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Getting your estate documents together

Thu, 10 Dec 2020 20:30:06 +0000

Jonathan See of Townsends Business & Corporate Lawyers recently published an article on ‘Preparing for the Inevitable: Getting your estate documents together‘. Below is an excerpt, the suggested list of documents clients can provide to Executor/s as part of their estate planning activities.

1. Make sure you have (or know where) your originally executed Last Will & Testament is and that it is up to date

Your Executor can act on behalf of your estate only if they have the originally executed Last Will & Testament. It is therefore important to make sure that it is up to date, no pages are missing and all pages are signed and witnessed. Your Executor will need this document when they seek probate so make sure they have access to it. For practicality, give your Executor a certified copy of your Last Will & Testament or at least tell them where they can find the document.

2. Prepare an inventory of all your assets and liabilities

Another document required for probate is an inventory of assets and liabilities of the estate. By preparing the inventory, your Executor will have an easier time in preparing and lodging the application for probate. Assets you may have include bank accounts, properties, shares owned in companies, automobiles while liabilities include mortgage, utilities, and mobile phone subscriptions.

3. Prepare a list of contacts of professionals and advisers you liaise with

Much of the time spent by your Executor will be in determining who your contacts are and searching for them. You can help your Executor by providing contact details for you solicitor, accountant, financial planner and life insurance agent.

4. Do you have all your title documents?

If any documents you are required to have are lost or missing it would be better if you arrange for their replacement now rather than requiring your Executor to do so. This is especially true for real estate as the documents are necessary to transmit the property to the beneficiaries.

Instances when you may not have custody of the physical title documents include:

where they are held by your mortgagee
simply lost over time
some Australian states do not issue paper documents of title e.g. Queensland (a printout of the Registration Confirmation Statement from the
Queensland Land Titles Office is recommended) or Victoria (obtain a copy of the electronic certificate of title)

5. List down your online accounts

You may want to provide a list of all online accounts together with the login details (e.g. usernames, passwords, answers to secret questions) to your Executor so that they can close or continue using some online accounts. Online accounts you might have include bank accounts, share registry accounts, utilities accounts, social media accounts, email accounts … virtually anything provided online.

6. Make sure your Executor has access to some cash

Your estate will incur bills such as medical expenses, funeral expenses, and legal fees. It is best to make sure your estate contains a cash account and give your Executor access to it so that they can pay these bills and other expenses of the estate.

7. Put the documents in a place where your Executor can find them

Gather all your important documents together and store them in a safe place for easy access for your Executor. It is advisable to prepare the following documents:

Last Will and Testament which is up to date
Codicil (if any)
Powers of Attorney, general or enduring
Appointment of Enduring Guardian
Living Will
Birth Certificate
Marriage Certificate
Citizenship Certificate, if naturalised
Certificates of Titles
Life insurance policies
Share certificates, brokerage statements and other documents of title of your Investments
Binding death benefit nominations which is up to date
List of assets and liabilities
List of contacts of professionals and advisers
Details of any safe or safe deposit box you use
Automobile registrations
List of online accounts to be operated or closed with details of usernames and passwords

By doing these things the Executor is better able to perform their duties. Planning ensures that the estate can be implemented with as little fuss and problem as possible and will avoid unnecessary delays and, importantly, fees, costs and charges.

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Asset rich, cash poor: Meeting cash obligations with all eggs in one basket

Tue, 13 Oct 2020 20:50:14 +0000

What to do when the fund owns a property and one of the members dies. Can the fund delay selling the property to pay the death benefit?

A self-managed superannuation fund (“SMSF”) is an investment vehicle granted tax concession because it has the sole purpose of providing aged pensions in retirement for its members. Members have the ability to effectively pool their resources and build wealth over time through their SMSF. They can invest in almost anything as long as the investment is consistent with the investment strategy of the SMSF.

Many people decide to have an SMSF in order to invest in property. As a long term investment, property can appreciate over a number of years providing important capital gain for the fund and in the meantime can earn income through rent payments received from the tenant.

The problem with acquiring a property in an SMSF though is that it is indivisible, can take up a huge chunk of the investment portfolio of the SMSF and has issues with liquidity. It is what is called ‘lumpy’ by the industry.

The fund’s resources may be nearly exhausted in acquiring the property leaving little for the SMSF to use to diversify into other more liquid assets in order to meet its cash obligations should an emergency payout arise.

Planning ahead

When a member passes away, the death benefits of the deceased member have to be cashed out as soon as practicable. If an SMSF has a property with very little cash, what can the trustee do to make sure that the corresponding death benefits are paid if one of the members suddenly passes away but the surviving members want to keep the property in the fund?

Establish Pension under Binding Death Benefit Nomination (“BDBN”)

In the case of SMSFs with husband and wife members, they can execute BDBNs nominating each other as their respective death benefit dependants. If one of them passes away, the death benefit dependant can opt to receive the death benefits as a pension with annual payment set to statutory minimum which may alleviate the need to sell the property straight away.

This option does not apply to a beneficiary who is not a death benefit dependant (e.g. father and child member where child nominates father as beneficiary and the child passes away). As a non-death benefit dependant, the death benefits of the deceased member can only be cashed out as a lump sum thereby forcing the SMSF trustee to come up with either cash or property to distribute to the non-death benefit dependant.

Insurance outside the SMSF

Both members can take out term life insurance over the life of the other outside of the SMSF. If one of them dies, the surviving member can contribute the insurance proceeds to the SMSF which can then be used by the SMSF trustee to pay the death benefits in cash (either as pension or lump sum).

The drawback of this option is that it does not work well with death benefits of large amounts as the amount of insurance proceeds to be contributed to the SMSF cannot exceed the beneficiary’s contribution caps. As the life insurance is taken outside of the SMSF, the members pay for the premiums out of their own pockets.

The same kind of strategy cannot be implemented within the SMSF (where the premiums are deducted from the member’s account in the SMSF) as cross-insurance arrangements where the insurance proceeds are paid to someone other than the insured member are prohibited under the regulations. Insurance proceeds from a policy taken out by the trustee and paid for from the deceased member’s account in the fund only add to the deceased member’s death benefit and can’t be used as a substitute for payment of their share of the fund’s property’s value..

Contribute cash to the SMSF

A surviving member who has cash outside of the SMSF can make contributions to the SMSF to enable the SMSF trustee to pay the death benefits to the death benefit dependant. However, a surviving member can only contribute cash up to the contribution caps provided by existing laws. It only works if the amount of death benefits to be cashed out is within the contribution caps.

In specie transfer of part of property

While there is a requirement to make a cash out of the death benefits as a lump sum (if pension is not possible), there is no requirement that the lump sum be paid solely in the form of cash. The SMSF can also make a in specie transfer of part of the property to a death benefit dependant as a non-cash lump sum. The disadvantage of this option is the serious tax consequences of the transfer especially if the SMSF is in the accumulation phase.

Sell the property at market value

If no other strategy is possible the fund will be forced to sell the property at market value and use the proceeds of the sale to pay the death benefits. Issues to be considered include the length of time it takes for the property to get sold, the amount of money it earns from the sale and the expenses and taxes to be paid after the sale.

If the surviving members want to retain the property as part of their overall investment portfolio they can buy the property from the fund as long as the necessary compliance requirements are met. They could in theory even contribute it back to the fund though issues like contribution caps could make this an unlikely strategy.

A final word

The prudent approach in the case of an SMSF with a lumpy asset is to plan well ahead so that the value of the property and potential tax savings in an SMSF environment are maximised to the fullest while at the same time making sure that the SMSF is able to meet its cash obligations when an emergency arises. The property was placed in the SMSF as a long-term investment so the goal is to keep it for as long it can until it is the right time to sell.

By Jonathan See, Solicitor

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New testamentary trust law

Thu, 13 Aug 2020 21:55:14 +0000

New law closes loophole on Favourable Tax Treatment of Income from Testamentary Trusts.

Testamentary trusts are trusts created by the testator under the will to be established upon the death of the testator. These trusts provide benefits such as asset protection (i.e. to protect a beneficiary who is prone to potential liabilities and matrimonial disputes) and tax concessions.

Generally minor beneficiaries are taxed at the highest marginal tax rates (“penalty rates”) for distributions of income by trusts received by them. This is to prevent adults with higher income from diverting their income to minors who normally would have the benefit of the income tax threshold were it not for the scheme.

However if the minor beneficiaries receive income distributed by a testamentary trust (or trust estate resulting from a will, codicil, intestacy or court order varying a will, codicil or application for intestacy in relation to the estate of a deceased person), they are taxed at marginal tax rates (“concessional tax rates”).

A loophole often used to avoid incurring the penalty rates is for a related trust to distribute its income to the testamentary trust which the latter ultimately distributes to the minor beneficiary. That is because under the previous law it was uncertain whether the property of a testamentary trust had to come from a deceased estate to enjoy the concessional tax rates.

Changes introduced by the new Law

On 23 June 2020 a new law was passed to plug this loophole by adding new requirements for income distributed by testamentary trusts to enjoy concessional tax rates. The law aims to prevent the practice of injecting property which is unrelated to the deceased estate into the testamentary trust and generating income subject to concessional tax rates (if received by a minor beneficiary).

For income distributed to the minor beneficiaries to be taxed at concessional tax rates, the new law requires that starting 1 July 2019 the property generating the income must be transferred:

to the trustee of the testamentary trust to benefit the beneficiary;
from the deceased estate; and
as a result of the will, codicil, intestacy or court order varying a will, codicil or application for intestacy in relation to the estate of a deceased person.

Accumulations of income or capital from the property described above (and subsequent accumulations of income or capital from the latter property) when received by minor beneficiaries are also taxed at concessional tax rates under the new law.

Example

A testamentary trust was established by will upon the death of Mr X.
A minor is a beneficiary of both a family trust and a testamentary trust.
The testamentary trust is also a beneficiary of the family trust.
The family trust earns income of $60,000 which is distributed to the minor beneficiary. The income received by the minor beneficiary will be subject to the penalty tax rates.
The testamentary trust has $40,000 transferred from the deceased estate of Mr X which was distributed to the minor beneficiary. The income received by the minor beneficiary will be subject to the concessional tax rates.
Loophole: Before 1 July 2019 the family trust could distribute $60,000 to the testamentary trust giving the latter a total of $100,000 to distribute to the minor beneficiary. This $100,000 income received by the minor beneficiary used to be taxed at the concessional tax rates.
New Law: The $100,000 income received by the minor beneficiary from the testamentary trust will be taxed as follows:

1. $60,000 will be taxed at the penalty rates as it is unrelated to the deceased estate of Mr X (i.e. it originated from the family trust).
2. $40,000 will remain taxed at the concessional tax rates as it is generated by a property coming from the deceased estate.

If the $100,000 was instead invested by the testamentary trust in a property which generated an income of $10,000 and eventually distributed to the minor beneficiary, the $10,000 income will be taxed as follows:

1. $6,000 will be taxed at the penalty rates as it is income generated by a property 60% of which was purchased using income originating from the family trust (i.e. unrelated to the deceased estate of Mr X).
2. $4,000 will remain taxed at the concessional tax rates as it is income generated by a property 40% of which was purchased using income coming from the deceased estate of Mr X.

Individuals who have already executed their wills with testamentary trust provisions may need to assess whether the new law changes their estate planning outcomes and seek professional assistance to review their wills and change their estate planning strategies if so.

By Jonathan See, Solicitor

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Plan B: SMSF pension strategies during the COVID-19 recession

Wed, 27 May 2020 21:40:14 +0000

Investment values have nosedived but an SMSF is still required to pay the minimum pension amount – Townsends Lawyers believe it’s time for Plan B.

Retirement is supposed to be the time when a person enjoys their hard-earned savings, i.e. superannuation. However when the value of investments made by the SMSF in the financial markets have nosedived because of the pandemic, and the trustee is pressured to sell assets to pay the minimum pension amount without allowing time for the investments to recover in value.

In response to the recent COVID-19 pandemic resulting in the underperformance of the financial markets, the Australian government temporarily reduced the standard minimum pension payments by 50% for the 2019/2020 and 2020/2021 financial years as part of the economic stimulus package. The minimum pension amounts were reduced as follows (subject to pro-rating):

Now, let us look at the case of Gino

Gino is 65 years of age and is the sole member of Gino Superannuation Fund (“Fund”).

On 1 July 2019 the Fund commenced an account-based pension with initial pension balance of $1.5 million with annual pension amount for the first financial year specified as $75,000.

As a result of the pandemic, the performance of the Fund’s investments has been significantly affected and there is insufficient cash to pay the annual pension amount.

Ensure the current governing rules and pension terms allow payment at the new minimum rates

Some governing rules or pension documentation may be inflexible and require amendment for application of the new regulatory minimum to your pension. If Gino wishes to take advantage of the reduced minimum pension rates, he should have the governing rules and the relevant pension documentation reviewed to check the current annual pension amount and determine whether any variation is required to the governing rules and/or the terms of the pension.

Cease withdrawing from pension account

Once the regulatory minimum pension amount effectively applies to the pension, the new minimum pension amount for the 2019/2020 financial year is $37,500.00 ($1.5 million x 2.5%) instead of $75,000.00 ($1.5 million x 5%).

This is good news if the Fund is struggling to have the cash to pay the standard minimum pension amount to Gino. As Gino only needs to withdraw a lesser amount to comply with the SIS regulations, the Fund will not need to sell its assets to pay the standard minimum pension amount.

If Gino had already withdrawn an amount equal to the new minimum pension amount, he can stop making further withdrawals from the pension account. If he withdrew more than that before adopting the new minimum, he cannot put the excess amount withdrawn back to his super account unless he is eligible to make super contributions and meets the contribution requirements.

Excess minimum pension payment strategy

With proper documentation, it is possible to prospectively treat any payment in excess of the applicable minimum pension amount as a cashing out of a superannuation lump sum (i.e. by way of partial commutation of the pension). However, the trustee must be cautious not to retrospectively change the nature of any past payments.

If, for example, the Fund paid Gino $50,000 as a pension on 1 January 2020 and subsequently varied the trust deed and the pension terms on 1 April 2020 to change the annual pension payment amount to the regulatory minimum amount as per Schedule 7 of the SIS Regulations, then the $12,500 in excess of the new minimum cannot be treated as a lump sum payment arising out of a partial commutation of the pension.

If however, the Fund has $50,000 cash available for distribution after adopting the reduced minimum pension rates, Gino can request payment of $37,500 (minimum pension amount) as pension and the balance of $12,500 as a lump sum payment arising out of a partial commutation of the pension. This will create an additional unused transfer balance cap of $12,500.

Legal review of the deed and pension documents will be necessary as some deeds and pension terms may have more restrictive cashing out conditions than the SIS regulations.

By Jonathon See, Solicitor

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Overcoming Asian reluctance to estate planning

Mon, 09 Mar 2020 20:35:12 +0000

Migrants or permanent residents in Australia who have backgrounds from Asia are often very averse to discussing estate planning. There are a number of time-honoured cultural reasons for that, but Jonathan See looks at whether they are still relevant.

Chang and his wife, Ming, migrated from China to Australia in 1975 with little money in their pockets. Like most first-time migrants, they did a couple of odd jobs for a few years and saved enough money before they opened their own Asian grocery store. Through hard work, determination and sacrifice, they were able to grow their business.

Chang and Ming have three children, Robert, Ashley and Terry, all born in Australia. Robert and Ashley help their father run the business as full-time employees whilst Terry works as a solicitor in a law firm. All three children are adults now and happily married with children.

Chang is now 70 years of age. Despite the substantial amount of wealth, he was able to make, he does not have a will in place and has not set up any plan as to who will make decisions for him should he lose his mental capacity. He is currently happy with his current disposition and does not see any need to plan these things as he is focused on growing his business more.

There are two reasons for his reluctance towards estate planning.

First is that death is a taboo, a topic nobody talks about in Chinese culture. Discussing or even thinking about it disturbs the inner harmony.

Second is the lack of understanding of its benefits. Before the 1990s everything the Chinese had was state-owned; hence they did not need to plan because the state would have provided for their children.

Should Chang be content about not doing anything about estate planning?

Definitely not. Times have changed and so has his situation. Chang is now living in Australia and he has savings and property.

The reticence to discuss death may derive from the teachings of Confucius. Confucius’s guiding belief was that of the philosophy Tien Ming (or the influences of fate and mission). Tien Ming states that all things are under the control of the regulatory mechanism of heaven. This includes life and death, wealth and poverty, health and illness. Confucius believed that understanding Tien Ming was his life’s mission. He encouraged people to accept whatever happened to them, including death.

Confucius affirmed that without knowledge of how to live, a person cannot know about death and dying. However, Confucius avoided discussions of death. He did not discuss death and the unknown future or afterlife in detail. He concluded that these issues were complicated and abstract, and that it was better to spend time solving the problems of the present life than to look into the unknown world of death and afterlife.

A discussion with Chang about this could assist him to reach the view that estate planning is not about his death but rather about the life of his surviving family. Our motto in the Estate Planning Division of Townsends is “Your Estate Planning is not about you, it’s about those you love”.

Whilst it may be a difficult conversation to have with him, Chang could be advised of the following benefits of estate planning:

a) He can plan his own needs.

A time will come when Chang may become incapacitated and unable to manage his own affairs. That is why it is necessary for him to appoint someone who can look out for his best interests to make these important decisions for him should that time come. He can appoint an enduring attorney and or guardian to look after his financial, investment, property, personal, medical and health matters.

b) He can dispose of his wealth in any way he wishes.

He can choose to leave behind his properties or part of them not just to his family but to anyone who is not related to him by blood (e.g. son of the man who helped him when he was starting off his life in Australia). Equally important is who he can choose to exclude as a beneficiary (e.g. ex-spouses of his children). Should Chang die without a will, his estate will be distributed according to the law of the state which could even be against his wishes.

c) He can prevent filial disputes.

Sometimes leaving the decision of distributing properties to the loved ones left behind can drive a wedge between them. The best way to avoid this conflict is for Chang to decide in his will how much to leave for his wife and each of his children especially in the case of Robert and Ashley who have substantial involvement in the family business.

d) He can protect family wealth.

Even if Chang’s children are on good terms, non-family members may try to access the children’s inheritance. For example, creditors could try to attack Robert’s assets and Terry may be open to lawsuits because of his profession. With a carefully crafted testamentary trust in his will, Chang can place his assets in a trust with his wife and children as his beneficiaries. In this arrangement, the assets are not placed in the names of the children thereby protecting the assets from reaching the hands of creditors. At the same time, Chang will be able to let his children enjoy the fruits of his labour and provide for future generations.

e) He can minimise taxes.

Considering that he was able to accumulate wealth by starting out from scratch, he would certainly want to keep as much of it as he can so that he can provide more to his family and the succeeding generations. Planning his estate carefully can help his heirs save in taxes and keep more for themselves. He can do this by creating a trust in the will wherein the trustee can distribute the income to the heirs in a tax-efficient manner.

In the end, the biggest benefit Chang can get from this is that he has control of his estate which will take effect even when he is no longer around.

By Jonathon See, Solicitor

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