A key concern for many families while preparing their Will and Testamentary documents is the discussion surrounding how they might ensure the needs of their children will be met in the event of their unexpected death or illness.  Indeed, this is a critical discussion that must happen, particularly when the clients have very young children.  While most clients in this situation come to us ready to discuss these arrangements (having nearly always discussed this prior to the meeting), the same can’t be said when addressing business owners in the process of preparing their estate plan with regards to planning for the succession of this business.

In fact, most business owners, who come to us for the purposes of estate planning have thought little (if at all), about what might happen to the business should they die unexpectedly, or, become incapacitated and are unable to run the business.

Consider the following scenario:

Eva and Jim are married.  Jim, an Accountant, has built a large, successful accountancy firm while Eva managed the family and occasionally assisted with general operations of the business.    They have two adult children, Tim and Sophie.  Tim is in the process of undertaking an Economics Degree at university and Sophie is in the process of completing her Bachelor Degree in Medical Science.  Tim is currently working at his part-time at his parent’s accountancy firm and plans to undertake post-graduate study in the future.  It is assumed that Tim will eventually take over the business when Jim retires at 65.  Sophie plans to work in the field of medical research and has no interest in the family business.

At face value, assuming that everything happens as it should, Eva and Jim’s plan sounds like a great one.  However, for couples in this situation, careful attention to estate planning is crucial to ensure that should something unexpected occur, a contingency plan is in place to deal with this.  Indeed, even if everything evolves as it should and Jim reaches retirement age at 65, careful estate planning operates to ensure a smooth transition of the business to their son.

Commonly, business owners appoint their spouse or their children to act as executor of their estate without adequately considering whether they are the best person to run the business in the immediate period following their death.  Ideally, in the case of Jim and Eva, their business will fall into the hand of their son when Jim retires at 65 and by this time it might be assumed that Tim will be appropriately skilled and qualified to manage the demands of the business.  However, should this not occur, if Jim was to die before this time (or become incapacitated), the choice of Tim as executor could be a disaster.

A skilled estate planner will be able to devise solutions to ensure that the client’s intentions are fulfilled even in the event of unfortunate circumstances.  This may involve the creation of a company trust, so that for an interim period, the control of the business falls into the hands of someone who can ensure seamless management of the business until such a time as the owner is able to do so.  In this situation, while appearing similar, there is a distinct difference between ‘ownership’ and ‘control’.

Furthermore, depending on how the business is set up, this will determine whether the business can be transferred to a beneficiary via a Will.  Indeed, if the business is owned by a company or a trust then they are not the property of the client, and as such are non-estate assets.

It also follows that careful consideration should be paid to other children who may not wish to have any involvement in the business.  In the situation described above, the daughter Sophie, intends to pursue a career outside the family business.  Jim and Eva would be wise to consider separate estate provisions for their daughter so as to prevent the possibility of eventual litigation.

While this article serves to identify a few of the things that business owners must consider when preparing an Estate and Succession Plan, it should be highlighted that this type of Estate Plan has the potential to be deeply complex.  With this in mind, business owners are encouraged to seek specialist advice when preparing Testamentary documents so as to cover every possible scenario.

A recent judgement out of the Supreme Court of South Australia sends a timely reminder to all Will Makers, that trying to successfully leave someone out of your Will is still a very difficult and tricky proposition.

 For many years now a myth has been perpetuated in many circles relating to the misconception that leaving someone a ‘token’ amount in your Will is a sound tactic for preventing them from mounting an inheritance claim against your estate.  Perhaps the notion originated from an assumption that the mere fact that you have provided for someone in your Will (no matter how nominally), makes it more difficult for them to successfully challenge it and be awarded a greater share of your estate. This is simply not accurate.

Take for example an estate of approximately $500,000.  If this was gifted to one of only two children then it seems likely the second child may commence an inheritance claim in reaction to receiving nothing under the original Will.  Invariably, it is highly likely that they will succeed in this inheritance claim.  If, however, in the original Will the second child was provided a nominal gift of $100,000, with the first child receiving the remaining $400,000, the second child is still likely to commence a claim, attempting to convince the Supreme Court that they deserve a share beyond that which was already allocated to them in the Will.

So you see, a nominal or ‘token’ gift just isn’t going to cut it.

Let’s get back to the recent case.  The claimants were three of the six children of the deceased widower.   When the deceased and his wife immigrated to Australia from the UK, three children stayed behind as young adults (they were gainfully employed).  The deceased and his wife emigrated with their 3 younger children who, under the Will, inherited the whole of the estate.  A few important points to consider:

–      The deceased emigrated in 1973 and thereafter sustained a cordial relationship with the children left behind.

–    The Will was written in 2007 some 34 years after the deceased emigrated from the UK and, of importance, the size of the estate was modest just a little over $300,000 in total.

–    The Judge still awarded the claimants a sum of $47,500 each.

The next chapter to be written in this case is that of who pays the legal costs.  Under normal circumstances the estate pays everyone’s legal costs.  This further diminishes the value of the estate thus reducing the inheritance received by those chosen by the deceased.

The ruling highlights some of the difficulties apparent when preventing an inheritance claim.  There are some strategies that can reduce the likelihood of such a claim arising.  This may involve using binding death benefit nominations concerning Superannuation interests and transferring ownership of assets in certain circumstances.

It is imperative you seek advice from a solicitor experienced in drafting Wills concerning your wishes to leave someone out of your Will.  A solicitor is best equipped to provide you with appropriate advice related to what strategies may work and in what circumstances the risks of an inheritance claim are high.  For advice on all matters involving Wills and Estate feel free to contact Greg Welden, Jason Coluccio or the team at Welden & Coluccio Lawyers.

Scenario: Mrs Smith married Mr Smith who had two children from a former marriage. Mrs Smith had no natural children of her own. Mr Smith predeceased Mrs Smith with Mrs Smith dying several years later. Are the children of Mr Smith entitled to make a claim against the estate of the Mrs Smith?

The children of Mr Smith became the legal step-children of Mrs Smith at the time of the marriage. A step-child may be entitled to make a claim against the estate of their step-mother or father pursuant to Section 6(g) of the Inheritance (Family Provision) Act 1972 (SA), if they are “a child of a spouse or domestic partner of the deceased person.”

We must then ask the question; because Mr Smith had predeceased Mrs Smith, could Mr Smith’s children still be classified as children of a spouse or domestic partner of Mrs Smith? The answer is no. A marriage or domestic partnership may be terminated in two ways, firstly through the divorce or the formal breakdown of the relationship and secondly, through the death of one of the parties. A requirement of being a spouse or domestic partner under the Inheritance (Family Provision) Act 1972 (SA) means you need to be legally married or together at the date of the death of the deceased.

As a result of this definition we can determine that the children of Mr Smith would not be eligible to make a claim under this provision because, although Mrs Smith and the biological father were married, they were not married at the date of Mrs Smith’s death, because at this time she was in fact a widow.

Therefore, it is prudent to seek advice from a solicitor in the event of the death of a family member. A solicitor is best equipped to provide you with appropriate advice related to the effects a death may have on your estate and how to best to structure your affairs in order to ensure your step-children are included in the division of your estate, or alternatively, to minimise them from making a claim against your estate. For advice on Wills and Estate matter contact myself, Maddalena Romano, Greg Welden, Jason Coluccio or the team at Welden & Coluccio Lawyers.

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How the family home can stay in an individual’s name for the purpose of the CGT main residence exemption yet the value can in someone else’s hands. It illustrates the pros and cons of asset divestment to the next generation during the lifetime of the senior generation and how it should and should not be done.

Doris and David Day married in 1975 at the age of 30. Doris was born into a wealthy family and as such never worried about money. David, on the other hand, was born into a hard working blue-collar family and left school at an early age to begin employment with his father as a carpenter.

David’s parents had never owned a property and David made it his goal in life to purchase a house for he and his family to live in.

Doris, in marrying David, went against her parents’ wishes who thought she should marry someone who would be able to financially care for her, as such Doris lost contact with her parents.

Later in 1975 Doris and David purchased a large 3 bedroom home on an ample block size of 800m2 at Ingle Farm in the Northern suburbs of Adelaide for $45,000 using predominantly funds David had saved over his years of working and a loan from the Commonwealth Bank of Australia. The home was purchased as joint tenants.

To cap off a big year for the Days, late in 1975 their only child was born Xanthia, who became known as X.

After such a big year for the Days trouble was brewing.

Doris’ parents convinced Doris that David could never financially cater for both her and X and that she should leave David and return to their mansion in leafy Burnside. Doris agreed and in 1980 she left the family home and took a young X with her.

A year later the divorce was finalised and the property settlement included a transfer of the Ingle Farm house to David, after all he had worked very hard for many years to purchase the house, there was no way he was going to lose it in the divorce.

The Sun would smile upon David again soon after when he bumped into his High School sweetheart Diana who soon after moved into the Ingle Farm property.

In 1982 David and Diana married and, as had been David’s trait, by the end of that year had twins with Diana, they were named Yvonne, who became known as Y and Zoe, who affectionately became known as Z.

David had learnt a thing or two as a result of his divorce and despite finding the love of his life, so in 1985 went to see a lawyer to draft a Will for he and Diana. David was hesitant to transfer the home to anyone and prepared a Will which gave everything to Diana upon his death or if she had failed to survive him them to his children Y and Z.

The lawyer in 1985 did not ask David if he had any other children than Y and Z, after all he had not seen X for 5 years and thought that drafting a Will giving his estate to Y and Z if his partner had died would be enough.

Life was great. Y and Z grew up to be intelligent and strong young women and in 2000, aged 18, they both enrolled in Law at University. Just when things were going great for David tragedy struck again and Diana was killed that year in a car accident on the Gallipoli Underpass on South Road.

David saw a lawyer later that year and despite being told there was no estate to administer, the lawyer asked David about his current Will and after further questioning informed the lawyer about X.

David was told that under his current Will X might mount an Inheritance Claim against his estate (and the house) if he died. This upset David as he had saved, improved and turned his house into his life’s achievement, a legacy he could pass to Y and Z with pride. David asked what he could do gift the house to Y and Z, defeat an inheritance claim by X and be confident he would have a place to live for the rest of his life.

In December 2000 David, now aged 55, executed a transfer of the house and created a legal life interest to himself and the remainder interest to both Y and Z for no value.

The Valuer General’s value of the house is $245,000.

Question 1:

What issues arise as a result of the creation of the life interest in 2000?

The transfer of a legal interest thereby creating the legal life interest is a dutiable event and stamp duty applies. This is very South Australia centric I know, as Stamp Duty is a State based collection the rules and laws that apply vary across the nation, however, it would seem consistent that such an event would be considered dutiable.

Using David’s life tenant factor (I will use the current table – which in South Australia is the 2010-12) at age 55 it is 0.70617.

As the property is valued at $245,000 the value of the life interest is $173,011.

That means the remainder interest is valued at $71,989 and Stamp Duty is payable on that amount – section 60 Stamp Duty Act (SA). That is $1,850 (using today’s calculation) plus a registration fee at the Lands Titles Office.

The creation of the life interest is also considered to be a CGT event A1 – disposal. The house is a pre-CGT asset having been purchased before 20 September 1985 and thus is disregarded. In any event, even if it was a post 1985 purchase this A1 event will still be disregarded as it was David’s principal place of residence.

The creation of the life interest and remainder interest also creates a GCT cost base calculation for both parties, the apportionment rules will apply and each of the life tenant and remainder interest owners will acquire their cost base at this time, the year 2000. That will have consequences much later on.

Question 2:

What issues arise when David dies in 2015?

In 2015 David will be aged 70 and the house is valued at $345,000.

Strictly speaking there is a CGT event C1 for David, that event occurring as a result of the life tenancy coming to an end however, as the life of the legal interest is measured by the life of it’s owner, upon their death coming to a legal conclusion, any CGT is disregarded as a result of section 128-10 of the Tax Act, disregarded as a result of his death.

There is actually no CGT consequence for the remainder owners, the proprietors of the remainder interest do not acquire any asset, their existing interest in the property is simply enlargened. The cost base of the remainder interest owners, who now own the freehold has not altered from the calculation that took place in the year 2000 when their original interest was created, that will of course become relevant when/if they then sell the property.

If the remainder interest owners decide to sell the property at that time CGT event A1 occurs, simple disposal, if they sold for $345,000 and their cost base, calculated in 2000 under the apportionment rule was, for example, $71,898 then their gain will be valued at $273,102 (less sales and associated costs of course).

In this instance there are 2 remainder beneficiaries who would likely split that gain, then on 50% deduction available they would EACH be seen to have made a gain of $68,275.50 which would be taxable at their individual rate.

If they were working at that time and earning say $80,000 then an additional amount of tax payable of $26,672 would apply – pretty hefty (and that’s each).

The calculation becomes even more complicated if Y & Z, or one of them, desired to reside in the property for a number of years after David’s death and then sold the property. It is likely a further calculation and apportionment would occur noting that one of the freehold interest owners used the property/asset as their main residence.

Question 3:

The biggest issues arise however when David, in these circumstances, instead of making things easy and dies, decides he wants to surrender his life interest early and provide the property to Y and Z, what are the consequences that arise in this situation?

David, still aged 70 in 2015, is fit and healthy and upon surrendering his life interest will be caught by further stamp duty event, duty will be payable upon the value of the life interest being transferred again using the relevant life tables.

In this instance the life tenant factor for David is now 0.49457.

The value of the property is now $345,000 hence the value of the life interest being surrender is $170,626 which equates to the payment of $5,658 plus some Lands Titles Office registration fees.

As is common in these circumstances David receives no benefit for the surrender of his life interest. Irrespective, CGT event A1 occurs and the market value substitution rule applies to determine the gain the life tenant makes.

There is still a question as to whether the property, being used for as the main residence of David, the then life tenant owner, still qualifies for a main residence exemption thereby absolving David from any CGT consequences. I believe it will apply, the legal interest to reside in the property (and giving rise to the gain) was used as the main residence and should therefore be exempt.

There will also be additional CGT consequences for the remainder interest owners. Unlike in the situation when David has died and Y and Z acquire the whole of the land without an additional cost base, when David surrenders his interest, usually for no value, the remainder interest owners will have a cost base in 2000 AND a cost base for an additional portion in 2015.

If Y and Z then sell the property, CGT event A1, the CGT consequences for them will be less significant than if David simply died.

Question 4:

Did the creation of the life interest defeat the inheritance claim of X?

In simple terms, yes it did.

On David’s death the life interest ceases and the remainder owners acquire the fee simple in totality.

If David owned nothing else of value then any inheritance claim that may have been brought by X will be nullified.

But didn’t X come from a wealth family, is it likely she would have no current financial need anyway which would hamper any claim she may have issued?

And then there is the anomaly of the notional estate in New South Wales. As the life estate was created in 2000 it is too far back for X to claw back into David’s estate for the purposes of an inheritance claim. If David had died only a few months after its creation then in New South Wales the notional estate possibility continues to exist.

Question 5:

Is there another was of achieving a good end result?

In 1985 when David and Diana drafted their Wills there was an option, subject to David being convinced it was a good idea, for David to transfer his entire interest in the property to Diana (assuming that is in 1985 the transfer of main residence between spouses or domestic partners free of stamp duty existed).

The Diana’s Will would set-up a life interest in the property if she ever pre-deceased David (which is what occurred), and then the remainder interest to Y and Z on David’s death.

There is no CGT event with Diana passing away and the creation of the life interest and remainder interests. The Legal Personal Representative acquires the asset via the Will at the date of her death in 2000 when the property is valued at $245,000 (market rate).

CGT events E6 and E7 do not occur where the Legal Personal Representative transfers the life and remainder interests because of the general exception in Div 128.

The main residence exemption continues to apply in this case to David because he was entitled to reside in the property by virtue of the terms of a Will, so if he surrenders his interest in 2015, despite Stamp Duty being payable, as seen previously, the main residence exemption would negate any gain made by David.

There is a risk of triggering a CGT event if the trustees transfer title other than in accordance with the will, akin to a surrender of life interest situation.

In addition, if the recipient of the life interest pursuant to the Will properly disclaims that interest (during the administration of the estate and prior to being absolutely entitled to it) then no CGT event occurs.

In addition, a greater benefit of dealing with the interest in a Will is to set out additional terms that apply, including when the legal interest concludes. Ordinarily the life interest would conclude upon death however in a Will additional terms could provide for the interest to end when the life interest owner declares that he no longer wishes to reside in the property or by reference to some other event.

Most importantly Taxation Ruling TR 2006/14 covers all of the situations that involve life interests.

For all your Estate Planning and Asset Protection needs:

Welden & Coluccio Lawyers

When dealing with the administration of a deceased estate it seems obvious that you need an actual deceased person!

The ordinary course of events would run as follows;

1. Make a will naming an executor;
2. Die;
3. Executor obtains a Grant of Probate;
4. Executor administers deceased estate.

Simple right?

As a lawyer, experienced in a great variety of Estate matters (many straightforward and quite a few complicated) I can certainly vouch for the fact that this is a predictable pattern which is rarely deviated from.

However, a 2015 change to the Probate Rules, now requires that a ‘Death Certificate’ is filed with an application when seeking a Grant of Probate.   Under normal circumstances this is not an issue; in fact, it is a routine part of the general administration that follows any death.   What many people fail to appreciate is that in order to issue a Death Certificate you need an actual dead body.  Of course you don’t need a great imagination to conjure up a range of situations where providing a corpse may be a challenge.

What happens then, if you don’t have one?

Clearly, the failure or inability to present a ‘Death Certificate’ will present roadblocks when it comes to obtaining a ‘Grant of Probate’.  This grant, declared ceremoniously with a rather attractive red seal, allows for the administration of the estate and a failure to have this seal may significantly delay the sale or transfer of real estate property?

Major headache?  Absolutely. . . although I would liken it more to a migraine.

A recent Western Australian Supreme Court case of Re Paul Allan Weeks dealt with an application by the wife of someone who went missing after boarding Malaysia Airlines flight MH370, to obtain an order from the Court that he had died thereby allowing her to deal with and administer his deceased estate.

It is fundamental to any application for probate to show that the person whose estate would be the subject of the proposed grant is in fact dead. That requirement is most commonly satisfied by the production of a certificate of death. A Certificate of Death, issued by the Registrar of Births, Deaths and Marriages in this State is evidence of the facts stated in it.  Without discovery of the body, a Death Certificate cannot issue unless a Court makes a presumption of death.

A similar situation like this arose a few years ago in South Australia when abalone diver, Peter Clarkson, went missing while diving. Mr Clarkson’s business partner, who had remained on the boat from which Mr Clarkson was diving, reported seeing Mr Clarkson attacked by a shark, but no part of his body was subsequently located.

There are legal differences between an order of a Court declaring death or a presumption of death, sometimes referred to as the 7 year rule (having not seen someone alive for 7 years can lead to an order of presumption of death).  The scope and nature of an application for leave to swear to death is summarised by some old texts as follows;

Where the applicant for a grant cannot swear in his oath to the death of the deceased, and there is no direct evidence of his being dead, but only evidence from which his death may be presumed to have taken place, application must be made for an order giving him leave to swear to the death. Such a presumption may arise: (1) from the disappearance of the presumed deceased at or after a given time, and from the circumstances attending such disappearance, or from his not having been heard of for a prolonged period by those with whom he might reasonably have been expected to communicate; or (2) from his having been on board a ship, which, from its non-arrival in port within a reasonable time, from the absence of tidings of any of those on board, and from other circumstances, is supposed to have been lost at sea; and similarly in the case of a missing or totally destroyed aeroplane.

As you can see, while Probate may be granted in the absence of a Death Certificate it is not achievable without delays and a certain rigmarole.  One does not need to think too hard to appreciate the numerous, similar applications occurring in different countries around the world as a result of the Malaysia Airlines disaster.