Don't Let Your Hard-earned Legacy Go to Waste.

Even if all you own is your house/apartment, you should still upgrade from a so-called 'simple' will to a more sophisticated will that properly protects your assets and reduces unnecessary tax. Short, simplistic wills do NOT avoid complications – in fact, they do the opposite, by preventing flexibility and leaving gaping holes for tax leakage. They also leave your estate exposed to creditors and predators.

You've worked all your life to build what you have: don't waste tens of thousands of dollars in unnecessary tax, and expose your hard-earned assets to risk, for the sake of a few hundred dollars now.

EXCLUDING PEOPLE FROM YOUR WILL

When you pass away, any "eligible person" may make an application to the court for a family provision order if they believe that there has been inadequate provision for them under your will. If an order is made, interests under your will may be adjusted and the applicant may be able to obtain part of your estate, contrary to your will.

Who is an "eligible person"?

Broadly speaking, this may include anyone to whom you had a responsibility, potentially including a current or former spouse or de facto partner, children, and grandchildren and (except in WA) other dependents and even persons living in your home.

The likelihood of a family provision order being successful might be reduced by expressly excluding people who may be eligible persons in the will, outlining the reasons why they have been excluded.

This is not usually a feature of a ‘simple’ will but can be included in a smarter will

The following are some examples of potentially valid reasons for exclusion:

◉ sufficient provision was made for the

excluded person during your lifetime;

◉ you and the excluded person have had

no contact for a long time and no

relationship of love/affection exists

between you;

◉ you have not had any responsibility for

the welfare of the excluded person

for many years;

◉ the financial circumstances of the

excluded person are much better than

those of the included beneficiaries;

and/or

◉ the excluded person has received or is

likely to receive, significant assets

from the estate of another person.

We offer a range of services for people needing advice and understanding in the complex areas of Wills, Estates, and Succession Law.

Whether you need help with drafting up a Will, upgrading a Will contesting a Will, or seeking advice about handling the estate of a deceased relative, we can help.

IF YOU ALREADY HAVE A SIMPLE WILL!

We can help you to upgrade to a smarter and more sophisticated will to protect your assets and wishes.

It's important to know the meaning of a few key terms in order to understand why upgrading to a more sophisticated will is so valuable.

TRUST

A trust is a common and powerful structure where the "legal" and "beneficial" ownership of an asset are separated. The trustee has official legal title to the asset but holds the asset for the benefit of the beneficiaries. Income earned from the assets is passed to the beneficiaries via the trustee.

DISCRETIONARY TRUST

A discretionary trust is a type of trust where the beneficiaries have no fixed interest in the assets – whether or not a particular person can benefit under the trust is entirely discretionary to the trustee. Many people have a "family trust" that is set up as a discretionary trust.

TESTAMENTARY DISCRETIONARY TRUST

A testamentary discretionary trust is a special type of discretionary trust that is created pursuant to a person's will. The trust is constituted after the will-maker passes away. Instead of passing the assets directly to the beneficiary, the executor puts the assets into a discretionary trust. The intended recipient becomes a beneficiary under the trust and can control the identity of the trustee.

STREAMING

Streaming means passing income earned from the trust assets through the beneficiaries via the trustee and doing so in the most tax-efficient way possible.

This is extremely useful where the trust has low-income beneficiaries who are in lower tax brackets.

Your house/apartment becomes your beneficiary's investment property, generating $40K+ in taxable rental income for your beneficiary every year. That income can be 'streamed' to low-income relatives of your beneficiary to save thousands in tax, year after year after year.

The key is that, with a testamentary discretionary trust, minors (i.e, children under 18 years old) are taxed like adults with the same tax rates, including the tax-free threshold.

This is contrasted with a normal family trust, where distributions to minors are taxed at penalty rates.

When a recipient in your will earns income from a gift – e.g, rent on an investment property, or capital gains when they sell it – that income will be taxable.

While they have children under 18 years old, that income can be ‘streamed’ to the kids to take advantage of their preferential tax rates. This requires a special structure called a ‘testamentary discretionary trust’ that can only be created under a will.

Income can also be streamed to low-income-earning adults, such as full-time or part-time students, which similarly provides a valuable mechanism for reducing tax.

FOREIGN BENEFICIARIES - CGT

When a person passes away, any capital gain they made in respect of an applicable asset owned just before passing away is disregarded, unless the asset passes to a beneficiary that is an "exempt entity" (this is known as "CGT event K3").

A foreign resident for Australian tax purposes is an exempt entity. This means that, where an applicable asset passes directly to a foreign resident as per a 'simple' will, capital gains tax (CGT) is triggered.

That CGT can be overcome by instead passing the applicable asset into a testamentary discretionary trust with an Australian trustee of which the foreign resident is a beneficiary.

This is important, even if all your beneficiaries currently live in Australia, because they may live overseas in the future.

The following fact scenario illustrates the benefit of income streaming in a smart will:

Jane's only significant asset is her primary residence, which is a modest 2- bedroom apartment worth $800K.

Jane leaves everything to Mary who is her only child. Mary has a job paying $120K p.a. and 2 children who are still in school.

Mary lives in a 3-bedroom townhouse, which she rents as she cannot yet afford to buy her own home.

Once Jane's apartment passes to Mary, to help pay the bills, Mary rents out Jane's old apartment as an investment property, which earns $40K p.a. in rental income. Mary holds Jane's apartment as an investment property for 10 years and then sells it for $1M, making a $200K capital gain on the sale

IN A 'SIMPLE' WILL SCENARIO

With an existing income of $120K p.a. from her job, the additional $40K p.a. in rental income from Jane's old apartment all falls within the $120,001 - $180,00 tax bracket, the rate for which is 37%.

37% of $40K is $14,800, which is the extra tax that Mary will pay on the additional rental income every year. In the final year, the $40K rent + $100K capital gain (after the 50% CGT discount) will all add to Mary's income, pushing her total taxable income up to $260K, taking her well into the top tax bracket of 45%. 'SIMPLE' WILL

With an existing income of $120K p.a. from her job, the additional $40K p.a. in rental income from Jane's old apartment all falls within the $120,001 - $180,00 tax bracket, the rate for which is 37%.

37% of $40K is $14,800, which is the extra tax that Mary will pay on the additional rental income every year. In the final year, the $40K rent + $100K capital gain (after the 50% CGT discount) will all add to Mary's income, pushing her total taxable income up to $260K, taking her well into the top tax bracket of 45%.

IN A SMARTER WILL SCENARIO

Mary streams the additional $40K in rental income to her 2 children, splitting it equally between them (i.e, $20K each).

Her children each pay only $342 in tax as the first $18,200 for each of them is tax-free. Instead of paying $14,800 in extra tax every year, Mary reduces the extra tax down to only $684, which is a saving of $14,116 per year, every year.

In the final year, the additional $140K income (i.e, $40K rent + $100K taxable capital gain) can similarly be split equally between Mary's 2 children $70K each. This way, nothing falls within the top 45% tax bracket at all. The result is that over the 10 years while Mary held Jane's former apartment as an investment property, Mary saved a whopping $158,810 in unnecessary tax!

BANKRUPTCY

Assets held in your beneficiary’s own name are vulnerable to claims from the beneficiary’s creditors. For example, if the beneficiary makes an investment that goes bad, or someone has an accident for which the beneficiary is held liable, then your hard-earned assets may be used to pay the debts.

FAMILY LAW CLAIMS

If your beneficiary is involved in a marriage or de facto relationship that breaks down, the beneficiary’s former spouse may make claims against the beneficiary’s assets.

The Family Court of Australia has broad powers to divide the beneficiary’s property between the spouses and require the payment of maintenance (i.e, alimony). Placing your assets in a testamentary discretionary trust of which your beneficiary is not the trustee may help to insulate your hard-earned assets from such claims. This is because technically the trustee owns the assets and, as it is a discretionary trust, the beneficiary does not have a fixed entitlement to the assets.

CENTRELINK ENTITLEMENTS

Many Centrelink entitlements are means-tested. Eligibility to receive the welfare benefit depends upon the value of the intended recipient’s assets (the “assets test”) and the level of the intended recipient’s income (the “income test”).

If one of your beneficiaries receives a means-tested welfare benefit, assets given to the beneficiary directly under a ‘simple’ will – and income earned from those assets – may affect the beneficiary’s entitlement to the benefits.

BENEFICIARY SUPPORT TRUST

Also called a “Protective Trust” or “Capital Protected Trust”, a Beneficiary Support Trust is a special type of trust created under a will for one particular beneficiary where the beneficiary does not have any control over the allocation of the assets.

This is especially useful where there is a concern that the beneficiary may be unable to manage his/her own finances – e.g, by virtue of having an intellectual disability or a problem with drugs, alcohol, or gambling. Where assets are in a trust, in determining the assets test and the income test, Centrelink focuses on whether the recipient has control over the assets, so a Beneficiary Support Trust may reduce the risk of the beneficiary losing his/her Centrelink entitlements.

SPECIAL DISABILITY TRUST

A Special Disability Trust is a trust created for one particular beneficiary who has a “severe disability” (as defined by legislation). If the terms of the trust comply with the requirements of the Department of Social Services, assets in the trust are exempt from means testing by Centrelink and the Department of Veterans Affairs (up to a maximum of $657,250 for the assets test from 1 July 2017 – this amount is increased annually).

Smarter wills can use the above trust structures aimed at preserving Centrelink entitlements.

Keep your beneficiaries’ options open.

Simple wills force your beneficiaries to take all of their gifts directly.

That limitation may prove to be immensely costly as it:

• places the assets at risk by exposing

them to claims from your beneficiaries’

creditors; and

• prevents your beneficiaries from

enjoying the tax savings from income

streaming that, as illustrated earlier.

The key is to keep your beneficiaries’ options open. Smarter wills give your beneficiaries the choice as to whether to take the assets directly or via a testamentary discretionary trust, depending upon what suits their particular circumstances in the future when you pass away.

Smarter wills allow the beneficiaries to receive the assets in the way that best suits their personal situation at the relevant time.

WHAT IF THE BENEFICIARY WANTS TO SELL THE PROPERTY?

The tax advantages of a testamentary discretionary trust are relevant where the beneficiary chooses to retain the assets to earn income from them. If the beneficiary chooses to immediately sell the property (e.g, to help pay off their own mortgage) then the beneficiary may prefer to receive the property directly. Smarter wills give the beneficiary that choice.

Don’t paint your beneficiaries into a corner: give them the flexibility to do what suits them best when the time comes.

POWER OF ADJUSTMENT

Simple wills are too rigid: they don’t give the executor room to make adjustments to deal with unintended scenarios.

For example, if two beneficiaries are intended to receive equal shares but the gift to one of them turns out to be subject to an unexpected tax, the executor needs the flexibility to increase the gift to that beneficiary to achieve a more equitable distribution on an after-tax basis. Smarter wills give the executor the general power to make such adjustments.

Smarter wills give your beneficiaries the choice as to whether to take the assets directly or via a testamentary discretionary trust, depending upon what suits their particular circumstances in the future when you pass away.