Brian Hor

You may be aware that toward the end of 2021, in a private ruling^[1], the ATO confirmed the tax payable in respect of a gift of superannuation to a member’s estate where that super is to be held in a testamentary discretionary trust.

With superannuation being the second main asset after the family home for many families, increasingly superannuation death benefits are being paid to a deceased estate.  This means that the deceased person’s Will directs what will happen to the superannuation.  But what if the Will includes Testamentary Discretionary Trusts (TDTs)?

1. Can superannuation be paid into a Testamentary Discretionary Trust?

Yes, it can, if paid to the deceased person’s estate on their death.  However, who the beneficiaries of the TDT are will determine whether or not any tax will be payable on the payment.

2. Will tax be payable on the superannuation payment?

If all the beneficiaries of the TDT are restricted to “tax dependants” (most usually the surviving spouse and any children under 18 years old) and no other persons, then it will be received by the TDT free of tax. This type of TDT is often known as a Superannuation Proceeds Trust.

However, normal TDTs have a wide range of beneficiaries which may include non-tax dependants such as independent adult children, grandchildren, parents, etc.  So if a superannuation death benefit is paid into such a TDT, then as non-tax dependants may be able to benefit from the super payment, it will not be received tax free.

Instead, it may be taxed – at 15% on any taxed component, and up to 30% on any untaxed component.

3. Should my Will have a Superannuation Proceeds Trust?

Whilst it may be tempting to think that having a Superannuation Proceeds Trust in your Will solves any tax issues, it should be understood that a Superannuation Proceeds Trust is not always appropriate, such as in the following circumstances:

• if the surviving spouse and/or dependent children receive all the super death benefit under a Binding Death Benefit Nomination (BDBN) – since no part of the death benefit will go into the estate
• if there is no surviving spouse and no dependent children (e.g. all the children are over 18 years old and financially independent) – so if the super was paid into the estate, it cannot be paid to a Superannuation Proceeds Trust even if the Will includes it
• if there are multiple children but only some are under 18 years old (this is often the case with “blended families”) – depending on the overall estate strategy, it may not be appropriate if only some of the children can receive the super tax free and the others cannot, without other measures in place to equalise their inheritances.

4. What about my Townsends Will?

If Townsends Lawyers prepared your TDT Will for you, we would most likely have taken the above factors into account to determine whether or not to include a Superannuation Proceeds Trust in your Will.

It’s important to remember a Will is not a static document and we recommend they be reviewed every 2-3 years or whenever there are major changes to succession or tax laws or a major life event such as marriage, divorce, property purchase/sale, birth, death or material inheritance.

The ruling is available at 1051920326857 | Legal database.^[2]

By Brian Hor, Special Counsel, Superannuation & Estate Planning

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[1] https://chstrategies.cmail19.com/t/r-l-tjscik-kucilyhhi-y/
[2] https://chstrategies.cmail19.com/t/r-l-tjscik-kucilyhhi-j/

The post Superannuation and testamentary trusts appeared first on AdviserVoice.

Brian Hor

From 1 July 2021, if a non-arm’s-length capital gain is made by a segregated current pension asset on or after 1 July 2021, it will be treated as non-arm’s length income (“NALI”), meaning that it will be taxed at the highest marginal rate of 45% under section 295-550 of the Income Tax Assessment Act 1997 (“ITAA97”).

This will happen because an amendment to Treasury Laws Amendment (2020 Measures No 6) Act 2020 will take effect from 1 July 2021 to correct an anomaly created by section 118‑320 of the ITAA97, which had the effect that any capital gain made from a segregated current pension asset was disregarded so that a capital gain arising from such assets would not be NALI.

Before that date, a non-arm’s length capital gain which relates to an asset supporting a retirement phase income stream did not cause NALI due to a legal loophole, in that NALI only applies to ordinary income or statutory income and a “capital gain” as such is actually neither ordinary income nor statutory income. On the other hand, a “net capital gain” is brought in as statutory income, so that a net capital gain (if it is non-arm’s length) can be NALI.

In this regard, section 118‑320 of the ITAA97 states that if a gain is made from a segregated current pension asset, the gain is simply disregarded. If the gain is disregarded, it cannot become a “net capital gain” and therefore cannot become statutory income so that it also cannot become NALI.

The amendment corrects this situation by introducing subsection 118-320(2) which will ensure that non-arm’s length capital gains in relation to segregated current pension assets are no longer disregarded and are therefore treated as NALI. Under paragraphs 295-385(2)(a), 295-390(2)(a) and 295-400(2)(a), to the extent that the ordinary and statutory income of a complying superannuation fund is NALI, the income is not exempt current pension income.

This means that the opportunity to take advantage of this legal loophole is closing, and fast. For instance, if an SMSF purchased an asset on non-arm’s length terms (e.g. by acquiring it at a discount to its market value) and the SMSF is fully being used to pay an account-based pension and the asset is a segregated current pension asset, and the trustees plan to shortly sell the asset, the timing becomes of the essence.

Put simply, if the trustees enter into a contract to sell the asset before 1 July 2021, any capital gain arising will be disregarded and will not be NALI. On the other hand, if the trustees enter into a contract to sell the asset on or after 1 July 2021, the capital gain would not be disregarded and thus would be treated as NALI.

Given the unprecedented surge in the Australian residential property market since the beginning of this year, there may well be SMSFs holding residential property assets which have grown significantly in value (especially if they were acquired during the property price slump which happened between July 2017 and May 2019 during which the median house price dropped by 8.4% and with prestige markets being hit even harder with an average price drop of 22.5% in Sydney and 32.1% in Melbourne, according to Core Logic data).

If it is desired for a SMSF to sell such a property asset in order to take advantage of the current boom conditions, the decision to sell either before or after 1 July 2021 may have a huge impact on the after-tax position of the fund post sale.

Let’s look at a simple example. Three years ago, Henry’s SMSF (which is 100% in pension phase and has segregated pension assets) acquired a residential property that was business real property of his aunt Thelma for $400,000, whereas its true market value at the time actually was $700,000.

After being approached by numerous real estate agents who have shown him convincing market research that in the current “fear of missing out” climate the property (which just happens to be a very desirable prospect for a first home buyer eager to get into the property market) is now “conservatively estimated” to be worth a handsome $1.4 million, so Henry decides to put it on the market. As properties are currently only taking around 14 days on the market before they are sold, Henry has some leeway in terms of when to list the property for sale.

Ignoring stamp duty, legal fees and other usual costs of purchase and sale, on the face of it the net capital gain for the sale of the property at $1.4 million would be a cool $1 million. If Henry goes to auction and sells the property before 1 July this year, his fund will have made that million dollars totally tax free! On the other hand, if he waits until on or after 1 July to sell the property, then the fund will make a net capital gain (after deducting the one-third CGT discount) of $666,667. The NALI tax payable on that, at 45%, will be $300,000 – just for delaying the sale until after 30 June.

Therefore, the trustees of any SMSF in full pension phase which is sitting on segregated pension assets which may produce a capital gain if sold should seriously consider whether or not to sell the assets before or after 1 July 2021, because the NALI tax consequences if they are sold on or after that date may be significant – and the deadline is fast approaching.

The post Pension asset CGT exemption from NALI ends 30 June 2021 appeared first on AdviserVoice.

Brian Hor

Many lawyers talk about ‘blended families’ as if they are all pretty much the same. Like, if you’ve seen one, you’ve seen them all.  But that is not the case at all.

There’s the classic style of blended family where two persons (who may be widows/widowers and/or divorcees) come together bringing with them one or more children from their previous relationship.

Or it could be that only one person brings children from a previous relationship.

In either of the above situations, the couple may also end up having one or more children together – who may be significantly younger than the other children from their respective previous relationships.

It could be that the couple are similar in age, or it may be that there is a significant age difference between them (particularly in the case where the older person has children of a previous relationship and the younger of them does not). Sometimes the younger spouse is also younger than the children of their partner.

Each of the above situations can be further complicated by issues such as:

• children being adopted, or not being adopted, particularly in a “step” relationship
• a previous relationship having ended due to divorce rather than by the passing of the previous spouse
• the previous and / or current relationship being legal or de facto
• LGBTQIA relationships
• multiple de facto spouses and their respective children are involved
• one of more children having special needs
• animosity between children of different relationships of their parents / step-parents
• one partner having significantly more or less personal wealth than the other
• assets being held in structures such as family trusts and self-managed super funds
• the State or Territory in which the parties are domiciled
• the types and locations of the assets in the estate of the Willmaker, which will determine which laws of which State or Territory will apply in the event of a challenge to the Will.

In each of the above scenarios, the objectives and obligations of the person who is the Willmaker in relation to their spouse and the children of either and/or both of them may differ enormously, and having regard to diverse considerations, such as:

• how close or otherwise the new spouse is to the children of the Willmaker
• the length of any spousal relationship
• whether or not a new spouse made any significant financial or non-monetary contributions towards their living arrangements and capital assets
• the legal ownership of assets
• promises made by one spouse to the other.

When someone is in a blended family, their Will needs to reflect the complexity and fullness of their individual situation – especially where it comes to dividing up that person’s estate amongst their intended beneficiaries and working out what happens when certain persons pass and in what order (such as assuming that the children will survive the spouse, and that grandchildren will survive the children, and so forth).

In other words, how will the assets of the Willmaker “cascade” down the generations – and what if someone who is expected to survive another person passes before they do instead, causing the assets (or a significant portion of them) to “flow” in a different and unexpected direction. This is especially possible in a blended family situation.

An example of this would be to apply the standard Will approach to a classic blended family situation. Suppose each parent made a Will that simply said that when I die, everything goes to my spouse, but if they do not survive me then everything goes to my children in equal shares. If the father dies first, the wife inherits all of his assets, then when she passes all of her assets (which also includes her husband’s assets) will flow to her own children on her death and none of the husband’s assets would flow to his own children. A similar and equally unfair result occurs if the wife dies first, because when her husband dies then her own children all miss out on the flow of inheritance. Clearly a more sophisticated approach is needed here to bring a more equitable result for all the children once both parents have passed.

Then there’s different legal implications arising from the different types of beneficiaries in the blended family, which can vary greatly depending on the State or Territory in which the Willmaker is domiciled. In particular, the so-called “notional estate” rules under the NSW Succession Act 2006 can easily lay waste to many strategies that might work in other States and Territories to protect the Willmaker’s assets from a claim against their estate.

For instance, if the Willmaker and the family home are located in Queensland, if the Willmaker wishes to ensure that their surviving spouse receives the family home without fear of it becoming exposed to a family provision claim by one of their children from a prior relationship, an effective strategy to prevent the family home from forming part of the Willmaker’s estate (and therefore potentially exposed to a successful claim under family provision laws) is for the Willmaker to hold it as joint tenants with their spouse. On the death of the Willmaker, the family home will not form part of their estate but will instead pass by right of survivorship to their spouse, and not be subject to any potential claim made against the deceased estate.

However, if the Willmaker and the family home are located in (or sufficiently connected to) New South Wales, it may be possible in the course of a family provision claim against the estate for the Court to utilise the “notional estate” provisions to “claw back” the interest of the deceased in the family home from the surviving joint tenant and into the estate so as to be able to satisfy a successful claim.

So, when considering estate planning for a blended family, just remember that each blended family situation is as individual as the Willmaker themselves, and that if you’ve seen one blended family – you’ve only seen one blended family.

By Brian Hor, Special Counsel, Superannuation & Estate Planning

The post When you have seen one blended family – you’ve seen one blended family appeared first on AdviserVoice.

Brian Hor

We often want certainty. In a world where there is increasing conflict between family members after a parent dies, and a greater propensity for children to challenge a deceased person’s estate, anything that promotes greater certainty with regard to estate planning is usually seen as a good thing.

Same story with SMSF death benefits. With a plethora of recent Court cases where spouses, children and others have been challenging death benefit nominations and going against the expressed wishes of the deceased fund member, the focus has generally been to tighten up the wording of Binding Death Benefit Nominations (BDBNs) to make them unassailable – especially since the case of Munro & Anor v Munro & Anor [2015] QSC 61 in which a BDBN was overturned due to a technicality in the manner in which the member (who paradoxically was a lawyer) attempted to nominate his estate as the sole recipient.

Is certainty the main game? What if the client’s family is not one which is racked by internal division and bitterness and strife, but is actually a close-knit family in which each member can trust the other members of the family to have each other’s best interests at heart, and who are more inclined to honour and respect their parent’s wishes rather than not?

Particularly where it is a traditional non-blended family where there are no natural conflicts of interest between children of different relationships and their respective step-parents?

In fact, it is often the case that a couple in such a relationship simply wish to give everything to each other outright, knowing and trusting that the survivor of them will do the right thing for their children. In which event, perhaps the binding shackles of certainty are the last thing the couple would want to impose on each other.

So instead of making a BDBN in favour of each other, with a back-up nomination to the member’s estate if their spouse does not survive them, the couple might decide to make no nomination at all.

Consider these points:

• In the absence of any BDBN, a SMSF is essentially a very special kind of discretionary family trust. Yes, in order to gain the benefit of generous taxation concessions under the super regime it is restricted in terms of who and how many persons can be members, trusteeship, what investments it can make and who can contribute to it and how much – but otherwise the trustee is essentially the trustee of a special discretionary family trust with an unlimited perpetuity period. Particularly when the taxable component of any death benefit, if paid to an adult child, is likely to be small, allowing a surviving spouse as remaining trustee (or director of the trustee) the flexibility to allocate their deceased partner’s death benefit flexibly amongst themselves and their children (and no-one else, unless an interdependency relationship is established) and / or to the deceased partner’s estate can be a very good thing, with minimal adverse or even positive tax consequences.
• Such flexibility can also mean that liquidity issues as regards the payment of a death benefit can be more easily managed, as the surviving spouse being the remaining trustee / director can strike the optimal balance between paying out a lump sum, a pension or a combination of both from a fund liquidity perspective. Once six member funds are permitted, this ability to manage liquidity issues is likely to be enhanced given that there are more fund members making more contributions to the fund – especially if they are all members of the same family.
  This flexibility can be especially useful where the members’ family expands over time to include grandchildren and even great-grandchildren. By not putting into place a BDBN (especially a non-lapsing one) there is the ability for the surviving spouse trustee / director to direct superannuation death benefits to the estate of the deceased partner so as to be able to benefit those grandchildren and great-grandchildren through the terms of the deceased partner’s Will, where such persons otherwise could not receive a benefit directly from the SMSF.
• Coupled with an appropriately worded trust deed, such flexibility can also permit the use of strategies to take into account unexpected changes in family circumstances. Suppose you have a client couple who have three children and they all get along famously. The couple are members and directors of the trustee of their SMSF. One spouse dies, and the survivor is concerned to protect the deceased partner’s death benefit from business exposures (and possible future romantic exposures) of the survivor. So the survivor as the remaining trustee / director determines in their discretion to pay themselves a pension which ends upon their death, bankruptcy or re-marriage (whichever first occurs) and thereafter the capital is divided equally between the three children.

So, at the end of the day, when considering the structuring of death benefits for a client, and of course depending on the specific circumstances of the client’s family, it may just be that the potential benefits of flexibility will outweigh the comfort of certainty.

However, as with any strategy, the decision as to whether or not to put into place (or revoke) any binding death benefit nominations will need to be reviewed from time to time as family dynamics change.

By Brian Hor, Special Counsel, Superannuation and Estate Planning

The post SMSF death benefits – the case for flexibility appeared first on AdviserVoice.

Brian Hor

Recently the government passed new laws which limit the treatment of income from a testamentary trust paid to minor beneficiaries of the trust as “excepted trust income” (which would be taxed at adult tax rates, including the all-important tax free threshold of currently $18,200 per year) only to property transferred to the testamentary trust from the deceased’s estate or from property that represents an accumulation of income from property from the deceased’s estate. These new provisions apply to property acquired by or transferred to the trustee of a testamentary trust estate on or after 1 July 2019.

Much has been said by various legal commentators about the possible impact of the new laws where a superannuation death benefit is paid to a deceased estate. However, a recent publication by the Australian Taxation Office has revealed a potentially much greater impact of the new laws on the investment strategies of a testamentary trust.

The Taxation Office have now publicised their own interpretation of the new laws in QC 16509, which as last modified on 26 Jun 2020 provides the following example where a discretionary testamentary trust borrows money:

Example: Rental property acquired with borrowed money, trust distribution and money from deceased estate

Johnston Trust is a testamentary trust established under a will into which $500,000 is transferred from the deceased estate on 22 August 2019. A trustee of a family trust then makes a capital distribution of $500,000 to Johnston Trust. The trustee of Johnston Trust borrows $1 million from a bank and purchases a rental property for $1.9 million. The remaining $100,000 is used as working capital for the rental property.

In the 2019–20 income year, the trustee of Johnston Trust receives $50,000 of net rental income. The net income of the trust for that year is $50,000. Michael, who is under 18 years old, is made presently entitled to 50% of the $50,000 net income, being $25,000.

Michael’s excepted income is $6,250. This amount is the extent to which the $25,000 of income resulted from the $500,000 transferred from the deceased estate (worked out as $500,000 ÷ $2 million × $25,000). The remaining $18,750 of income is attributable to assets unrelated to the deceased estate and is not excepted income.”

Notice how the formula used by the Tax Office specifically limits the excepted income to income generated from the original $500,000 transferred from the deceased estate, and excludes the income generated not just from the family trust capital distribution of $500,000 to the Johnston Trust but ALSO from the borrowing of $1 million from the bank.

This represents a HUGE departure from the long-accepted treatment of income derived by a discretionary testamentary trust from assets acquired using borrowed monies.

Ever since the landmark case of The Trustee for the Estate of the Late A W Furse No 5 Will Trust v FC of T 91 ATC 4007 – way back in 1991, nearly 30 years ago – it was accepted that a discretionary testamentary trust could borrow money to acquire an asset, and the income generated by that asset would be treated as excepted trust income if paid to minor beneficiaries of the trust.

To refresh the memories of those of us who were practising tax law back then (and to educate those of us who were not even born back then), the salient facts of the case were as follows:

• The trust was established under a Will;
• Using assets of the deceased estate and further borrowed funds, the trustee acquired units in a unit trust, the trustee of which performed services for a law firm;
• Income from those units was included in the net income of the testamentary trust in 1982 and 1983. The trustee distributed some of that income to three minor beneficiaries of the trust. The Tax Office assessed the trustee in respect of that income under Division 6AA of the Income Tax Assessment Act 1936 (“ITAA36”) at the rate of 46%;
• The trustee lodged objections which were disallowed by the Tax Office and which decision was affirmed by the Administrative Appeals Tribunal;
• On appeal to the Federal Court, it was held that for section 102AG(2)(a)(i) of ITAA36 to operate, it is not necessary that the assessable income of the trust estate be sourced from the property of the deceased. The trustee borrowed funds and used the borrowed funds to invest in such a way to derive assessable income from that investment. In the words of Justice Hill, “the consequence of such an investment was that assessable income was derived by the trust estate so that that income was “assessable income of the trust estate” and clearly enough the trust estate was one that resulted from the will of the late Mr Furse”. Therefore, the trustee’s objections were allowed.

This long-standing principle has now been overturned (according to the interpretation of the Tax Office at least), so that now any income arising from assets acquired on or after 1 July 2019 using monies borrowed externally by a testamentary trust will no longer be treated as excepted trust income if paid to minor beneficiaries of the trust, and therefore will be taxed at the “penal rates” under Division 6AA which reduces a prescribed person’s tax-free threshold from $18,200 to just $416 and then taxes any additional trust income between $417 to $1,307 at 66% and thereafter at 45%.

What does this mean for Estate Planning and Investing with Testamentary Trusts?
Until the interpretation of the Taxation Office in relation to the new provisions is tested in the Courts, estate planning advisers and their clients need to take into account the implications of the new laws in relation to borrowings made by discretionary testamentary trusts.

For instance, the trustees of any testamentary trusts that were considering borrowing funds to acquire new investments (particularly in the current climate of historically low interest rates and a depressed residential real estate market which is likely to suffer even greater falls due to factors such as the impact of COVID-19 on immigration levels and the forthcoming reductions in government assistance to mortgage holders) will need to take into account the possibility that any income generated from such investments may not attract the testamentary trust tax concessions in relation to excepted trust income when distributed to minor beneficiaries of the trust – which may represent a significant reduction in the after tax return from such investments.

Also for estate planning advisers thinking about incorporating discretionary testamentary trusts in the Wills of their clients, it may be important to consider having “opt out” provisions built into the Will, so that in the event that at the time of death the share of the estate of the testator which is to be allocated to a testamentary trust under the Will is insufficient to make the trust financially viable, having regard to the ability of the trust to generate income without borrowings (or with borrowings where the proportion of the resulting income which relates to the borrowings will not be treated as excepted trust income when distributed to minor beneficiaries) vis a vis the ongoing accounting and other costs of maintaining the trust structure, the client’s beneficiaries can effectively bypass the trust and receive their inheritance as a direct gift from the estate.

For expert legal advice and assistance with all types of wills and with issues such as those considered in this article, please contact Townsends Business & Corporate Lawyers.

By Brian Hor, Special Counsel, Superannuation & Estate Planning

The post Borrowing strategy banned from testamentary trust concessions appeared first on AdviserVoice.

Brian Hor

Whether you just own your own home, or you have an expansive investment property portfolio, you need to have a Testamentary Trust Will.

A Testamentary Trust Will is simply a Will that contains one or more special trusts that act very much like a discretionary family trust that is only set up after you die. Like a family trust, the trust has someone who holds and controls the trust property (the Trustee) on behalf of a range of other persons who will benefit from the trust (the Beneficiaries). The trust is also discretionary, in that it is entirely up to the trustee to decide each year which one or more of the beneficiaries will receive any income generated by the trust assets, and who will receive the remaining assets of the trust when the trust eventually ends.

So, what are the advantages of having a Testamentary Trust Will?

First, flexibility. A simple old-fashioned Will divides a deceased person’s assets (their “estate”) into fixed shares (for example, between their children in equal shares). Easy and simple to understand – however, this will also mean that their children will pay tax on any income generated by their inheritance, at their own marginal tax rate (which could be up to 45% plus 2% Medicare Levy). Now, suppose instead that each child was able to receive their inheritance in a Testamentary Trust. This would mean that they could allocate the income from their inheritance each year between themselves and / or other family members, such as their spouse and their own children. It also means that they could allocate the assets in their trust flexibly as well between the different beneficiaries of their trust, depending on their individual needs. This flexibility allows for changes in personal circumstances so that distributions of income and assets can be made to suit each child’s needs from time to time.

Second, that inherent flexibility together with special tax concessions that apply to Testamentary Trust income gives rise to significant ongoing taxation benefits. Under section 102AG of the Income Tax Assessment Act 1936, any income received by a minor (aged under 18 years) beneficiary from a Testamentary Trust is treated as “excepted trust income” and taxed as if that beneficiary was an adult. This means that adult tax rates apply, so that the first $18,200 received by that beneficiary from the trust is tax free – every year. (This is unlike a normal family trust set up during your lifetime, where income paid to minor children from the trust over $416 per year attracts “penalty” tax rates of 66% up to $1,307, with the balance being taxed at 45%.)

For example, say Tom’s Will leaves two investment units directly to his wife Jill. Say they earn a combined rent of $50,000pa. If Jill is on the top tax rate, she will pay tax and Medicare Levy of $23,500 just on that income. However, if instead Tom’s Will leaves the units to a Testamentary Trust for his wife and 3 kids, if the kids earn no other income then the $50,000 rent can be split equally between them and they pay no tax at all – a saving of $23,500 in just one year.

If this situation continued for 10 years, the savings would add up to $235,000.

Third, by having assets held in a discretionary Testamentary Trust, each child’s inheritance is protected from lawsuits that might arise from their own business or profession, or from their creditors if they fall on hard times. This is because it cannot be argued that the child owns the assets, as they are just one of a number of potential beneficiaries of the trust who only get anything if the trustee says so. This also means that the assets of the trust are protected from the bankruptcy of any particular beneficiary of the trust. It can also provide meaningful protection of the trust assets in the event of the child experiencing a relationship breakdown, with the Family Court often treating the Testamentary Trust as a financial resource instead of part of the matrimonial property that is available for division by the Court.

The only drawbacks of having a Testamentary Trust Will are that it is usually more expensive to draw up than a simple old fashioned Will (although for many couples with children, the once-off legal fee could be less than just one year’s premiums for their top private hospital and extras health insurance), plus each year (after you die) the trust has its own tax return to lodge (that may cost around $1,500 – $2,000 per year). But if the tax savings are anything like in the above example, clearly the Testamentary Trust will more than pay for itself.
By Brian Hor,  Special Counsel – Estate Planning & Superannuation

The post Why every property investor needs a Testamentary Trust Will appeared first on AdviserVoice.

Brian Hor

As our population gets older (and lives longer), the likelihood that an elderly parent will need to go into a nursing home is increasing.

Usually this requires having to make a payment to the nursing home for the privilege of being accommodated there – either by way of a Refundable Accommodation Deposit (“RAD”) or for those who are unable to come up with a lump sum contribution a Daily Accommodation Payment (“DAP”).

As one might gather from its name, the RAD is refundable on the death of the person in care, or if they move out of the nursing home. The RAD in this sense is effectively an interest free loan to the nursing home. On the person’s death, the RAD must be refunded to their deceased estate within 14 days of a grant of probate or of letters of administration. Interest is payable for this period, with a higher rate applicable if that time is exceeded. Alternatively if the person changes facilities, 14 days’ notice must be provided, and then the RAD (again with interest) must be paid back to the person in order to pay the RAD for the new nursing home.

On the other hand, the DAP is not refundable, since it is akin to paying a daily rent. It applies if no RAD is paid, or if the RAD sought by the nursing home is only partly paid (so that the DAP is based on the unpaid balance of the RAD). Where a combination of a partly paid RAD and paying a DAP is involved, it can be agreed that the DAP be paid out of the RAD (e.g. for cashflow reasons) – although this will mean that the RAD (and therefore any amount that will be repaid to the person’s estate after they die) will decrease over time, whilst the DAP will correspondingly increase over time.

Paying for the RAD

Often when a sole parent needs to go into a nursing home and they own their own home, the home is sold into order to use the proceeds of sale to pay for the RAD. Any excess proceeds (and any other assets) can be invested so as to pay for any other ongoing costs of care (and possibly also to pay a DAP if that option is taken).

However, sometimes the home is not sold. This may be for a number of reasons, including:

• The parent is hoping that their stay in the nursing home is only temporary, so that they will eventually move back home when they get better;
• Often the home is the only valuable asset that the parent has, and (particularly in recent years in capital cities) one which usually increases in value, as compared to the “interest free loan” that is the RAD;
• The parent wishes to preserve the home as an inheritance for the benefit of their children when they die.

Or it may even be the case that there is no home to sell, as the parent may have been living with one of their children at their home or in a granny flat on the children’s property.

In this case, it may be that one of their children will pay for the RAD, on the assumption that after the parent leaves the accommodation (by reason of death or otherwise) they will eventually get their money back.

Estate Planning Issues

However, there are a number of important estate planning issues that need to be considered, such as:

1. What if the parent’s will fails to recognise the payment of the RAD made by their child?

Given that the RAD must be paid to the deceased estate of the parent on their death, and not directly back to the child who paid for it, it is essential that the parent’s will recognise the payment and deal with it separately.

For example, if the will of the parent simply divides their whole estate between their children in equal shares (and there is more than one surviving child), then the RAD will end up being split equally between all the children and will not go wholly back to the child who paid it – giving rise to unfairness and possibly a challenge to the will and a rift in the family.

What needs to be done to avoid such unpleasantness is for the parent to amend their will after the RAD is paid so as to make a specific gift of the repayment of the RAD back to the child who paid for it, and then the balance of the estate can be distributed accordingly.

Alternatively the will could have a specific “equalisation clause” that directs the executor to take the repayment of the RAD to the relevant child into account when dividing up the balance of the estate.

2. What if the parent leaves no valid will at all?

A similar problem arises. Under the various State and Territory Succession Acts, there are provisions that impose a “statutory order” of inheritance where a deceased person leaves no valid will (i.e. they die intestate). For instance, under section 127 of the NSW Succession Act 2006, if an intestate person leaves no surviving spouse but leaves surviving children, their children are entitled to the whole of the intestate estate, and if there are 2 or more surviving children the entitlement vests in them in equal shares.

The answer here is to put into place an appropriate will, which specifically recognises the entitlement of the relevant child to receive the repayment of the RAD from the estate.

If the parent is no longer capable of making a will (e.g. due to advanced dementia – which may have been the reason why they needed to go into a nursing home in the first place), it may be possible to have the Court approve the making of an appropriate “statutory will”, for instance under section 18 of the NSW Succession Act 2006.

3. What if the RAD has been used to pay a DAP?

It may be the case that the RAD was a part payment of the assessed RAD, and that due to lack of funds elsewhere the RAD was being used to fund the ongoing payment of a DAP – so that the amount ultimately paid to the deceased estate after the death of the parent is less than the amount originally paid (perhaps quite significantly less).

In this instance, the will should make a gift back to the relevant child of the amount originally paid by them, as opposed to the amount received by the estate from the nursing home.

4. What about possible challenges to the parent’s estate?

It may be the case that there is a significant risk of a challenge to the parent’s estate after they die, perhaps due to there being a blended family situation and / or concerns that a surviving former spouse may seek to make a claim.

In this situation it would be best for the relevant child to act like a bank – instead of making a gift of the money required to pay the RAD, the child should lend the money to the parent under a written loan agreement where the child also obtains a registered mortgage over the title to the parent’s home. That way, the child can enforce their security (just like a bank) to obtain repayment of the loan (perhaps with interest too) before unsecured creditors and family provision claimants can negotiate the rest of the estate.

If the parent did not have a home to provide as security, but they have other personal assets available (such as shares, bank or ADI accounts, cars, artwork, etc.) the lender child might instead register a security interest over them on the Personal Property Securities Register, which is a national online register administered by the Australian Financial Security Authority under the Personal Property Securities Act 2009 (Cth).

The post Beware estate planning issues with aged care appeared first on AdviserVoice.

Brian Hor

Often a member of a superannuation fund (whether self-managed, industry or retail superannuation fund) will want to provide for their spouse and, if the spouse should predecease them to their children and, if one of the children predeceases them, to the issue of the deceased child; that is, their grandchildren.

Consider the position of Xander and his wife Xanthe.  They have two children, Hector and Lysander, and Hector has two small children, Bert and Elmo.

Xander wishes that his super benefit be paid to Xanthe and should she die first then his benefit is to be paid equally to Hector and Lysander.  However, if Hector dies before him, he wishes Hector’s share of the death benefit to be paid to Bert and Elmo (whilst his parents did not watch television, Hector was a fan of Sesame Street).

Xander’s binding death benefit nomination is drafted as follows:

“The death benefit is to be my spouse Xanthe, but if she predeceases me then the death benefit is to be paid equally to my children Hector and Lysander.  Should either Hector or Lysander predecease me, the share which should otherwise have been allocated to either of my children shall be paid to their issue in equal portions.”

For a gift under a binding death benefit nomination to be valid, the recipient must be an eligible beneficiary of the member making the nomination at the date of death of the member.  The eligible beneficiaries are the legal personal representative of the member (that is, the estate of the deceased member), the member’s spouse, the member’s children, any person who was financially dependent on the member and any person who was in an interdependency relationship with the member.

The first contingent gift to Xanthe is valid.  She is an eligible beneficiary of Xander as she is his spouse and so Xanthe is eligible to receive the death benefit, if she survives Xander.

The second contingent gift to Hector and Lysander is also valid.  They are children of Xander and, as such, they are each eligible beneficiaries of Xander.  Assuming Xanthe predeceases Xander, and they each survive Xander, they will be entitled to share the death benefit equally.

The third contingent gift to Bert and Elmo will generally not be valid.  They are not the children of Xander (but his grandchildren).  The gift to Bert and Elmo will only be valid if they are financial dependents of Xander (grandchildren are not automatically financial dependants of a grandparent) or in an interdependency relationship with Xander at the time of his death (which would be an extraordinary position).

How does the nomination play out on Xander’s death?

If Xanthe survives Xander – the first contingent gift applies (the death benefit is paid to Xanthe).  The second and third contingent gifts do not apply and are not considered.  Consequently, it is irrelevant whether either or both of Hector and Lysander have survived or died before Xander.

If Xanthe dies before Xander – the first contingent gift cannot apply.  Also, as the estate of Xanthe is not an eligible beneficiary of Xander, it cannot be paid to Xanthe’s estate.  In this situation, the second contingent gift applies – so that the death benefit is shared equally between Hector and Lysander.

If Xanthe and Hector die before Xander – the first contingent gift cannot apply and the second contingent gift to Hector also cannot apply.  Neither gift can operate as gifts to the estates of Xanthe and Hector, as neither estate is an eligible beneficiary of Xander.

The gift to Lysander is valid and can apply so that he obtains 50% of the death benefit.

However, the third contingent gift (to Bert and Elmo) cannot apply as they are not eligible beneficiaries of Xander – as they are his grandchildren and not his children.

The second contingent gift to Hector fails.  What happens to this half of the death benefit will depend on the rules applying to the particular superannuation fund.  The rules could provide that the failed gift is paid to Lysander (so that he obtains 100% of the death benefit).

Alternatively, the rules could provide that the failed gift is to be allocated at the trustee’s decision as if there was no applicable binding death nomination (to the failed portion at least).  Another possibility is that there is a general residual gift to the estate of Xander of the failed 50%.

What should Xander have done?

If Xander wanted the portion of the death benefit which was to go to Hector to be allocated to Hector’s issue, then there should have been a fourth contingent gift in the nomination to the effect that “Should either or both Hector and Lysander predecease me, the portion which, but for their death, would have been paid to them must be paid to my Legal Personal Representative”.

Xander should then have included special provision in this Will to the effect that any superannuation benefit which would have been paid to Lysander or Hector but for their death must be applied for the issue of the deceased child and if there is no issue, to be included in the residuary portion of the estate.

What is the moral?

Simply that grandchildren are not eligible beneficiaries of the grandparent and if the grandchildren are to share in the death benefit, the death benefit must be paid to the estate of the grandparent (technically, their legal personal representative) and the terms of the Will must provide that the death benefit is to be applied to the grandchildren.

By Brian Hor, Special Counsel, Superannuation & Estate Planning

The post Can grandchildren be beneficiaries of BDBNs? appeared first on AdviserVoice.

Brian Hor

The process of probate may seem straightforward but, depending on the complexity of a client’s estate plan, along with family dynamics, it is not always easy to navigate.

Here we cover some of the frequently asked questions about probate.

What is probate?

Simply, probate is the validating of a Will.

Why does probate need to occur?

Firstly, to determine that the Will, is actually a valid and last Will of the person.

Without probate, institutions such as banks, share registries, etc cannot be satisfied as to who has the correct authority to receive the deceased’s assets and may refuse to pay out.

Obtaining a Grant of Probate is generally necessary if the deceased held assets in their name only or jointly with other parties as tenants in common.  Many third parties who hold or control estate assets require a copy of the probate document prior to releasing certain assets or payments (e.g. bank deposits, insurance payouts, aged care accommodation bonds, etc).

Does every estate go through probate?

Every estate is likely to go through probate. There are few exceptions.

What is a Grant of Probate?

A Grant of Probate is a document issued by the Supreme Court of each State, and that Grant of Probate then formally authorises an executor to manage the estate of a deceased person, in accordance with their Will.

What are the responsibilities of an Executor or Executrix?

The executor or executrix of the Will is responsible for distributing the person’s assets to the people named in the Will. This happens after any debts are paid.

Why does probate need to happen?

Sometimes, for smaller estates or if assets are mostly jointly owned with a surviving spouse, asset holders might agree to release payment without requiring a Grant of Probate. This is usually on the basis that the person who receives payment promises to repay (or indemnify) the asset holder if it turns out they paid the wrong person.

If there is no Will, then you cannot obtain a Grant of Probate. Instead you obtain Letters of Administration. This is effectively the same, in terms of authorising someone to administer the estate, and would usually be obtained by the person who is the closest next-of-kin to the deceased.

How long does probate take?

There is unfortunately no set answer to this question. It depends on a number of factors.

Using the professional services of a lawyer may help ensure that essential elements are included in the application to streamline the efficiency of the application, and subsequently, the process of probate.

What steps are involved in the process of probate?

In order to obtain a Grant of Probate, the Supreme Court needs to be provided with information about the assets and liabilities of the estate, the deceased person, the witnesses to the Will, the executors and or executrices, as well as the Will itself.

An advertisement of your intention to apply for probate must also be placed on the Supreme Court website for at least 14 days prior to any application.

Obtaining all the necessary information to apply for probate can take a number of weeks to collate. Importantly, you will need the death certificate for the application for a Grant of Probate and possibly for making proper enquires regarding the assets and liabilities.

Depending on the office issuing the formal death certificate, processing times can vary, so waiting for the death certificate to be issued can also add more time to the overall process. Typically, lodging an application for a Grant of Probate will take at best, one or two months, from the date of death. This is indicative only.

Do I need to attend a hearing for probate?

You do not have to attend as a Grant of Probate is completed without a hearing. Once the court receives a Grant of Probate application, it may generally take up to two weeks to process the application. However, this is done at the discretion of the Court, so it could in fact take longer. The Court may also issue a ‘Requisition’ asking for more information relating to the probate application, and this can also delay matters.

What happens after a Grant of Probate is issued?

A Grant of Probate is simply the start of the estate administration. Executors are then able to use a Grant of Probate to deal with the shares of the estate and follow the terms of the Will. Generally, executors have 12 months from the date of death to finalise and distribute the estate, based on the Will and wishes of the deceased.

What may cause delays in finalising the estate?

Depending on the complexity of the estate, the number of beneficiaries and interdependencies, the timeline to administer an estate can vary.

•  Some assets will take time to divest to cash or transfer
•  A challenge to the Will and estate may occur
•  Creditors
•  Finalise the tax returns for the deceased and/or for the estate. Failing to do this may leave the executor personally liable for a tax bill.

Does everyone have a right to see a Will?

Not everyone actually has a right to see the Will. The executor is only obliged to provide a copy of the Will to certain persons on their request as prescribed by law, such as a parent, guardian, spouse, de facto partner or child of the deceased. However, once a Grant of Probate has been granted, a copy of the Will can be purchased from the Court of jurisdiction.

The post Probate – a detailed overview from SuperCentral appeared first on AdviserVoice.

Brian Hor

More parents are contemplating helping children enter the home market.

Whilst the banks are starting to relax their lending criteria, with the now sky high prices of real estate in the major capital cities, the “Bank of Mum and Dad” is still very much in demand.

But don’t just give them the money! There are real risks in doing so, such as:

• The “King Lear” trap – remember him? He gave his kingdom away to his daughters in return for their promises of love and when they got what they wanted they dumped him (more or less). Don’t let that happen to you!
• Relationship breakdown – what if you give your money to your child and they go through a relationship breakdown? When the dust settles, will half the money (or more) go to their ex?
• Creditors and predators – these days young people are increasingly striking out on their own, whether as a side gig or as their main occupation. But if bankruptcy befalls your child – or they fall victim to a frivolous (but successful) lawsuit – your gift to them may be exposed.

Lend the money with a proper written loan agreement … Just like a bank

Instead you should lend the money to your child – with a proper written loan agreement, secured by a registered mortgage over the home. Just like a bank.

Even if you can’t get a first mortgage (because the bank will want that), you can usually get a second registered mortgage (meaning that once the bank is paid out, you’re next in line).

Whilst your child might prefer a straight out gift, you’re still helping them out in a big way, and importantly it means three things:

1. Just like a bank, you are their lender, and you can call in the loan if they default.
2.  If your child suffers a personal financial crisis such as a business failure, lawsuit or relationship breakdown, the amount of the loan (possibly with interest) can be reclaimed by you.
3. Depending on the terms of the loan, one day you may be able to call in the loan if you need the money for yourself – perhaps to fund aged care.

What if your child has a partner? In this case what you do will depend on in whose name the home will be purchased.

If the home will be purchased in the name of your child alone, then the loan agreement and mortgage will bind your child alone. In this case, your child’s partner has no say in the matter.

What if home is purchased in both the names of your child and their partner?

But what if the home is to be purchased in both the names of your child and their partner? In that case, the loan and mortgage will need to bind both your child and their partner to enable the mortgage to be registered over the home.

You need to protect yourself and in so doing you are also protecting your child, because one day you may well decide to forgive the loan or you may actually give the benefit of the loan to your child in your Will as part of their inheritance.

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