Topic 11 Flashcards
(23 cards)
What is a will and what does it do?
A Will is a legal document signed by the Willmaker, which disposes of the Willmaker’s assets to their beneficiaries. It will determine:
- who will be in charge of the administration of the Estate; and - how the assets of the Estate are to be distributed after death
Outline the rules of intestacy in Victoria. If Carol dies intestate leaving assets of $300,000, and has a surviving husband and two children, how will Carol’s assets be distributed? Would it make any difference if Carol were separated from her husband?
Generally, in the case of intestacy, funds are left to the next of kin.
- where there is a spouse and no children, the whole Estate will pass to the spouse
- where there is a spouse and children, the first $100,000 goes to the spouse and a third of the balance of the Estate. The remaining two thirds of the Estate is passed onto the children.
In the case of Carol, the husband will receive in total $166,667 (first $100,000 plus one third of remaining $200,000). The 2 children will each receive $66,667.
If Carol were separated from her spouse, the husband would still be the legal spouse and entitled to the inheritance.
Who needs a will and when should it be changed?
Every person who is aged 18 and above should have a Will. It needs to be modified whenever there is a change of circumstances which affects the Estate. A review should generally be carried out every 3 years.
What effect does divorce, remarriage and separation have on a will?
Divorce does not cancel a Will in Victoria but is does cancel any distribution to the spouse.
Remarriage does cancel a Will.
Separation does not affect the contents or validity of a Will.
Outline the role of a professional trustee company.
Role of professional trustee company
-offer independence, continuity and skill in the administration of Estates.
The role is to administer the Estate, as per the role of an executor described above
Detail some of the assets that can and cannot be distributed as part of a Will.
Estate assets may include: property, chattels, shares, cash, bonds etc. (Assets owned with another(s) as tenants in common).
Non-Estate assets include: superannuation, jointly owned assets and life insurance proceeds where beneficiary is not the Willmaker, allocated pension with reversionary beneficiary.
Jointly owned property
Superannuation (including superannuation pensions)
Life insurance
Assets owned by trusts
Assets owned by companies
Outline the different ways in which a house owned by the deceased may be distributed to his spouse, based on the following situations:
- the deceased owned the house outright; and
- the deceased had a share in the ownership of the house with their spouse.
Where house is owned outright
-house will form part of Estate and will be distributed to spouse through the Estate or held in a Testamentary Trust on their behalf
Where deceased had a share in the ownership: - house may be held by way of joint tenancy – passed directly to spouse - house may be held as tenants in common – forms part of Estate and the deceased’s share may be distributed to spouse or held in Testamentary trust.
A mother dies leaving her husband and four minor children. Under the following scenarios, what would the tax free threshold be for the family?
(a) A testamentary discretionary trust was established. (b) A testamentary discretionary trust was NOT established.
Tax-free threshold of family with Testamentary Trust
-$18,200 for each of the husband and 4 children = $91,000
NOTE: If a child under the age of 18 receives income from a trust established in a will then the adult tax free threshold of $18,200 (for 2016/2017) and marginal rates of tax will apply to the child.
(b) Tax –free threshold of family with no testamentary Trust*
- $18,200 for husband only. Children are no longer entitled to the Low Income Tax Offset. They can earn up to $416 and not pay tax. Refer to minor tax rates. For four (4) children they can receive 4 x $416 = $1,664 tax free.
Kevin’s father dies and leaves an Estate valued at $390,000 to be split equally between his three sons. Kevin’s share of $130,000 can be assumed to be returning 8%. What are the benefits in the father establishing a discretionary testamentary trust in his Will based on the following situations:
(c) Kevin runs a business and is facing bankruptcy.
as long as Kevin does not control the assets of the trust (not the trustee), then assets of the trust will not be available to the creditors of Kevin’s Estate.
Kevin’s father dies and leaves an Estate valued at $390,000 to be split equally between his three sons. Kevin’s share of $130,000 can be assumed to be returning 8%. What are the benefits in the father establishing a discretionary testamentary trust in his Will based on the following situations:
(a) Kevin is 45 and has two minor children; and
Kevin is able to distribute income to his children who will be taxed at adult marginal rates of tax – no tax payable on distribution
Kevin’s father dies and leaves an Estate valued at $390,000 to be split equally between his three sons. Kevin’s share of $130,000 can be assumed to be returning 8%. What are the benefits in the father establishing a discretionary testamentary trust in his Will based on the following situations:
(b) Kevin is 65 and is in receipt of an Age Pension
-As long as Kevin has no direct or indirect control over the trust (eg. trustee of the trust, primary beneficiary) the assets will not be counted for the purposes of establishing Kevin’s asset test threshold. If Kevin, is seen to have any control whatsoever over the trust, assets within fund will count towards asset test.
Fred is looking at drawing up his Will and is looking at how best to distribute his Estate equally between his three children.
His assets consist of the following: $ Principal residence 320,000 Shares 140,000 Investment property 185,000 Bank account 60,000 Managed fund 190,000 Term deposit (held jointly with the eldest son) 100,000 Total 925,000
Fred is proposing allocating his assets as follows:
- the principal residence to his eldest son
- the investment property and the shares to his second child
- the managed fund, bank account and his half of the term deposit to his youngest child
Comment on some of the issues that need to be considered in Fred’s proposals.
Issues that need to be considered:
liquidity considerations
tax considerations
jointly owned assets:
liquidity considerations
the assets being passed to eldest and second child are a lot less liquid than the managed fund, bank account and term deposit distributed to the youngest
tax considerations
as long as eldest sells the principle residence within 24 months, or uses the house as his principal residence, there will be no CGT
:the second child will be liable to CGT upon sale of shares and investment property
:the youngest will have CGT implications on managed funds distributed to him
jointly owned assets:
the term deposit is jointly held between deceased and eldest child. Does not form part of Estate assets and will be distributed directly to eldest child. In order for this asset to form part of the estate, the asset needs to be held under “tenancy in common” basis and not a “joint tenancy”.
Remarriage
Remarriage renders an existing will invalid so unless the person has drawn up a will since her remarriage, she will die intestate.
Ramifications if person was to die without a valid will in place:
Where a person dies intestate, the estate is distributed in accordance with State intestacy laws. This situation results in the deceased’s estate being distributed in accordance with strict government laws that prescribe the order of persons who will share in the estate and the extent to which they will benefit from the estate.
If the person was to die instate, all the estate will be left to husband from 2nd marriage. Consequence of this is that none of estate may end up with children from first marriage.
Difficulties of excluding family members from an estate distribution:
Under the Testator Family Maintenance (TFM) laws applicable to each State, family members are provided with rights to ensure that they are properly maintained and supported out of the proceeds of a deceased estate. If a family member feels that they have not been adequately provided for, they have the right to challenge the will for the right to make a claim, or for an increased share
What can be done to restrict the opportunities for challenges against the will:
To restrict the chances of the youngest daughter mounting a successful challenge, it may be wise to provide for a small distribution to be made to the youngest daughter. The reasons for the exclusion should be adequately documented and kept with the will. Although not guaranteeing success, the court will be provided with some understanding of the deceased’s reasoning for excluding the daughter.
You have just accepted a position at your local newspaper as Mr Money, a financial advice columnist. The following letter arrives in your tray on the first day. You are required to provide a detailed response.
I am 61 years of age with three grown up children and have recently remarried. My husband has two children from his first marriage. I am not in the best of health and want to ensure that my estate is left appropriately to my children upon my death.
I own a house worth $240,000, a share portfolio worth $52,000 and some managed funds worth approximately $60,000.
I have a will that was drawn up whilst my first husband was still alive and this provided for the appointment of an executor and a general Power of Attorney.
The terms of the Will stated that all of my assets were to be distributed equally between my three children. However, I have had a number of arguments with my youngest daughter over the past 2 years and have provided her with a significant amount of money on the basis that she will not receive any inheritance from my estate. I would like to make the distribution from my estate as fair and as equitable as possible and plan to leave my house to my eldest son and the shares and managed fund to my eldest daughter. Both children are married with their own families and earn good incomes.
Required
Can you advise whether my estate planning is appropriate to meet my needs? Is there anything else that I should be doing to ensure that my 2 children receive the maximum benefit from my estate? Can you also advise whether I can simply amend my existing Will to delete my youngest daughter from receiving any inheritance?
- Ensure that a new Will is drawn up and contains appropriately appointed Executor and Power of Attorney that reflect the client’s altered circumstances
- Investigate establishing a testamentary trust for the children. The benefits of a testamentary trust include safeguarding the assets of the Estate for the beneficiaries and providing a tax effective distribution of income to family members
- Need to protect the assets of the person’s estate to ensure appropriate distribution to children from the first marriage
- Recommend that the client contact an appropriate lawyer
- Investigate the desire of the wife and husband to retain separate ownership of their own assets (eg. consider whether the family home should be owned as tenants-in-common. Home would form part of estate to be distributed to children or placed within trust)
Q7
DO IT
Testamentary Trust
A discretionary trust established by a Will
Usually portion of estate that otherwise may have gone to a beneficiary absolutely
Allows distribution of capital and income to nominated beneficiaries
Controlled by a trustee (typically one of the beneficiaries)
Benefits of testamentary trusts
Flexibility - Trustee has range of choices in distributing income and capital from the trust to the beneficiaries
Provide for family member with disabilities
Creation of a life interest in an asset
Asset protection
with a discretionary trust, the trustee has discretion as to distribution of income
income of the trust can be split in the most tax effective manner
beneficiaries pay tax on income received from the trust at adult marginal tax rates despite age of beneficiaries
