As featured in WFO 2022 February Issue #2
As a succession (inheritance) lawyer, I see many Wills come across my desk. My clients include people who have never made a Will before, people who want to change or update their Will and people who need help with administering (or litigating!) an estate after a person has died.
In the thousand or so Wills I have reviewed in my career, I see the same 5 mistakes when it comes to property time and time again.
So, here are the top five property-related mistakes, in no particular order, and what you can do about them!
Getting the Ownership Wrong!
This mistake usually manifests in the following ways:
- Purchasing the property using an ownership structure incompatible with your estate planning wishes; or
- Your estate planning documents do not deal with the property effectively on your death, because the property ownership is not understood and accounted for properly in those documents.
If you get the ownership of your property wrong, in either of these ways, it can have a seriously detrimental effect on your estate plan, and, in some cases, lead to a court dispute about your estate.
Here is a brief overview of the different ways to own property, and how they can affect your estate planning.
Firstly, we need to distinguish between property that you own personally, and property that is owned by an entity, that may or may not be controlled by you.
Only property that is owned by you, personally, can be given to another person under your Will. If the property is owned by an entity that you control, such as: (i) a company (Example Pty Ltd); or (ii) a trust (Chris Herrald as trustee for the Example Trust or Example Pty Ltd as trustee for the Example Trust) or (iii) a Self-Managed Superannuation Fund, then you cannot gift someone that property by your Will.
However, it might be possible to give control of an entity to someone via your Will.
Are you still following? For example, if you owned all of the shares in Example Pty Ltd, then, in your Will, you could give the shares to another person. The person who now owns the shares in Example Pty Ltd (because they have inherited them from your estate) can choose who to appoint as Director/s of Example Pty Ltd. Therefore, if Example Pty Ltd owned Property A, then your Will cannot give Property A to a beneficiary. Rather, your Will would need to gift the shares in Example Pty Ltd to the intended beneficiary.
Jointly owned property is the other area where I see estate planning failures time and time again.
Generally speaking, when you own property jointly with someone, there are two different ways that property is co-owned: either as joint tenants, or as tenants in common.
The difference between the two ways of co-owning property is this: when property is owned by two (or more) people as joint tenants, the person who outlives the other co-owners will end up owning the whole property.
For example, if a husband and wife own a property as joint tenants and the husband dies first, then the property automatically becomes the sole property of the wife. The husband’s interest in the property bypasses his Will entirely. So, for example, if the husband’s Will said that he wanted to leave his half of the property to say, his children from a previous relationship, that part of his Will is not valid!
Conversely, if the property was co-owned by the husband and wife as tenants in common in equal shares, then the gift in the husband’s Will to his children would have been valid.
Of course, that would then mean that the wife would be left in the situation where she had to co-own her home with her step-children!
Not Documenting Living Arrangements
Picture this: your 35 year old daughter telephones you and asks if she can move back in for short period of time so she can study to advance her career prospects.
Fifteen years later….she is still there!
However, you have probably never formally documented things like: (i) how much rent she needs to pay; or (ii) whether she will be permitted to stay there if you need to move out.
Getting adult (middle-aged) children out of their parents’ homes can be very difficult – especially if you have appointed that child as an attorney under an Enduring Power of Attorney and that document does not include terms to cover such things as: (i) whether the attorney can continue to reside in the home; (ii) what is to happen if the home needs to be sold to cover the fees for retirement living; (iii) how rent is to be calculated, if rent is payable; or (iv) whether the attorney is permitted to invite anyone else to live at the property with them.
It is also difficult removing adult children from a property after their parents have died. This can lead to a significant increase in the legal fees incurred in the administration of the estate.
Ensuring that arrangements like this are property documented is a critical part of the estate planning process.
Not Getting, or Ignoring, Taxation and Financial Advice
Now, a lawyer cannot provide taxation or financial advice – but they can identify when such advice is needed!
Here in Australia, we do not have inheritance tax or death duties, but increasingly, our federal and state taxes and revenue laws act like inheritance tax.
Things like Capital Gains Tax, the Foreign Investment Review Board regime, and various state duties can have a huge financial impact on the benefit a beneficiary receives from a person’s estate.
This is especially true if the beneficiary (or an intended beneficiary) is a foreign person (note – even Australian citizens can be foreign persons under some of our laws).
Some of our laws that were enacted in January 2021 can have the effect that foreign beneficiaries can be required by the Australian Government to “divest” (i.e. sell) property that they have inherited.
If your estate planning lawyer tells you that you must get this taxation or financial advice – do it, or your beneficiaries may pay the price, quite literally.
Not Updating Your Estate Plan
Every succession lawyer like me has had this happen in their office when they are meeting with family members to discuss the Will of a loved one: a specific property has been gifted to one of them in the Will, and then these words are spoken, “But Mum and Dad sold that property 10 years ago.”
Now the beneficiary gets nothing.
It is the law that a “Will speaks from death”. This means that if a particular property is described in the Will, but is not owned by the deceased person at the date of their death, then the gift is said to have “adeemed”. As in, it doesn’t count.
Now, there are various exceptions if attorneys for the elderly parents were involved in the sale but for the sake of this article, let’s assume that it was Mum and Dad themselves that sold the property but did not update their Wills.
In not updating their Wills, the parents have deprived that family member of their inheritance.
Related to this problem is when a Will contains specific gifts of property that have equal value at the time the Will is prepared, but at the date of death they are of significantly different value.
For example, let’s say that Child A is gifted Property A, Child B is gifted Property B and Child C is gifted Property C. In the minds of the parents, these gifts were probably equal gifts because at the time that the Will was drafted, the values of the properties were similar. However, at the time of death, it is entirely possible that Property A has increased in value at a significantly higher rate than the other properties.
If not equalisation clause has been included in the Will, then once again, there are beneficiaries who receive unequal gifts and the parents’ wishes cannot be fulfilled.
Not Having an Estate Plan at All
Of course, the biggest mistake property-related estate planning mistake is not having an estate plan at all!
I have spent many a barbeque arguing with people about the need for a properly drafted Will, Enduring Power of Attorney and superannuation death benefit nominations, at a minimum!
Common phrases uttered my way include, “I won’t care, I will be dead.”
Every single family member that I have ever assisted after someone has lost capacity to make decisions for themselves or has died, has uttered this phrase to me, “I just wish Mum/Dad/Brother/Daughter had sorted this out properly.”
Disclaimer
This article is intended for educational purposes only and is not to be relied upon as legal advice. If you have a legal problem or matter for which you require advice, please do not hesitate to contact the author.