Estates Specialist
M: 0429 921 919
M: 0429 065 287