Estate Planning

Wills

A Will is a legal document in which you state how you want your assets to be distributed after your death. A Will also allows you to choose an executor who will be responsible for making sure your wishes are met.

It may sound obvious but the world is full of people who are still planning to make their will soon. It is estimated that more than a third of the population die without a valid will, either because they have never made one, or the one they made doesn’t work or is out of date.

Methods of making a Will

There are four methods for making a Will:

1. Doing it yourself, perhaps by using a form obtained from most newsagencies or the post office. This method must be avoided if possible. Making a Will is complex and there can be serious problems if technicalities aren’t strictly complied with. It is not unusual for someone to save a few dollars in making their Will but then have their estate spend several thousand times the amount of that saving trying to sort out what was messed up.
2. Through a trustee company.
3. Through the Public Trustee.
4. Through solicitors.

For these last three methods, it is desirable to compare the different costs. The cost of preparing a Will is fairly trivial; the true cost lies in the estate administration. A difference of $100 in making the Will is of little account when the difference in administering the estate might be $10,000. Fees for preparing the Will and the administration of the estate should be assessed and compared.

It is also appropriate to consider who will be managing the estate. Does the testator (the person making the Will) want someone entirely unknown to him or her to be managing their estate after their death?

Intestacy

Another way of making a Will is of course not to make one. In that case sections of the Succession Act set out the sequence in which the estate will be distributed. The rules cover many variations but essentially the estate goes firstly to the spouse, then to the children and then to parents. The legislation is quite complex and covers the possibility of there being one or more de facto spouses or domestic partners as well as some specific provisions for indigenous intestates. There are further provisions, but if no immediate family are available then the estate will go to the Crown. The shares in which the estate is left and the provisions to be made for the family are fixed by law and there is no discretion. This is not a good way of looking after those you leave behind.

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Considerations when making a Will

There are several items which need to be considered carefully when making a Will.

Executors

Essential characteristics for an executor is that he or she is reliable and honest. This is not negotiable. If possible it is also desirable that the executor has some business skills and perhaps be aware of the testator’s affairs.

Depending on the manner in which the document is drafted, it may be possible to give directions to an executor as to how the testator wants the estate administered. It would be very unwise to attempt to give binding directions except in a formally valid Will. To attempt to do so, and fail, means that the directions have no effect. Before giving such binding directions, consider carefully whether it would be wise to bind the executor in this way. If the executor needs that type of constraint, you may have the wrong executor.

It is often preferable for either a broad general direction to be given or a clearly non-binding direction. In this way, the estate will have the benefit of both the executor’s own skills and abilities to make relevant decisions on all available facts at the time and the statement of the testator’s intentions or wishes. It is often worth also nominating alternate executor/s, in the event that the first person nominated cannot carry out those duties for some reason.

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Assets

This is one of the times it is essential to identify exactly what a testator owns and what she or he can actually deal with by Will. The assets of a company or a trust do NOT belong to the testator. The testator may have shares or some other interest in the company or units or an expectancy in a trust and it is only those shares, units or other interests that can be considered in making a Will. These same considerations will usually arise when dealing with an interest in a superannuation fund, although, with some exceptions, that interest can be better secured to the intended beneficiary when there is a self-managed superannuation fund.

A further issue that often arises when dealing with related entities is that, although the shares or units may not have any value or only nominal value, they may be the means by which the underlying company or trust is controlled. In that case, the intended recipient of the shares or units will actually receive not just the nominal value of the shares or units, but more importantly, control of the relevant company or trust. The same comments can be made in relation to the office of Appointor or Guardian in many discretionary trusts.

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Beneficiaries

Who is going to get what share of the estate and assets?

There are various issues to look out for when choosing the beneficiaries.

A poorly thought out gift can be a nightmare for the executor, adding significant expense and delay. Gifts can be in forms other than cash.

It may often be worth considering the forgiveness of all or part of a debt owed by a beneficiary, or potential beneficiary. If a testator has over their lifetime lent substantial sums to a family member, company or trust. Unless those loans are forgiven, the family member, company or trust can be forced to repay the loan to the estate. This may produce very difficult issues where the family member, company or trust has those advances committed in some way, for example, in a business. Such forgiveness techniques may also be a way of capitalising a family company or trust for future use by beneficiaries, possibly without the beneficiary being entitled to demand the repayment of capital. Similarly, it may be worth considering whether there should be gifts and/or forgiveness of debt so as to equalise or eliminate loan account balances.

A Will should also have a ‘residue’ clause so that anything overlooked by the testator or any gift that is difficult to account for will still be able to be dealt with and passed on as the testator would wish.

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Business affairs

Some consideration should be given to the method by which the testator holds his or her interest in any businesses. Is the testator in a partnership? If so, there may be some provision in the partnership agreement about the surviving partner/s buying out the deceased partner. If the testator is a shareholder or unit holder in a company or trust that owns a business, then only those shares or units can be left under the Will, not the company or trust property.

Trustee powers

It is often the case that the powers that can be exercised by the executor (as trustee) under the applicable legislation are too narrow. Therefore, it can be worthwhile granting the executor a greater scope of powers in the Will to take advantage of any relevant options. This may include the power to appropriate assets to beneficiaries in satisfaction of their entitlements in the estate. In this way, the executor may be able to postpone capital gains tax and possibly minimise or eliminate it altogether by allocating assets appropriately, depending on the taxation position of the various beneficiaries.

Family circumstances

It is important to note that unless a Will is expressly made in contemplation of a specific marriage, it is revoked if the testator later marries. Separation does not have any effect on a will but divorce revokes any gift in favour of the ex-spouse and any appointment of the ex-spouse as an executor unless there is clear evidence that the gift and/or appointment was intended to continue despite the divorce. Divorce does not revoke any appointments of an ex-spouse as a director or trustee.

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Formal requirements

There are a number of matters set out in legislation that must be complied with for a Will to be valid.
These include:

• The person making the Will must have ‘testamentary capacity’, that is, they must:
  • understand what the document is;
  • understand what its effect will be;
  • know to some extent what property they have;
  • know who it is that may be entitled to provision under the will.
• The Will must be in writing.
• The Will must be signed, or marked in some way which clearly demonstrates that the testator approves its contents.
• The Will must be witnessed by two people, neither of whom can be beneficiaries or married to a beneficiary.

These requirements do have some interesting variations or concessions but it is far better to comply with the formal requirements than to have to try to invoke those concessions.

Other issues

Other issues that need consideration include:

• how the body is to be disposed of (burial, cremation etc.);
• whether the executor should have power to advance money on behalf of beneficiaries under 18;
• who should look after minor children;

These can be adequately dealt with in the Will. However, disposal of bodies is best arranged through a pre-paid or at least pre-arranged funeral rather than the Will. It is not uncommon for the Will only to be consulted after the funeral is over.

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Powers of attorney

Our bodies are now outliving our minds. There is a rise in the incidence of diseases such as Alzheimer’s and senile dementia. ‘Enduring’ Powers of Attorney can often help ease the burden for those who are required to look after someone’s affairs when they lose mental capacity. The Power of Attorney can be made conditional or can be limited so that it only operates in certain circumstances or in relation to certain assets. The person giving the power of Attorney always retains control while ever they retain their mental faculties. In other words, the donor can revoke or vary the Power of Attorney at any time as well as continue to administer their own affairs. A Power of Attorney is quickly becoming an essential part of proper business planning. It should be noted, however, that the Power of Attorney only lasts while the donor does. That is, on death, as the donor loses all authority, so does the attorney. That authority then passes to the executor/s of the donor’s will.

Normally, a Power of Attorney cannot operate if the donor has lost capacity through unsoundness of mind. For some time now however, legislation has permitted the Power to continue to operate despite that unsoundness of mind, provided that the document has been prepared, signed, witnessed and completed in the manner prescribed by that legislation.

But even if the possibility of unsoundness of mind is one we don’t want to consider, a power of attorney may still be useful because it permits someone to attend to another’s affairs. So, if the retiree wants to travel, or could not be bothered with all the administration that can be needed with an investment portfolio, he or she can appoint someone to attend to the necessary paperwork without them. Again though, the donor of the power will retain control

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Appointment of Enduring Guardian

A power of attorney is limited to financial matters. It is now also possible to appoint someone, perhaps the same person but not necessarily, to make decisions about health and welfare if we are no longer able to make those decisions. That document is known as an appointment of an enduring guardian. Thus, medical, housing, and other nominated decisions can be made by someone known to and trusted by us. If necessary, appropriate directions regarding one’s wishes for care and treatment can then be given to that person who, hopefully, will honour them as best they are able at the relevant time. This is sometimes what is known as a “living will” or an “advance health care directive”.

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Other estate planning issues

There are a number of other estate planning strategies that may be recommended by advisers when planning for the future of transition of business ownership.

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