There are many tax implications arising from a death. One important object of a comprehensive estate plan is to ensure tax liabilities are minimised when death inevitably occurs.

Estate assets are a person’s individually owned assets at the time of their death.

Non-estate assets are assets a person has control over, or has a right to benefit from, but does not individually own at the time of their death.

Different tax considerations apply to estate assets and non-estate assets. Estate assets are subject to tax rules that apply specifically to deceased estates. General tax laws apply to non-estate assets (such as assets held in a family trust) relevant to those assets and transactions arising from those assets.

Here are a few common examples of how failing to plan might lead to an unexpected and unwelcome tax liability:

1. Generally a capital gains tax exemption applies to sale of a primary residence during a person’s life. But what happens when a person’s primary residence is transferred to an executor or a beneficiary? The exemption only applies when specific conditions, are satisfied. Failing to understand these conditions, and where applicable including appropriate provisions in a will may result in a tax liability.
2. Superannuation death benefits are tax free, but only if paid to persons that are a deceased member’s “dependants” under tax laws. The tax levied upon payments made to “non-dependants” under tax laws, depends upon the component parts of the death benefit. The tax payable could be as high as 30 percent plus the Medicare levy. Proper planning may identify opportunities to structure a person’s affairs in such a way that minimises tax payable on death benefits.

The Cost

The cost of estate planning varies depending on the complexity of a person’s circumstances and their wishes for the transition of ownership and control of assets.

It also depends on which estate planning documents are necessary to implement a person’s wishes.

A comprehensive plan involves much more than the preparation of a will. It also addresses all non-estate assets and often involves drafting testamentary discretionary trusts and formulating strategies to protect assets from claims – both during the administration of an estate and subsequently, once a beneficiary has received an inheritance.

Some individual documents forming part of an estate plan may cost just a few hundred dollars. That may be all that’s required in some circumstances. However, a more comprehensive plan for a client with substantial assets, a desire to minimise taxes and protect legacies from claims,  may cost several thousands of dollars to implement.

Our free Blueprint Session outlining general information, or one-hour consultation with specific recommendations applicable to your individual circumstances, enable us to collect necessary information to provide a fixed price proposal relevant to a client’s needs.

The Value

The information that appears above, under the heading “who needs an estate plan” highlights some problems arising from a failure to plan.

You should also consider the value an effective estate plan represents, in light of opportunities to:

1. Save beneficiaries thousands (sometimes hundreds of thousands) of dollars in tax.
2. Avoid significant depletion of estate assets from a family provision claim (estate challenge).
3. Place an asset protection shield around the assets gifted to your beneficiaries, safe from challenges by third parties.

We welcome the opportunity to demonstrate how effective estate planning can create significant value relevant to your specific circumstances.

Preparing your own will is fraught with danger. Also, considering the threats ignored and opportunities missed by DIY will-makers, the perceived savings often represent false economy.

Often DIY will-makers don’t get past first base, as they don’t understand which assets in their ownership or control are included in their deceased estate. Only assets falling within a person’s deceased estate are available for distribution under a will. While DIY will-makers often assume all their assets have been covered, significant assets are often ignored.

Tremendous estate planning opportunities exist to maximise the value and longevity of a beneficiary’s legacy. Opportunities which are typically missed by DIY will-makers include:

• mitigating the impact of will challenges
• minimising tax payable on the transfer of estate assets and on subsequent income generated from those assets
• safeguarding gifted assets from loss or depletion where a subsequent challenge is made against a beneficiary.

Estate planning can be very complex. The drafting of will clauses, even in the most basic will, must be very precise and drafted with a full appreciation of the law. Otherwise, intended provisions may be ambiguous or completely void, resulting in disputes and depleted estate assets being available for distribution after the cost of litigation is deducted.

Countless court cases illustrate mistakes made by DIY will-makers.

Can you spot why the following example clauses might result in a major headache?

1. “I leave my house to A, all the house contents to B and the balance of my estate to C”
2. “I leave $100,000 to the St Mark’s Cathedral”.
3. “I leave all my estate to my 4 children A, B, C & D in equal shares”.
4. “I leave my son X the sum of $10 as we have been estranged for the last 20 years. I leave the balance of my estate to my daughter. Y”
5. “I leave my business to X”.
6. “I leave everything to my spouse A, but if she dies before me, then everything to my children”.

How did you go? See comments below

There are no second chances when it comes to making a will. The will takes effect once you die. It’s too late to make corrections once you’re gone.

What did you miss?

1. What if there was an expensive sports car in the garage? Is that considered part of the house contents? Who gets the car, B or C?
2. How can you leave money to a building?
3. What if A & B are independent adults and C & D are dependent minors. If the estate included death benefits of $500,000 received from a superannuation fund, along with $500,000 in other assets, an opportunity to save thousands in tax has been squandered by failing to structure correctly.
4. Leaving a token amount to someone you are trying to exclude does not work. X may challenge the estate and get significantly more than $10. If the dispute settles at mediation, the legal fees depleted from the estate could be $50,000.00. If the matter goes to court, the legal fees could be substantially more.
5. If the business is operated through a family trust (as many small businesses are), it does not technically belong to the will-maker and can’t be left in his / her will. Separate estate planning documents must be prepared to deal with the business.
6. If A is a second or third wife and the will-maker has various step-children, was it intended that the step-children be included?

There is no clause you can insert in a will, which prevents an eligible person from making a claim.

You can, however, take measures to lessen the impact of a claim, reduce a claimant’s chances of success, or even make their claim futile.

Examples of strategies that may be implemented, as part of an estate plan include:-

1. Transferring an asset to a preferred person, during your life.
2. Transferring a property from your sole name, into joint names with your preferred recipient means the property does not form part of the deceased estate and is not included in the pool of assets subject to a claim.
3. Assets held in a discretionary trust do not form part of your deceased estate and are not included in the pool of assets subject to any claim. Accordingly a strategy may involve transferring assets into a trust during your life and ensuring your preferred person takes control of that trust upon your death.
4. Preparing a Binding Death Benefit Nomination in relation to superannuation death benefits enables payment directly to a dependent and accordingly the benefit does not form part of your deceased estate and is not included in the pool of assets subject to any claim;
5. If a Binding Financial Agreement is made with a spouse (including a de facto) during your life, the content of that document is taken into account by a court if the surviving party to the agreement makes a claim. This may be particularly relevant to people in blended families that seek to protect the interests of children of a first marriage.

Note, things get a little more complex in NSW, as that State’s Succession Act enables a court to treat certain property transferred within 3 years prior to a person’s death (not forming part of their actual deceased estate) as forming part of a deceased person’s “notional” estate. When a claim is made, the court looks at both the actual deceased estate and the notional estate, when assessing the pool of assets potentially available to a claimant.

A will governs the distribution of assets held in a deceased person’s estate. It does not determine what happens to non-estate assets.

Non-estate assets are assets a person has control over, or has a right to benefit from, but does not individually own at the time of their death.

It is not always straightforward to determine which assets fall outside the estate. Some examples follow:

1. The deceased’s share of a property that is held as a joint tenant (in this case the surviving joint tenant/s are entitled to the deceased’s share irrespective of what the deceased’s will provides).
2. Superannuation death benefits – (distribution of benefits is governed by the fund deed and the trustee of the fund is the most likely decision maker regarding how benefits will be disbursed unless a valid Binding Death Benefit Nomination has been prepared, in which event the deceased fund member decides how benefits will be disbursed).
3. Assets held in a discretionary (“family”) trust – (the trust continues to operate upon the death of a beneficiary and the trustee decides which surviving beneficiaries will benefit from the trust and receive distributions from the trust).
4. Insurance benefits when the nominated beneficiary differs from the deceased – (the beneficiary is entitled to the benefits and accordingly the deceased’s will is not relevant).
5. Franchise Assets – (the franchise agreement will typically govern what happens to these).

For starters, every person over the age of 18 years, that has legal capacity, should have a will.

Even young adults, with no significant assets, may have significant wealth to pass upon their death. This often occurs because of compulsory superannuation and in particular, because life insurance is often incorporated into superannuation death benefits. So in addition to having a will, most adults should also plan on how their superannuation death benefits are to be paid.

People that have a business or assets in a family trust need to consider how control of those assets will transition upon their death.

Some problems that arise, where a will has not been prepared or other associated planning matters have not been addressed, include:-

1. Assets owned or controlled by a deceased person do not get divided and dealt with in the manner he or she would have preferred. This may particularly apply in the case of blended families.
2. Disputes may arise leading to costly litigation and significant depletion of assets;
3. Failure to have a will or associated estate planning documents may result in considerable delay and expense associated with estate administration.
4. Significant taxes, that could lawfully be avoided, may become payable by beneficiaries.
5. Inherited assets may be squandered by a beneficiary or lost due to claims by creditors or estranged partners.

A claim (known as a family provision claim) may be made to court against a deceased person’s estate by an eligible person, such as a spouse or child of a deceased person (or other eligible person as determined by law)

Where a claim is successful, a will-maker’s wishes are essentially overruled by the court and the claimant is awarded provision (or extra provision) from the deceased person’s estate (in NSW, including their notional estate). In order to receive provision (or extra provision) from an estate, the claimant generally needs to show the court funds from the estate are necessary for their ongoing maintenance or support.

Eligibility to claim differs slightly from State to State, however below is a guide to eligibility requirements in Queensland, Victoria and New South Wales:

In Queensland, the following persons are eligible to make a family provision claim in accordance with the Succession Act (Qld):

1. The deceased’s spouse (including a de facto);
2. The deceased’s child (including biological, adopted and step children); and/or
3. A dependant that has been wholly or substantially maintained by the deceased at the time he / she died (such as a parent or any person under the age of eighteen who was being maintained by the deceased, regardless of their relationship with the deceased).

In Victoria, the following persons are eligible to make a family provision claim in accordance with the Administration and Probate Act (VIC):

1. A person who was the spouse or domestic partner of the deceased person at the time of the deceased’s death
2. A person who was a former Spouse or domestic partner of the deceased person as at the date of death, who was able to take proceedings against the deceased under the Family Law Act and who did not take such proceedings and was prevented by the death from taking the proceedings, or, who did take proceedings and could not finalise them because of the death of the deceased;
3. A carer, if they were in a “registered caring relationship” as defined under the Family Law Act 1975 with the deceased.
4. A child of the deceased being:

–                 under 18 years of age;

–                 A full time student aged between 18 and 25;

–                 with a disability (as defined in Section 90 of the Administration and Probate Act);

–                 a step-child, or adopted child of the deceased, subject to the categories listed above;

–                 an adult child who can demonstrate he or she is not capable by reasonable means of adequately providing for their own proper maintenance and support; or

–                 an “assumed child”. This is where the child was treated by the deceased as a natural child.

5. Grandchildren (including step grandchildren or adopted grandchildren) of the deceased, provided the grandchild was dependent on the deceased in the same way that a child is dependent on a parent.
6. A member of the household of the deceased person, provided they have been wholly, or partly, dependent on the deceased for their proper maintenance and support.

In New South Wales, the following persons are eligible to make a family provision claim in accordance with Section 57 of the Succession Act 2006 (NSW):-

1. The deceased’s spouse at the time of death (including a de facto spouse);
2. The deceased’s former spouse;
3. The deceased’s child;
4. A person who was wholly or partly dependent on the deceased;
5. A person who was a grandchild of the deceased, or a member of the household of the deceased
6. A person who lived in a close personal relationship with the deceased at the time of death.

Are there ways to avoid a challenge against your will?

There is no clause you can insert in a will, which prevents an eligible person from making a claim.

You can, however, take measures to lessen the impact of a claim, reduce a claimant’s chances of success, or even make their claim futile.

Examples of strategies that may be implemented, as part of an estate plan include:-

1. Transferring an asset to a preferred person, during your life.
2. Transferring a property from your sole name, into joint names with your preferred recipient means the property does not form part of the deceased estate and is not included in the pool of assets subject to a claim.
3. Assets held in a discretionary trust do not form part of your deceased estate and are not included in the pool of assets subject to any claim. Accordingly a strategy may involve transferring assets into a trust during your life and ensuring your preferred person takes control of that trust upon your death.
4. Preparing a Binding Death Benefit Nomination in relation to superannuation death benefits enables payment directly to a dependent and accordingly the benefit does not form part of your deceased estate and is not included in the pool of assets subject to any claim;
5. If a Binding Financial Agreement is made with a spouse (including a de facto) during your life, the content of that document is taken into account by a court if the surviving party to the agreement makes a claim. This may be particularly relevant to people in blended families that seek to protect the interests of children of a first marriage.

Note, things get a little more complex in NSW, as that State’s Succession Act enables a court to treat certain property transferred within 3 years prior to a person’s death (not forming part of their actual deceased estate) as forming part of a deceased person’s “notional” estate. When a claim is made, the court looks at both the actual deceased estate and the notional estate, when assessing the pool of assets potentially available to a claimant.