Proper Estate Planning ensures that your estate goes to those you care about, and not the Tax Man.
Does a “Simple Will” protect your family?
Many people believe that their affairs are simple. You may wish to simply leave everything to your spouse, and if they die before you, then to your children. Simple. Right? Unfortunately, this is rarely the case.
This Manual has been prepared to alert you to some of the pitfalls of preparing a “Simple Will”. A “Simple Will” may seem to fulfill your needs on the surface, but there are often many other issues that you may not have considered.
Ask your Accountant, Adviser and Tax Lawyer how you can be certain that your estate goes to the family – and not the Tax Man.
Are ‘mistakes’ in homemade Wills common?
This is not an unusual case. There are a lot of problems that can arise from people creating Wills without legal support.
Sadly, a number of non-law firms are putting Wills online. It seems very alarming that they are offering legal documents without being a law firm themselves and having the lawyers available for advice. Estate Planning is an extremely serious and important process and should be handled by experts.
The Law Society of New South Wales agrees with us. They write:
“Some people choose to make their own Will. We think that’s a mistake. Although writing your own may seem easy enough, the law around Wills can be complex.”
Estate Planning is taxation and superannuation complex
When you make a homemade Will, you risk not drawing it up properly or not expressing your intentions clearly enough. It’s also easy to create a tax liability which your beneficiaries will have to pay. Finally, a DIY Will is more likely to be contested, which means the whole process of giving away your assets could end up in Court.
That’s why, when you make your Will, it’s important you have it drafted by someone who understands the law and can advise you on the best way to make sure your assets end up where you want them to. And that means engaging a solicitor.”
Do homemade and Post Office Wills work?
Homemade and Post Office Wills are not tax-effective. They are also often informal. Or, do not work at all.
Will the Tax Man smile when I die?
Imagine $1.5 trillion “up for grabs!” That is the projected total value of estates from Australians who die in the next 20 years. The question is, who gets that money: the Tax Man, Trustee Companies or your family?
It all depends on your Accountant, Adviser, and Tax Lawyer coming together to carry out Estate Planning before you die.
Careful planning can reduce Capital Gains Tax, Stamp Duty and other death taxes. The most basic protection is to include a Testamentary Trust in your Will. Most Wills made before 1998 don’t have even this protection. A 3-Generation Testamentary Trust and Superannuation Testamentary Trust provides the best protection for your family.
Does it coincide with your wishes? Who benefits from your property when you die? A Government imposed Will rarely corresponds with your wishes as to how much you leave the Tax Man!
Children under 18 in Wills?
If you die leaving orphans then you can recommend Guardians to the Family Court in your Will.
You can consider:
- Does your Trustee conserve your estate for your children’s education?
- At what ages do your children receive the trust capital and in what amounts?
- If a child dies before you, who then receives the property? Your grandchildren, your other children or charities?
- What happens if one of your children is bankrupt or of unsound mind when you die?
Capital Gains Tax on your family home when you die
Death and Probate Duties were abolished by 1981. However, in 1985 the Federal Government introduced Capital Gains Tax. Capital Gains Tax now earns the Australian Federal Government more money on deceased estates in a single year than in the cumulative history of death duties.
Contrary to what Treasurer Paul Keating told us back in 1985 when he introduced CGT, Capital Gains Tax and Stamp Duty are applying more often to your family home. Even your pre-1985 family home can be subject to Capital Gains Tax.
A 3-Generation Testamentary Trust is the most effective safeguard to put into your Will to dampen the effects of Capital Gains Tax and Stamp Duty.
This is an example of a Will without a 3-Generation Testamentary Trust:
Tom always wanted to build his retirement home on the canals where he had purchased a block a few years ago. Unfortunately, Tom died before realising his dream to build on the block.
As a dutiful husband, Tom left everything to his much-loved wife Jenny.
Little did Tom know, but Jenny never shared Tom’s vision to live by the canals. Their 2 children did share Dad’s vision. Jenny decided to give the children the block of land. After all, it was now interfering with her aged pension and pharmaceutical entitlements.
The gift made the children excited. The block had increased in value to $175,000. However, the children were less excited when they got a Stamp Duty bill of over $4,200.
Later, Jenny gets a notice from the Tax Office to pay Capital Gains Tax of
$28,000.00 on the “disposal” of the block. (“But I just gave it away!” she lamented)
The nightmare continues when Centrelink advises Jenny that the gift is subject to the depravation rules.
Tom could have put 3-Generation Testamentary Trusts into his Will. Tom’s Will then leaves everything to his wife, children and extended family. Tom also makes his wife Trustee of the 3-Generation Testamentary Trust. Jenny controls the assets but does not own the assets for tax purposes.
Does that mean that Tom’s estate goes to Tom’s mother-in-law and Uncle Harry? Do the children have control over what Jenny does with her husband’s estate?
No, to both questions.
Jenny has full control of who gets what from the estate. With a Testamentary Trust, Jenny can give everything to herself or give some things to the children, grandchildren or any of the extended family as she so wishes. With her Accountant’s help, Jenny can take advantage of the lower income tax rates paid by some members of her family. Now that is flexibility.
CGT on pre-1985 family home at death
The ATO is angry that the family home is exempt from CGT. It tries to claw your family home back into the CGT regime, whenever it can.
Intangible capital improvements made to a pre-CGT asset are separate to that asset. Including an improvement to a family home. The ATO confirmed this in Taxation Determination TD 2017/1.
The ATO Taxation Determination TD 2017/1 is entitled:
“Can intangible capital improvements made to a pre-CGT asset be a separate asset for the purpose of subsections 108-70(2) or (3) Income Tax Assessment Act 1997?”
Even a pre-1985 family home can suffer CGT at death
The Determination sets out the Commissioner’s position on whether intangible capital improvements are a separate CGT asset from the pre-CGT asset to which those improvements are made. This is provided that the relevant thresholds are satisfied. Subsection 108-70(2) provides that if an improvement is made to a pre-CGT asset then that improvement is treated as a separate asset. This is if its cost base is more than the improvement threshold. The amount is increased by the inflation rate each year. Further, it is more than 5% of the capital proceeds from the event. The ATO separates works undertaken on pre-CGT properties and subjects the improvements to CGT.
Let’s say you do an improvement (‘new asset’) on your family home. You then run a business from home. The new asset is subject to CGT. Therefore, you pay CGT on that new asset when you sell the home. The new asset, by law, forms part of your home. This would include a new bedroom or garage. But under CGT it is considered a separate asset. A very unfair outcome.
Flexibility: 3-Generation Testamentary Trust?
In the above case, Jenny could have merely distributed the block to her children through Tom’s Will. Even if the transfer took place years after Tom’s death, the transfer is direct from Tom to his children. Therefore:
- No stamp duty is payable because Jenny did not own the land – she merely controlled the land in the Testamentary
- There is no “disposal” of the Therefore, Jenny does not have a Capital Gains Tax bill – CGT Generation Skipping.
- Alternatively, the asset could have been kept out of Jenny’s hands to protect her Centrelink
Is it only minors who benefit from the 3-Generation Testamentary Trust Will?
In a Family Trust and Bare Trusts the Tax Man penalises your children, grandchildren and beneficiaries. This is when they under 18 years of age and receive trust income over $416 per year. Above this amount, minors pay tax at the highest marginal tax rate (66% in some instances). This is under Division 6AA Income Tax Assessment Act 1936.
But nevertheless, there are over 800,000 Family Trusts in Australia. They are still popular. This is because you can hunt down adults who are on low marginal tax rates. This is for the current financial year. And next year you can hunt down and use the low marginal tax rates of others.
In a 3-Generation Testamentary Trust Will there is an exemption to the draconian Division 6AA. Section 102AG states that minors in your 3-Generation Testamentary Trust Will are exempt from Division 6AA.
Therefore, minors can take advantage of the low marginal tax rate of an adult.
However, even without this wonderful Section 102AG tax break the 3-Generation Testamentary Trust Will is still worth having. The section 102AG tax exemption for minors is just icing on the cake.
The Section 102AG exemption is only one of the many advantages of a 3-Generation Testamentary Trust.
Other advantages of a 3-Generation Testamentary Trust Will
The 3-Generation Testamentary Trust Wills are not just about saving tax. Other advantages include:
- Divorce Protection Trust
- Bankruptcy Trust
- Protects your right to sell you parents’ home up to 3 years after their death – tax free
- Special Disability Trust – and still get Centrelink benefits
- Reducing the 32% tax on the dead person’s superannuation
- Considered Person Clause – to stop people from challenging your Will
Rich enough for a 3-Generation Trust Will?
Of all the people who paid Capital Gains Tax, 80% earned an income of less than $80,000.
Capital Gains Tax is a tax on the middle class.
The only people who don’t need a Testamentary Trust in their Wills are people who feel guilty for not paying enough tax during their life! Even if your only major asset is your family home, you can gain tax advantages from a Testamentary Trust.
Estate Planning is not for the rich. It is for people who don’t like paying taxes.
Pay Capital Gains Tax on my family home?
Paul Keating told me in 1985 that my home was exempt from Capital Gains Tax
How times have changed. A lot has happened since then. Within one generation, every asset in Australia falls within the Capital Gains Tax regime. Even the family home is not automatically exempt.
You can own property with another person either as Joint Tenants or Tenants in Common. When a joint tenant dies, his or her interest goes automatically to the survivor(s) – not via the Will.
In the past, it was popular for married couples to buy assets, such as the family and investment homes, together as Joint Tenants. Capital Gains Tax legislation does not recognise Joint Tenancy in its calculation of Capital Gains Tax. Generally, holding assets as Joint Tenants is now considered dangerous.
By owning property as Tenants in Common and including a 3-Generation Testamentary Trust in your Will, you can provide your Accountant with the flexibility to significantly reduce any Capital Gains Tax that may be payable on your home.
Tax Man takes my Superannuation when I die?
Adult children can pay 32% in tax on your super.
Instruct your Tax Lawyer to include a Superannuation Testamentary Trust in your Will to wash out the 32% of tax.
Unless you decide otherwise, Super goes to who your Trustee decides.
Can I do Estate Planning after I die?
If there is no Testamentary Trusts in your Will then your family may be able to set up a Post Testamentary Trust after you die. A Post Testamentary Trust has limits that do not exist for a Testamentary Trust. It is a poor second best option.
How come my Partner loses the Aged Pension when I die?
Your gift may partially or fully reduce Centrelink and other pensions.
“I’ll just renounce the gift because I really want to keep my pension for the medicines subsidy. Even better, I’ll just keep the gift & give it to my children”.
Even abandoning a gift under a Will presents complications for pensioners. It leaves that pensioner open to the so-called “deprivation” rules of Centrelink. Centrelink considers the gift an “asset”.
‘Gifts’ reduce pensions?
Why is Centrelink so tough on Pensioners? The philosophy is that those who can provide for themselves should. Give careful thought on how to leave assets to pensioners. Your well-intentioned wishes may result in an Aged Pensioner losing all or part of their entitlements. Estate Planning can help.
Public Trustee as executor?
You appoint an Executor in your Will. Executors handle your affairs after you die. Most people appoint their spouse and then their children when both parents are dead. You can appoint alternative executors in case the executors are never born or are under 18 years of age or dead. Be careful appointing Professional Trustees and Lawyers as Executors. They charge to administer your Estate.
My children don’t get on. Should I appoint all of them?
If your children don’t get on together then you should appoint them all as executors. Contrary to popular rumour, the job of an executor is one of servant – not master. The executor can’t boss the beneficiaries. The beneficiaries, however, can boss around the executors. Therefore appoint all the children if they fight.
If the children all love each other and get on well, then appoint them all as your executors.
What does an Executor do?
Your Executor arranges the funeral, applies for Probate, pays debts and distributes your assets according to your Will. These are not normally difficult jobs and the Executor can always get professional help.
Many trusts are put in your Will:
1. 3-Generation Testamentary Trust to reduce the defacto death duties
2. Bankruptcy Trust if a beneficiary goes bankrupt
3. Maintenance Trust if a child is too young or can’t look after money
5. Superannuation Testamentary Trust to reduce the 17% or 32% tax on your Superannuation when it goes to adult children
6. Divorce Protection Trust
The Divorce Protection Trust delays or stops any capital or income going to the beneficiary who is suffering divorce or separation proceedings. It is designed to reduce the opportunity for the Family Court to get its hands on your money.
The Divorce Protection Trust sits dormant in the Will until needed. The Divorce Protection Trust activates for the benefit of the married person and that person’s children and grandchildren. It removes that person’s power to control the trust while they are suffering the separation.
The Divorce Protection Trust benefits the current and succeeding generations. This helps protect the assets from the Family Court.
Can my Will be challenged?
Family Law and the Family Maintenance Provision Act affect married and de facto couples alike. Your spouse (and sometimes your ex-spouse) is entitled to make a claim on your estate.
Even your parents, children and grandchildren can make a request to the court for some of your estate – irrespective of how little or how much you leave them in your Will. A small gift of say $1 000 left to a wayward son does not stop that son from challenging your Will. It is unwise to make such gifts as it gives the person more rights over your Will.
An Estate Planning strategy reduces the chances of these people being successful in their request to the court.
Stop government meddling?
Sadly, your spouse gets Alzheimer’s disease at 61 years of age. Your children have left home. You decide to sell the large family home. You want to buy a smaller home closer to amenities that can help your spouse.
The family home is in both your names. Your spouse no longer has the legal capacity to sell the home. While there are many different types of Power of Attorney, you have none. Therefore, your only option is to apply to a government instrumentality for permission to sell the home.
During this Tribunal procedure, your children are asked to swear in court as to whether you are a “spendthrift”. Other people such as friends, other family members and even nosy neighbours may be contacted by the government to see whether they support your application. At the hearing, you are cross-examined as to whether you are a “good person” to look after the affairs of your partner.
Eventually, this government department tells you that you are allowed to sell your home. However, it can direct that you hold your spouse’s half of the proceeds in a separate bank account. If you need to buy toilet paper for your partner then you may need to provide a receipt.
Without all the proceeds from the sale of the home, you cannot afford to buy another property.
Overcome the government’s meddling with both a Power of Attorney and a Medical Power of Attorney. (Medical Treatment Decision Maker in Victoria.)
Please read the article written by Professor Brett Davies titled Estate Planning: beware of failing to consider business structures.