Estates and Wills

Life in the time of COVID-19

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What is the process for Wills, Enduring Powers of Attorney and Appointments of Enduring Guardian

On the 24th March, 2020, The COVID-19 Legislation Amendment (Emergency Measures) Bill 2020 [NSW] was passed

At present the person signing the document and the witness must be physically present and sign at the same time, which is not practical in the time of COVID-19 but at Russell Kelly & Associates we have the facilities to accommodate this requirement.

The Law Society of NSW is working with the Government to enact regulation(s) in accordance with the regulation-making power as soon as possible. We will monitor the situation and update this blog. Pending introduction of these regulations, the current requirements and ‘good practice’ for revocation and execution of Wills, Enduring Powers of Attorney and Appointment of Enduring Guardian documents are as follows.

Wills

  • To be valid, a Will should be in writing and signed by the Will-maker and two independent witnesses.
  • The witnesses should be over 18 years of age and should not be the same person as the Executor(s), or any named or potential beneficiaries contemplated by the Will.
  • The will-maker should sign the document first, following by the two witnesses.  
  • All parties should use the same pen.
  • The witnesses should write down their names, addresses and occupations.
  • The Will should be dated.

In light of the COVID-19 situation, it may not be possible or practical to locate two independent witnesses, which begs the need for the contemplated regulations.

Pending the introduction of these new regulations, if you realize that you need to update your Will for one reason or another, we do have the facilities to accommodate witnessing of documents

A Will that is not executed in accordance with the prescribed legislation, is commonly referred to as ‘an informal Will’. The Court may admit an informal Will to Probate provided that:

  • It is ‘a document’;
  • The document sets out the author’s wishes or intentions for what he/she wants to happen in the event of his/her demise; and,
  • The Court is satisfied that the Will-maker intended the document to operate as his/her Will.

It is always recommended that you have your Will professionally prepared. Writing one out yourself is a risky exercise which may result in misinterpretation of your wishes, prolonged litigation and extra costs to your estate.

Enduring Power of Attorney

An Enduring Power of Attorney should be signed by the principal (you) and witnessed by a prescribed witness. Your appointed attorney(s) do not require to have their signature(s) witnessed.

A “prescribed witness” means:

  • a registrar of the Local Court, or
  • an Australian legal practitioner, or
  • a conveyancer, or an employee of the NSW Trustee and Guardian, who has successfully completed a prescribed course of study; or,
  • a foreign legal practitioner.

If you need to urgently revoke a Power of Attorney document you have in place, it is crucial that you tell your appointed attorney(s) that you have revoked the document, preferably in writing (for example, by email or post), please contact our office for any help required.

Appointment of Enduring Guardian

An Appointment of Enduring Guardian document should be signed by you and witnessed by a prescribed witness. Your appointed guardian(s) will also need to have their signatures witnessed by a prescribed witness.

Similarly, a revocation of an existing Appointment of Enduring Guardian should be in writing and witnessed by a prescribed witness. A copy of the written revocation must be provided to the guardian(s) it removes.

We will continue to monitor further announcements and issue an update when the new regulations are introduced. In the meantime, if you need to update your Will, Enduring Power of Attorney or your Appointment of Enduring Guardian documents, please contact our office

When do I need a Witness

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Do you need a signature from a witness in order for a contract to be valid.

Most documents and contracts do not require a witness for them to be valid.  But wills and documents that need to be registered with NSWLRS (Land Registry Office) have legal requirements in relation to witnessing.

Who can be a witness to a document?

The person you choose to witness a document should have no financial or other interest in the document that is being signed. An independent adult (over 18 years old) witness who does not benefit from the document is the best solution.

Ideally a witness will observe the relevant party or parties signing the document and then the witness will sign the document as proof that they witnessed the parties signing. The witness is generally not required to know or understand the contents of the document.

It is also important that documents such as wills have clearly regulated requirements regarding the number of witnesses and the nature of the relationship between the parties and the witness. Most States in Australia will not allow witnesses that are mentioned in your will, either as beneficiary or executors. The witnesses must be of legal age (18) and they must be mentally capable of managing their property and making their own decisions.

Contact our office to get a clarification on witness protocol.

What is a Testamentary Trust

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“Testamentary” is a legal term that means the issue relates to the making of a will. A “trust” is where one person holds the legal title of property for the benefit of another person (not themselves). A “trustee” is the person who take the ownership in “trust” for another person (known as the “beneficiary”). Under the trust the trustee owes a legal financial duty to the beneficiary.

A testamentary trust is established under a will to appoint a trustee to use property for the benefit of the beneficiary in the way that the will specifies. Many people, especially those of wealth, create trusts to protect assets or to minimise tax. In the same way a trust can be set up under a will. These trusts can last for many decades following the date of death.

Why a trust?

A trust is a legal device that separates the ownership and control of an asset, which beggars the question, why is this useful in the first place?

Rather than an asset passing into the personal name of a beneficiary (as it does in a traditional will), under a testamentary trust the asset passes to a trustee who holds it in trust for the beneficiary. The trustee then decides how (or if) the beneficiary will receive income and capital from the trust. From an estate planning perspective, testamentary trusts offer almost endless flexibility for accountants and financial planners.

What it can achieve

Let’s take the example of a couple with a child who has an intellectual disability. They naturally worry what will happen to the child after their death. One of the ways to deal with the child’s financial security is to set up a testamentary trust. In this way the testator (the person making the will) can direct how the assets will be used after their death.

Another example might be where a parent is concerned about the marital situation of a child, and wants to ensure that only their child and not the child’s spouse inherits their wealth, or that the inheritance does not become subject to a claim under the Family Law Act.

The advantages include:

  • maintaining social security entitlements;
  • ensuring that assets pass to children even if a surviving spouse remarries or the child divorces;
  • capital gains tax and income tax advantages;
  • providing for children with an intellectual disability or mental illness; and
  • protecting assets where a beneficiary becomes bankrupt.

Discretion of trustees

Under the trust the trustee can either be given specific instructions on how the money will be spent, or they can be given a discretion.

Often it is better to allow for a discretion because:

  • it is the most flexible type of the trust;
  • it may provide the best chance of the beneficiaries’ actual future needs being met;
  • it may best allow for the best interests of the beneficiary to be met.

Choosing a trustee

This is a significant decision and should not be made without serious thought. The person you choose will have a lot of responsibility, and should have some financial management skills (or access to those skills).

You can choose:

  • an individual.
  • Private trustee companies
  • Private trustee companies are regulated by law.

The advantages of using these companies are:

  • they are professional;
  • they are independent;
  • they are companies and therefore, unlike an individual trustee, can continue to act as trustee into the future.

The disadvantages are:

  • the trustee will not have a personal relationship with the beneficiary;
  • the company will charge.

It is possible to appoint an individual as a co-trustee with the company.

Individual Trustee

The main advantages of an individual trustee are:

  • you can appoint someone with a personal relationship with the beneficiary (in a discretionary testamentary trust it can be the beneficiary);
  • it may be cheaper.

The main disadvantages are:

  • the individual may not have sufficient expertise;
  • there can be a conflict of interest

Will & Estate Planning – Top Ten Questions

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1. Should I make a will?

Everyone should have a will. A will is the only way you can tell others how you want your assets to be distributed after your death. It is the only way you can provide for people who may depend on you financially, e.g. children.

2. Can I leave a child out of my will?
You have to be very careful about doing this. Children may be able to challenge your will if you don’t make adequate provision for them. And it’s no good including a term in the will that anyone who challenges the will loses their inheritance. This would not be valid.

3. Does it matter if I am very sick when I make the will?
As long as you have the mental capacity, it’s OK. But it’s a good idea to get a statutory declaration from a competent doctor to prove that you understood what you were doing when you signed the will.

In some States a court can make a will for you in certain circumstances, if you don’t have sufficient “mental capacity”.

Can I make a testamentary trust with a DIY kit?
No. You must see a lawyer. Consider the issues in the fact sheets carefully and ten make an appointment, armed with your research.

4. Can anyone be a witness?
No. The witness should not inherit anything under the will, or be your spouse/de facto. It is also best that the witness not be anyone who is married to a person who inherits under the will. It is sometimes possible to have a will declared valid if it does not conform to the technicalities, but it is far better to do it properly in the first place.

5. What happens to debts?
Unfortunately for those who survive you, any debts that you have while you are alive remain as debts.

6. What if I don’t have a will?
If you die without making a valid will, you leave what is known as an “intestacy”. This means you have not validly disposed of some or all of your assets.

Many people believe the Government takes their assets if they die without a will. This isn’t completely true. It could only happen if you have no living next of kin. However, if you die without a will, your assets will be distributed according to a legal formula. This might mean that your assets do not end up with the person you would have chosen. It also means that you have no control over who distributes your assets.

7. Who arranges the funeral?
Funerals could be arranged by anyone, but they will be paid for (or reimbursed) by the executor – the person who has the legal responsibility for this task. Nevertheless, it is far better to have dealt with the issue beforehand – if there are instructions in the will, but it is not read till after your funeral, you may not get what you intended for your funeral.

8. Do I need a lawyer?
It’s always better to get a lawyer to make your will. Lawyers are covered by indemnity insurance, which means that beneficiaries can take action against your lawyer’s insurer if they miss out on an inheritance because of an error.

9. Will the guardian we appoint for our children be appointed after we die?
Not necessarily, the Courts have the final say, but if you follow the guidelines we suggest and make an appropriate choice, then your choice will be persuasive.

10. Can I leave a particular piece of jewellery to someone?

Yes, but be sure it can be identified by the executor (you may want to take a photo) and the description should be incorporated into the will.

Family trusts: are your assets protected

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A family trust can form an important part of planning in your will. This can include thinking about protecting the assets you leave behind and also helping your loved ones deal with the financial consequences of inheriting your estate. So, what is a testamentary trust and how are they used?

What is a testamentary trust?

According to the Australian Tax Office (ATO) definition, a testamentary trust is a trust which is established according to a person’s instructions in their will. That is, the trust does not exist until the person who has made the provision in their will passes away.

At this time under the terms of the will, the beneficiaries could be given the option to inherit their assets within a testamentary trust, rather than inheriting them directly.

Establishing a testamentary trust effectively allows you to “ensure that a trust over your assets is created on the day of your death, which means that rather than your assets being distributed directly to your beneficiaries, they are held for their benefit by a trusted individual or organization”.

There are a number of different kinds of testamentary trusts, although in estate planning, commonly a testamentary trust is discretionary, which means the trustee has discretion as to which of the beneficiaries named share in the capital or income of the trust fund.

Why would you leave instructions in your will to set one up?

A discretionary testamentary trust is not for everyone. However, there are some benefits conferred by the structure that make it a good option in some cases.

The benefits most commonly cited are:

  • tax effectiveness; and
  • protection of the bequeathed assets

Tax effectiveness

Say a couple has two children and either the husband or wife passes away. Under a standard will, the one spouse would leave all of their estate to the other spouse and vice versa. Usually if both spouses pass away then they will provide for the estate to be divided equally among their children.

In the above scenario, where only one of the spouses passes away, then the surviving spouse would inherit all of the estate’s assets.

The surviving spouse will then have to pay tax on any income and capital gains earned from those assets at his or her marginal tax rate, meaning that person’s tax bill could rise significantly and any unearned income distributed to children under the age of 18 would be subject to a penalty tax rate.

Where there are young children or grandchildren under the age of 18, however, then inheriting assets within a testamentary trust can be more tax effective for the family.

This is because Division 6AA of Part III of the Income Tax Assessment Act says that 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 2012/13 and 2014/15) and marginal rates of tax will apply to the child.

What this means

If the spouse who passed away in our example left an estate of $1m invested and it returned 10%, or $100,000, during the 2014/15 tax year and if the surviving spouse already earned a taxable income of $75,000 that year, then ignoring the Medicare levy, the surviving spouse would have to pay tax on an income of $175,000. This equates to a tax bill of $52,697.

If, however, the will included the provision that the whole of the estate was to be left to the surviving spouse as trustee of a discretionary testamentary trust, with the beneficiaries of the trust being the surviving spouse and the couple’s two children, then the income would be split. If the income was split equally then it would look like the below (rounded to the nearest dollar):

Beneficiary Taxable income Tax liability
Surviving spouse $75,000 + $33,333 $28,030
Child 1 $33,333 $2,430
Child 2 $33,333 $2,430

This is because each child is entitled to the $18,200 tax free threshold, with the amount over this taxed at 19 cents in the dollar. In addition to this, they would qualify for the low income tax offset of $445.

So, this equates to a family tax bill of $32,890 – a saving of $19,807.

Jonathan Philpot, specialist wealth management adviser at HLB Mann Judd, says that the other big tax advantage is where there is a large amount of unrealized gains with the inheritance – say a large share portfolio.

“This is because the estate is one tax payer so the marginal tax rate for one person applies, whereas if those shares are transferred into a testamentary trust and then all the shares are sold it may be possible to distribute the capital gains, say, between three people, which would reduce the capital gains tax.”

Protection of assets

The other reason commonly cited for establishing a testamentary trust within a will is protection of assets; that is, the desire to ensure that assets remain within the family for the benefit of direct family members.

Philpot says that in his experience, while the benefits of flexibility in terms of distributions covered above is attractive, often more important to his clients is added asset protection in the event of things like future marital breakdowns.

“It’s more about protecting your wealth so it only goes to your lineal descendants and there is no worry about half of your assets going to a child’s ex-spouse, which tends to be what people prefer,” Philpot says.

Protection against a child’s bankruptcy can also be a motivating factor in establishing a testamentary trust as assets are owned by the trust rather than becoming the direct property of the child.

Another instance where a testamentary trust may be used is to provide for a child with a disability, allowing for the assets to be used for the benefit of that child who may not have the capacity to handle financial matters following their parents’ death.

What to watch for

Philpot cites a number of things to consider before establishing a testamentary trust. One consideration is the need to understand at what level of assets it becomes worthwhile to establish a testamentary trust. Generally, testamentary trusts provide the greatest benefit for larger estates with multiple children, Philpot says.

Another is working out who will act as trustee of the trust – of which there can be more than one. For example, a trust may be established where one trustee is independent, such as a lawyer, accountant or other arms-length professional, and one trustee is the primary beneficiary of the trust.

The reason those making a will may want to consider appointing an independent trustee is to ensure all beneficiaries’ best interests are looked after and that distributions are not influenced by things like family politics. For this reason, it can provide an extra degree of protection over assets.

Philpot says that it’s important when considering the structure to speak with an expert – such as a specialist estate planning lawyer.

read more https://www.mywealth.commbank.com.au/strategies/testamentary-trusts–what-are-they-and-when-can-they-be-used–infocus201406