This article was originally part of a publication by MGI, to which Mullins Partner Michael Klatt contributed: Family Wealth Without Family Drama: Navigating Intergenerational Wealth Transfer and Estate Planning.
Approximately 50% of the Australian population does not have a valid Will. This seems to be a result of complacency, largely, but also, in some circumstances, testators find it difficult to decide on how to distribute their estate following their death. This is particularly the case where the testator is a member of a blended family.
Estate planning is more than just making a Will. It is also important to have an Enduring Power of Attorney by which a person can authorise an attorney to act in relation to their financial affairs and personal (including health) matters. This document terminates on the person’s death.
It is important to identify how assets are owned. Sometimes, assets are owned by an individual; other times, they are owned jointly with one or more other persons. Assets can also be owned by a company or trustee of a trust, including family trusts or units trusts. Assets can also be held by a superannuation fund, either a self-managed superannuation fund controlled by the members or a retail or industry fund controlled by the trustees of those retail or industry funds. It is not uncommon for clients to not fully appreciate where the assets sit.
Once assets and liabilities are identified, it is necessary to consider the personal circumstances of the testator; are they married or in a relationship, do they have children, are they in a blended family situation, are there any issues of estrangement with family members that need to be considered, do family members who are identified as potential beneficiaries get on?
It is necessary to consider who to appoint as an executor or executors of the Will. These should be responsible people, not merely people who would expect to be appointed as executors. Appointing the right people to act as executors is crucial in avoiding family disputes.
If multiple executors are being appointed, then they need to be able to work together. Sometimes, it is appropriate to appoint an independent executor, either a friend or a professional advisor, particularly where the testator may be in a blended family situation. In the event that executors are not able to work together, the likely scenario will be a beneficiary or executor making an application to the court for the removal of the executors and the appointment of an independent administrator, typically an independent lawyer.
Typically, if children are not treated equally in the division of a testator’s estate, a family dispute will arise. Sometimes, however, a testator may feel that one child should receive a larger portion of the estate and other children, particularly where the testator may have a family business and one child has contributed significantly in the improvement of the family business to that child’s detriment, particularly also where they have not been paid a commercial rate of salary for the effort provided. Careful planning is necessary when developing an estate plan in these circumstances. If it is possible to distribute non-family business assets to children not involved in the business, then that is typically the preferred course of action.
Communication with family members in relation to the testator’s estate plan is usually advisable. This may prevent family disputes after a testator’s death, but this is not always the case.
The advice to testators who are members of a blended family is generally that, if it is possible to leave an inheritance to the testator’s children of a previous relationship in circumstances where their new spouse is still living, then this assists with potentially avoiding a family dispute after the testator’s death. Again, this is not always the case. Sometimes, there are insufficient assets to provide for adult children of a previous relationship and the new spouse. Testators may well consider entering into a mutual Will deed with their spouse by which they promise to leave their estate a certain way in the event that their spouse pre-deceases them.
Generally, children co-owning assets that have been left to them by their parents does not work. Careful consideration needs to be had before a decision to leave assets to children to be co-owned is made. If, however, it is decided that children will co-own assets, particularly in the situation of a family business, then proper governance needs to be put in place. Family Charters, Family Constitutions, Shareholders Agreements, and Unitholders Agreements are all tools that can be used to assist with avoiding a family dispute in a co-ownership arrangement.
Some testators have control of a family trust. A family trust is typically a discretionary trust where no one beneficiary has an absolute entitlement to the assets held by the trustee of the trust. Careful consideration needs to be given to the succession of control of the trust and, to the extent that the testator is able, they should leave wishes as to how the trust assets should be administered.
Clients with any significant wealth are typically concerned about leaving an inheritance to their children and their children subsequently separating from their spouse, exposing the inherited assets to a family court property settlement. Accordingly, many testators decide to incorporate testamentary discretionary trusts in their Will. Instead of leaving the inheritance directly to the child, the inheritance is left to the child as trustee for a testamentary discretionary trust. The beneficiaries of that trust include the child as the primary beneficiary and then other discretionary beneficiaries, including the child’s children and other relatives. Sometimes, spouses of the child and other beneficiaries are included as beneficiaries but are limited to being income beneficiaries and not capital beneficiaries. Proper consideration of the terms of those testamentary discretionary trusts is important. There is no standard testamentary discretionary trust Will that will suit all testators.
It is important that clients have Enduring Powers of Attorney in place. These documents are not just for elderly clients. One never knows when they may have an accident and therefore not be able to manage their own finances and personal health matters. Again, proper consideration as to who to appoint as attorneys is imperative. These are not documents that can simply be printed off and completed by clients without professional guidance.
It is vital that clients surround themselves with competent advisers, including a lawyer, an accountant, and a financial planner and that all of these advisors are engaged to assist with the estate planning exercise.
