• More onerous revenue claims against wills/estates have led to the increasing desire to protect estates from future claims
• ‘Blended families creates potential for unhappy spouses and step children contesting the will

Anecdotal evidence suggests 2/3rds of Australians do not have a will: Townsend lawyers.

The current available survey evidence is that many adults in America do not have a will^[1].  Anecdotal evidence suggests the same in Australia.  Combine this statistic with the estimated two thirds of existing wills likely to be out-of-date owing to an individual’s changed circumstances, this leaves around 85% of adults without any means of adequately allocating assets in the event of death.

This is a tragedy.  Many of these people will let their families down by not having in place the proper arrangements to protect family members and minimise tax on both the estate and the family member.

There have been a number of significant social and regulatory changes which have led to the situation that even if one does have a current will in place, it may no longer suffice to cover all future eventualities.

What has changed?

Previously, the will was used to ensure certainty in the transfer of assets on a person’s death to their family, and to avoid any disputes arising from this process.

Now a number of factors have complicated the process:

• There has been a massive growth in the uptake of financial products such as discretionary and superannuation trusts and funds, that fall outside the parameters of a will.  One of the drivers of this growth has been changes in superannuation law making this vehicle so much more attractive from a tax point of view and as a safe haven from bankruptcy trustees.  A will cannot regulate how these trust assets will be distributed
• There has been substantial growth in litigation disputing the allocation of assets upon death by beneficiaries. Lawyers are even now specializing in estate challenges.  Courts have ruled that solicitors owe a duty of care to the deceased’s beneficiaries so that if the will has not been properly drawn those beneficiaries can sue the solicitor who prepared it
• The growth in the incidence of divorce and partnership breakdowns, leading to what is now called the ‘blended family’, has created the potential for unhappy spouses and step children to contest the will
• More onerous revenue claims against wills and estates have led to the increasing desire to protect estates from future claims
• Growing levels of wealth in baby-boomers sometimes held across different countries, in different structures, and even subject to claims by disparate beneficiaries from different families!

The result is that a significant proportion of ordinary people now need a comprehensive range of documents in an estate planning package to cover all eventualities after their death. A will has become only one of the documents a person needs to have in their portfolio to protect their assets for future generations.

An effectively drawn will and the other estate planning documents need not cost a fortune and will repay the set up costs many times over.

[1] http://west.thomson.com/about/news/2008/06/30/findlaw-survey.aspx

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Ross Higgins

Many things can go wrong when preparing wills and setting out clear instructions for dispersing an estate. Ross Higgins from Austock Life highlights some of the big mistakes that he see in his work with lawyers and financial planners.

1. Not achieving intergenerational wealth transfer objectives
2. Leaving your Will open to legal challenge
3. Not simplifying complex wills and estates
4. Dedicated purposes in estate planning – clear direction of your intent

“So what big mistakes are people making with their wills?

“What can upset the wishes of people when they die and lead to their wills being disputed?

“Is this a growing problem with blended families?

“I believe that contested wills and estate planning bungles are a big problem that some plain thinking and sensible planning can avoid,” said Ross Higgins, MD of Austock Life.

1. Not achieving intergenerational wealth transfer objectives

Testamentary trusts are a common vehicle to pass on wealth and can also establish a level of control beyond one’s death. These are not straightforward structures and are usually created under a person’s will. A testamentary trust not only requires establishing the trust under your will and finding ‘willing’ trustees, but can be impracticable for smaller dollar bequests. As a form of trust they also require annual administration and tax reporting costs and can be inflexible and costly to unwind.

As an alternative, parents (and especially grandparents) can use modern insurance bonds to plan ahead with “peace-of-mind” about how, when and to whom their estate’s wealth (or part of it) will be distributed to the next generation.

Some modern imputation bonds have special design features for passing money cleanly to children and grandchildren – and with the following advantages:

• allow for multiple beneficiaries with different entitlements;
• be tailored for meeting small and large bequests;
• are low cost; and
• operate in a low maintenance “set and forget” and tax-effective environment.

2. Leaving your Will open to legal challenge

Legal challenges can arise due to disgruntled beneficiaries and others left out of the Will, or someone just being unhappy and wanting to overturn elements, such as a charitable bequest. This can cause costly, lengthy (and unhappy) legal disputation.

There is a simple and tested solution though:

“It is better to place the money out of reach of the Will and put it beyond challenge. Modern insurance bonds are increasingly being used for making protected bequests and can even be done as ‘secret/confidential bequests’.  They can also be established for ‘set purposes’, which can be particularly useful to create inheritances for children and grandchildren.

“Because Insurance Bond Nominations can be set up as “excluded assets” from legal estates – therefore bequests made in this fashion can be put beyond Will disputes” said Mr Higgins.

“The other upshot of using Insurance Bond Nominations for non-estate bequests is that these can be made in secret because these types of inheritances are not subject to Probate procedures (and costs) and hence not brought within the public domain.”

3. Not simplifying complex Wills and estates

An Insurance Bond Nomination being outside the deceased’s Will and legal estate (and possibly made in secret) opens strategies to use a Nomination in conjunction with a Will, or as an alternative estate planning arrangement.

For instance you can use a standard Will for certain beneficiaries, but separately establish Insurance Bond Nominations to provide for other beneficiaries.  The Nomination could:

• provide for children of previous marriages or a new spouse’s children;
• solve potential conflicts and inequities between children and grandchildren that might be difficult to handle just under a Will; and
• privately (secretly) meet moral obligations to someone such as a good friend or trusted employee.

4. Dedicated purposes in estate planning – clear direction of your intent

“We are now seeing a significant proportion of our new business (just over 40%) invested into ChildBuilder bonds – and many of these are established with a “stated intended purpose” for the child’s or grandchild’s expected use of the investment’s proceeds.

ChildBuilder’s most common ‘intended purposes’ that Austock Life is seeing include:

• first home deposits and funding the move out of home
• education funding and job qualifications
• or simply starting a family

“A special innovation with ChildBuilder is an extensive menu of ‘intended purposes’ that parents (or grandparents) can choose from when establishing a ChildBuilder Bond” said Mr Higgins.

Specifying an intended purpose for ChildBuilder works in much the same manner as someone expressing non-binding instructions in their Will for the particular use of a bequest.

———-

What are non-estate assets?

• Jointly owned assets, such as the family home that automatically passes to a surviving spouse as joint owner
• Assets held through a family trust
• Life insurance policies – where a nomination of beneficiary is made
• Superannuation nomination benefits are also normally a non-estate asset

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Review of Wills

Despite the best efforts of financial planners, around 40% of Australians do not have a valid will. Intestacy results from a failure to write a will, but also occurs if a will is not valid (perhaps because it has not been signed and witnessed according to the law, the testator did not have mental capacity to make a will or the will has been badly drafted) or if a valid will has been made but all the beneficiaries have died. Partial intestacy occurs when a valid will exists but it does not dispose of the whole of the estate.

A will is revoked by making another will, deliberately destroying the old one, or by marrying. A will may be open to challenge, and may be invalid, if it does not adequately take into account any change of marital status including de facto arrangements, an addition of children, the death of a child or significant changes in financial circumstances.

Dying intestate

When a person dies intestate, the law of the jurisdiction in which the person is domiciled at the date of their death will determine how the estate is administered and the assets distributed.

If  there are no surviving spouses or relatives, the assets of the estate may pass to the Government of the State or Territory.

The new laws applying in NSW from March 1 make the provisions listed below. Note that the term “de facto spouse” has been replaced with “domestic partner”. Domestic partners are included in the definition of “spouse”, and they may be of the same or opposite sex. Under this definition, it is clear that a person may have more than one spouse.

• To receive a benefit in an intestate estate in NSW a relative must survive the intestate by 30 days (this is a new rule: previously a relative only had to survive the intestate)

• If a person dies leaving a spouse or spouses the spouse or spouses inherit the whole intestate estate.  This applies whether or not there are any children from the spouse or spouses, but It does not apply if there are children from other relationships involved.
• If there are children from a relationship other than the spouse/s (perhaps from an ex-spouse), the estate is divided according to a formula between the spouse/s and the children. When this formula is applied, children from both the current spouse/s and from the other relationship(s) are included.It works like this. The spouse will receive (or multiple spouses will share between them) a legacy of $350,000 as adjusted by the Consumer Price Index in accordance with a formula set out in the intestacy laws. (Under the previous intestacy laws the legacy was only $200,000 and only one spouse or one de facto spouse was entitled.) The spouse(s) will also receive the intestate’s personal effects and one-half of the remainder of the intestate’s estate.All children, including those of the other relationship and of the spouse/s, share the remaining part of the estate.
• Where multiple spouses survive the intestate their entitlement is shared in accordance with a written agreement they make between themselves and submit to the administrator of the estate or in accordance with an order of the Supreme Court. If no agreement or court order exists, they share equally between them.
• The legislation has created a new right for a spouse to acquire any of the property that belonged to the deceased. It must be paid for, either from the spouse’s entitlement in the intestate estate or, if that is insufficient, from his/her own resources.  The property includes any real estate or personal estate such as a car, boat or shares. Previously the spouse or de facto partner could elect only to take the matrimonial home. Note that this provision does not apply where there are multiple spouses.
• If no spouse exists, but only issue, then the issue share the estate equally. Note that “issue” includes all generations of descendants: children, grandchildren, great grandchildren and so on.
• If the intestate dies with neither spouse nor issue then the distribution goes, in order, to parents, siblings (there is no longer a distinction between siblings of the whole and half blood), grandparents, aunts and uncles (there is no longer a distinction between whole and half blood) and, finally, first cousins.  Cousins were previously not entitled. Note that if one or more of the siblings has died then their share will pass to their issue.
  

  Dangers of Intestacy

The NSW Trustee and Guardian (a NSW Government body which includes what was formerly known as the Public Trustee) has further information on its web-site on these changes at http://www.tag.nsw.gov.au/Intestacy/default.aspx. That site also includes the following real life examples of how things can go wrong when a valid will is not in place.

• A man died without a will. It could not be established that his birth was ever registered and therefore next of kin could not be established. His estate worth $180,000 passed to the Government.
• A reclusive woman decided to write her own will. The only relative with whom she had contact was a niece. However, after writing her own will, she asked the niece’s husband to sign the will as her witness. On her death she left an estate worth $400,000, but unfortunately the niece was not able to inherit the estate due to the fact her husband had signed the will as a witness. The will fell into intestacy as a spouse of a beneficiary should not be a witness. The estate was distributed to entitled next of kin.
• A woman decided to write her own will and one of the terms was “I want my house sold and the money from the sale placed into my investments”. On her death, it was noticed the woman had 2 investments, one which passed to her husband and the other which passed to her infant son. The issue was who was entitled to the proceeds of the sale of the house?
• A woman drafted her own will and she used a number of terms such as “balance”, “remainder” and “residue”. The whole will was confused and conflicting. Action was taken in court to rectify the terms of the will and the cost was $13,000, and took 2 years to complete. The value of the estate was $78,000.
• An eighteen year old man had been living with his girlfriend for only 6 months when he died without a will. The court decided that his girlfriend was his legal de facto spouse, and she received his entire, substantial estate. The man’s parent’s received nothing.
• A will provided for the income from a very expensive property to be paid to a person during her lifetime and after her death the property was to go to “Crown Street Women’s Hospital”. By the time the lady died that hospital had closed down and a lot of legal costs were spent in an application to the Court to decide which Charities were to receive the property. This could have been avoided by a carefully drafted will.
• John Thomas was a wealthy and educated man. He left a will in Australia to cover his Australian assets and a will in England to cover his U.K. assets. Unfortunately his Hong Kong assets were not covered by either will and were administered according to the Laws of Intestacy of Hong Kong.
• Jim had looked after his uncle Wayne for many years and had been assured that he was included in the will. When Wayne died Jim, searched the house for a will but to no avail. He checked all the local solicitors, banks and anyone else who might have dealings with his uncle. There was no evidence of a will anywhere or anything to suggest Wayne ever made a will. Under the Laws of Intestacy, Jim shared his uncle’s estate with several other nieces and nephews who barely knew their uncle and never attended to any of his needs.
• A 21 year old girl with no will was killed in a motor vehicle accident during the course of her employment. There was $200,000 accident cover. The estate passed to mother and father equally on intestacy but the father had deserted family weeks before she was born. He had had no contact since but was entitled to $100,000.
• A ‘family’ consisting of 3 step children fought for 3 years over the division of old ‘antique’ furniture which was valued at $6,000. Legal costs incurred by the children amounted to $55,000.
• Husband filled in a ‘do-it –yourself’ will form – intending to leave the whole estate to his wife. He inserted his wife’s name in the section of the form appointing her the executrix but forgot to insert her name in the section for nominating a beneficiary – in effect, he left the whole estate to nobody.

While this article is mainly concerned with the new laws in NSW, the broad principles, dangers, expense and inconvenience of intestacy apply equally in other States and countries. The job of drawing up a will falls to legal advisers, but a good planner will include questions about changes that may affect the currency of a will at every review, and will do everything possible to motivate clients to keep their wills, powers of attorney and beneficiary nominations current.

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