Wills & EstateS
Why do I need to make
a Will?
By making a Will you decide how your assets will be distributed
after your death and who will administer your estate. After your
death, your assets are frozen until the Probate Court issues a
certificate called a 'Grant of Probate' which confirms that you
have left a valid Will, and gives your executor legal authority
to deal with your assets.
If you don't leave a Will, then State Government
Law will decide who will inherit your assets and who can administer
your estate.
Beware of Home-Made Wills
and Will Kits
Homemade Wills can be worse than having no Will. If you have signed
anything as a will then after your death this must be submitted
to the Probate Court to check that the wording and signing complies
with all legal requirements and rules. If all of the rules are
not met the Court will ask for extra documents, which increases
legal costs, delays the finalisation of your estate, and your
Will may be deemed invalid.
“Will Kits” are designed for you
to fill in the gaps. They do not cover your individual circumstances.
If you are not aware of the legal requirements any mistakes will
not be discovered until after you die. It is false economy to
prepare your own Will and risk the possibility of your beneficiaries
having to pay increased legal costs and tax.
Your Will May Create
Unnecessary Taxes 
Taxation
Institute of Australia
The way your Will is worded can make the difference between high
taxes being paid or minimised. When a person makes their own Will
they are usually not aware of the taxation laws in relation to
deceased estates.
Capital Gains Tax
Capital gains tax may apply on the disposal of your assets by
your executors or beneficiaries. Research showed that 6 years
ago 80% of all people paying capital gains tax in Australia earned
less than $35,000 per annum.
Superannuation is Taxed
if Paid to Non-Dependents
Some of your family may pay tax if they receive your Superannuation
whereas others pay no tax on the same Superannuation. Some funds
do not allow “binding nomination forms” and whereas
the Trustee of the fund decides who receives your Super.
Estate Planning Maximises
your family’s Inheritance
Estate Planning is not just for the rich, it is for people who
don’t like paying unnecessary taxes. Careful estate planning
will ensure that your beneficiaries obtain the maximum benefit
from your assets at the minimum tax rate.
Example
LLOYD. Lloyd was a widower with an adult son and an
adult daughter. He owned a home unit in which he lived and an
investment unit, both valued at approximately the same value.
Lloyd used a “will kit” to make his will and believed
that his children would benefit equally from his estate.
Result: Within 12 months of Lloyd’s
death both units were sold. The daughter paid no capital gains
tax as she had inherited Lloyd’s residence. The son had
to pay $30,000.00 capital gains tax on the sale of the investment
unit.
Testamentary Trusts
Saves Taxes
A Testamentary Trust is a discretionary trust established by
a Will that only comes into effect after your death, and funded
by the assets of your deceased estate, superannuation or insurance
proceeds. The Trustee of the trust, who can be your spouse or
a child, has the discretion to distribute the income and assets
between beneficiaries that you have nominated in the will who
can be your spouse & children.
Avoid Penalty Tax Rate
for Minor Children
Children under 18 (a minor) who receive income that has not
been earned by them can only receive $643.00 per year before
they are taxed at penalty rates of:
- 66% on income between $643.00 and $1,446.00,
and
- 47% thereafter
- If a minor earns income from work they have
performed, or received as a beneficiary of a Testamentary Trust,
then it is taxed at normal adult tax rates, which are:
- Tax free for the first $6,000.00 (instead of $643.00)
- and then at normal individual rates starting at 17% (instead
of 66%)
Examples
JILL AND PETER. Jill and Peter together had 3
minor children, and Peter had an adult child from a former
marriage. Peter had $60,000 in Superannuation and an Insurance
Policy of $300,000.00. He left his Superannuation to his
adult child and the Insurance to Jill. As Peter’s
adult child is not a tax dependent 33% of the superannuation
was paid in tax. If Jill or the minor children had inherited
the superannuation there would have been no tax to pay.
Tax paid on Superannuation by adult child
is $19,800
Tax paid on Super if paid to spouse & minor children
is NIL
Jill invested the Insurance proceeds at 5% & received
$15,000 pa. When added to her other income she is now taxed
at the highest rate, 48.50%. If Peter had created a Testamentary
Trust in his Will, Jill could distribute the income equally
between her 3 children (which she can use for their maintenance
education and welfare), The children can earn $18,000.00
between them, before any tax is paid,
Tax that will be paid each year by Jill
is $7,275
Tax that would be paid if income distributed through trust
is NIL
MRS SMITH. Mrs Smith
gave her estate to her son Bob who has an unemployed wife
and 3 minor children. He uses the income to educate his
children. He is on the highest tax rate and loses 48.5%
of the income in tax. Mrs Smith's failure in her will to
give Bob the option of a testamentary trust means that Bob
is unable to distribute income to his wife who is paying
no tax and to take advantage of the concessional tax rates
for minor children receiving testamentary trust income.
The income earned each year from the inheritance is $25,000.00,
If the income was distributed through a Testamentary Trust
to Bob’s wife and children they could between them
earn $24,000.00 each year before paying any tax. The tax
on the remainder will be at normal adult tax rates beginning
at 17%.
Tax that is paid each year by Bob is $12,125
Tax payable if distributed through a testamentary trust is
$170
Who Should You Appoint
As Executor and Trustee
In every Will you must appoint an Executor and a Trustee. Who
you should appoint will depend on your individual personal family
circumstances.
You can pay a fee to a solicitor to make your
Will and appoint a relative, friend or professional adviser.
The Executor can instruct a solicitor of their choice to attend
to some, or all, of the Executor’s duties on their behalf.
A solicitor will charge for work done but does not charge a
percentage of the estate.
Trustee Companies Charge
Commission
Trustee Companies make Wills for no charge if you appoint them
as Trustee. After your death Trustee Companies charge commission
on the gross value of the whole estate. There is a sliding scale,
which can be as high as 8% of your gross estate and up to 7.5%
on income earned by your estate.
If you appoint a private Executor they have
a personal choice to employ whichever solicitor, accountant,
real estate agent or financial planner that they wish.
When a Trustee Company is appointed beneficiaries
have no choice. If they are dissatisfied they cannot terminate
the Company’s instructions and go elsewhere.
Why should You Review
your Will regularly
The Law, your circumstances and your beneficiaries' circumstances
are constantly changing. You should review your will regularly
to ensure that it continues to reflect your wishes. It is important
to review your will in the event of births, deaths, separation,
divorce, marriage, illness, bankruptcy and financial circumstances.
It is cheaper to identify
mistakes before you die
It is easier and cheaper to ensure that your will is correct
before you die than it is to try and fix mistakes after you
die. Professional estate planning can identify potential problems
and fix them. Without estate planning your wishes may not materialise.
Example
Sue’s Will Unintentionally Wasted
Her Savings
Sue and her deceased husband had worked hard, made good use
of sound financial advice, saved well and lived frugally but
did not consider estate planning. Sue left her estate equally
to her children, Alison, Beth & Clark.
Alison’s share: Alison and her husband were divorced.
His business was in financial difficulty. During the marriage
Alison had nothing to do with her husband’s business
but she had signed a personal guarantee to the bank. Alison
was relying on her inheritance to bring up her 2 minor children.
Alison’s husband knew that Alison would inherit from
her mother’s estate and alerted his creditors of this.
Result: Alison’s ex-husband’s
creditors received the whole of Alison’s share in her
mother’s estate. None of Sue’s estate will benefit
Alison or her 2 infant children.
Beth’s share: Beth is a compulsive
gambler who is unemployed. Her inheritance was lost within
one year.
Result: The beneficiaries of 1/3 of Sue’s
estate were the casino & poker machine operators.
Clark’s share: Clark is a Doctor and like many other
professionals and company directors, he carries the risk of
being sued by patients.
Result: As Clark’s inheritance is
not in a testamentary trust it could be lost to a litigious
patient sometime in the future.
