Wills and Testamentary Trusts
This article appears in the Jan/Feb 2016 issue of Business Franchise Australia & New Zealand
This is a serious matter and therefore a joke is in order… as Groucho Marx said “I intend to live forever, or die trying.”
Why make a Will ?
• Where a person dies without a will or they do not have a valid will, the deceased dies intestate. This does not necessarily mean that your assets will go to the State or Crown, however under the laws in each State you lose control over the distribution of your estate as it must be distributed in accordance with a statutory order fixed and set out in the Administration and Probate Act, in each State.
• As the distribution is fixed there is no account taken of a particular beneficiaries needs or the wishes of the deceased and the estate may not go to who you want it to.
• Inheritance rights now also apply to partners who live in a genuine domestic relationship irrespective of gender where they are registered as domestic partners or have lived domestically and continuously for a period of two years immediately before the person’s death.
• Without a will there can also be disputes and confusion as to who should apply for administration of the estate. Sometimes it is ‘first in - best dressed’ which means the role of Administrator may be taken on by a party the deceased may not have wanted.
• The benefit of making a will is one of control; you decide who to leave a benefit to and in what proportion. It provides flexibility as you can give specific bequests or assets, cash and/or a percentage of the estate not only to relatives but also to other parties such as charities and friends that you may wish to recognise.
• Making a will may limit, but not completely remove the likelihood of dispute or contest over your estate. Our affairs are far more complex these days with domestic or de facto relationships, second marriages and children from previous marriages. These all need to be carefully considered.
There may also be interests in a business, shares, unit-holding in a trust or a self managed superfund (SMSF) all of which need to be considered.
Be prepared to spend time and costs, and get the right advice.
These are complex issues and the homemade will or newsagency will may only end up causing disappointment to those left behind.
Power of Attorney
At the time of making a will you should also consider having an Enduring Power of Attorney and a Medical Treatment Power of Attorney. Also take the opportunity to review any nominations, binding or non-binding, in relation to your SMSF as these fall outside of your estate.
There has been recent changes from the long-awaited Powers of Attorney Act 2014 (Vic) which incorporates a number of changes recommended by the Victorian Parliamentary Law Reform Committee. The new Act repeals previous provisions under the Instruments Act 1958 and provides for General Powers of Attorney and Enduring Powers of Attorney for financial matters and personal matters. It also defines the meaning of decision making capacity for the purposes of the Act and clarifies various aspects of the law.
So what are they ?
Most financial advisors and accountants recommend them, but what are they and do I really need one? Possibly.
• A testamentary trust is an express trust created under a will. It does not come into existence until the testator (person who makes the will) dies and the property is settled on the trust.
• The testator declares their estate or assets to be held subject to the testamentary trust. This can include superannuation benefits and life insurance proceeds.
• They can be ‘fixed’ or ‘discretionary’ as to the payment of income or capital, establish a life interest and are available to a wide range of beneficiaries.
• The basic elements which must be present for a trust to exist are:
1. trust property;
2. at least one Trustee who holds the legal title to the trust property;
3. beneficiaries for whom the trust assets are held;
4. the Trustee must be under a personal obligation to deal with the trust property for the benefit of those beneficiaries; and
5. there must be certainty in relation to the ‘intention’ to create the trust, the subject matter of the trust (property) and the objects (beneficiaries) for it to be valid. The will itself must also be valid.
Why have one?
Most people have complex financial and personal affairs these days. Regrettably, there may be a child who suffers from a drug, alcohol or gambling addiction, a mental or physical disability or unable to manage their affairs.
Some are vulnerable and open to influence, if they had access to significant wealth. Some simply have poor judgment if given substantial assets.
By a testamentary trust, the will maker can control those risks. It can also enable a beneficiary to access tax benefits by income splitting while ensuring the asset itself is protected.
It can also enable a beneficiary to access and enjoy their share of the estate, with minimum restraint.
Do I need a separate trust for each child or beneficiary?
There should be one trust for each child, rather than one trust for all children as one trust can reduce flexibility and cause dispute. One child may have a different risk profile than the other, one may prefer to invest in shares, the other property.
Having one trust for all may cause dispute and put pressure on the trustee of the trust. One trust also requires income distributions to be equal which may not be ideal. With significant farming business or investments, a head testamentary trust can hold non liquid assets (the farm) for each child who can then have their own individual testamentary trust for their own family.
Who should be my Trustee?
The testator can appoint one or more trustees. It can be a natural person, a corporate trustee, a professional advisor, professional trustee, or combination of all the above. It can mirror the trustees of your will. It can be sensible to have the child/children as co-trustee with a professional advisor such as lawyer and/or accountant.
If the primary beneficiary is bankrupt or faces a marital breakdown the trust deed should provide that they must resign as trustee and appointor of the trust. Another sibling or non-family member such as the family accountant or family solicitor can then be appointed.
The appointment controls the trust and has the ultimate power generally to remove the trustee and appoint another.
Should the Testamentary Trust be mandatory or optional?
It is preferable to have an ‘optional’ testamentary trust as it provides some flexibility and ease of access to an inheritance and asset protection. It allows a beneficiary to take a part of their inheritance directly (if required) to pay off debt or make immediate use of funds.
Purpose and Powers in the Trust Deed
The trust terms should be broad where there are significant non cash or non liquid assets such as farming property or business. If it is to look after young children or a spouse and the major asset is life insurance then a simpler testamentary trust deed could be used.
Testamentary trusts need to be carefully drafted to meet the particular circumstances and needs of the parties. Under Common Law and Trust Law, trustees are not given the power to carry on a business on a continuing basis so a specific power to operate the business should be included in the trust. A power to vary and amend the deed is also extremely important otherwise approval must be obtained from the Supreme Court which is an expensive process.
If a principal residence is gifted to a beneficiary and held in a trust (even with a right of occupation) this will not relieve it from land tax, in New South Wales once two years has passed from the date of death of the testator.
An application, however can be made for exemption from Land Tax where real estate is transferred from a testamentary trust to a beneficiary in New South Wales.
A surviving spouse may live in the home that the deceased owned and gifted via a testamentary trust to the spouse. When the trust is wound up, or the home transferred from the trust to the surviving spouse stamp duty would be chargeable which may vary from State to State.
Where a testator wishes to leave a financial benefit - to a grandchild for example to purchase their first home - the distribution should ideally not be made from the trust. It can be made by a loan to the grandchild (properly documented) so that if the grandchild becomes bankrupt or involved in family law proceedings, the trustee of the trust can seek repayment of the loan under the loan agreement.
This same strategy could be used for capital distributions for a risky purpose such as a new start-up business or speculative investment. The trustee could also take security over the asset as security for the loan.
Trustees must maintain proper records of trust distributions especially in relation to distributions to minors where payments are made to the minor’s parents and used to meet family expenses. Otherwise the minor could bring legal action against the trustee for breach of trust.
Testamentary Trusts and the Infant Beneficiary
What is a suitable age for a child to take control of their testamentary trust? In some cases it is 25, others 30, or it could be a staged release of funds between the age of 25 and 30.
Once a child is 18 they can apply to the Court to access all of the capital in the trust although that rarely happens.
Where children have issues with drugs, money-management or mental or physical disability ‘Capital Protected Testamentary Trusts’ or ‘Capital Reserve Testamentary Trusts’ can be established. These are mandatory, not optional trusts, and provide greater restriction on access to capital. The beneficiaries in these trusts are referred to as ‘protected beneficiaries’. The trustee can only release capital in specific circumstances, such as medical emergency, accommodation or replacement of a motor vehicle.
The trust deed can include a power to pass control of the trust to the protected beneficiary once they recover from their addiction or meet other specified criteria. Death benef its and SMSF’s SMSF members should check their superfund trust deed.
Superfund benefits can be dealt with in the following ways:
• No nomination. Where no member is nominated the trustee has an unfettered discretion to determine to which dependants the death benefit is paid and in what proportions. This is not recommended.
• Non-binding standard (‘Death Benefit Nomination’). A non-binding, standard or discretionary nomination may be suitable where there is one beneficiary, (usually the spouse), who is also a co-trustee. The nomination gives guidance to the trustee but is not binding on the trustee who retains control and discretion as to the distribution;
• Binding Death Benefit Nomination (‘BDBN’). Most public offers and Industry Super Funds offer members a BDBN. This allows the member to direct the fund trustee to who and in what proportion the benefits are to be paid. A BDBN is binding on the trustee and provides maximum control and comfort for a member. For public or for corporate, and industry superfunds the BDBN must be renewed every three years, however for SMSF’s it can be a non-lapsing BDBN.
• Death benefit rule (‘DBR’) or SMSF will is another advantage for members of a SMSF. The rules of the superfund may be drafted to allow for a specific death benefit rule whereby the member directs the trustee as to how to pay their death benefits and in what form.
• This can provide estate planning certainty by leaving specific benefits to dependents and non-dependents and their estate, and allow specific assets of the fund to be directed to ‘specific beneficiaries’, similar to a specific bequest in a will.
So now you know what to do! Don’t procrastinate, it’s better to get on with the process now. Review your existing will and talk to your financial advisors and lawyer and put these things in place. You can then rest easy and put them out of you mind and get on with other more enjoyable activities.
You will need specialist advice and ensure that your financial advisor, accountant and lawyer work as a team to ensure your succession planning is right for you and your circumstances and achieves the outcomes you want for your family.
The days of simple wills are gone, so be prepared to get proper specialist advice to avoid the risk of dispute and disagreement.
Robert Toth is a Partner of Marsh & Maher Lawyers, with over 30 years of experience in franchise law. He is an Accredited Business Law Specialist with expertise in franchising, licensing and distribution and franchise dispute resolution (acting for both international franchisors and franchisees).