Estate Planning Queries

Hi all,

Would appreciate an opinion on the following. I am try to assist some clients in understanding their current situation, and in turn to seek professional Estate Planning advice from an appropriately qualified specialist.

Scenario:

• Client 1 is widowed with three adult children, and has now met new partner (Client 2) who also has three adult children.

• Together, they have purchased a new principal residence and business (Joint tenants). Client 1 used the family house that she wishes to leave her three adult children as security for the new lending required to purchase new PPR and Business.

• Her desire is that half of any non-estate assets (i.e. Jointly Held assets with new partner) be split 50/50 between herself and Client 2 in the event that she predeceases.

• Both clients are too old for Life/TPD insurance to be an affordable consideration.

In light of this situation, could anyone help me to understand the following;

• Given a mortgage is held against the old PPR for securing debt with new partner, could title transfer to the children of client 1? What issues are there to consider?

• One thought is that the clients should potential change their ownership structure. Were the clients to change ownership from Joint Tenancy to Tenants in Common, would there be any stamp duty or capital gains tax issues to consider? Logic says no, but legislative reference would be fantastic if you have some? How would they effect such a transfer if deemed appropriate?

• Can a life tenancy agreement be implemented in combination with what are effectively Call/Put options, such as “If Client 2 suffers ill health and can no longer take care of his financial affairs or decision making, the family of client 1 would have the option to purchase the 50% share of the business from Client 2”, or Perhaps a Life Tenancy agreement would have some of these issues considered already. I have not seen one before. Perhaps you have a copy of an example, or could direct me to one?

• Client 2 is older than Client 1. If they both passed away at the same time (e.g. car crash or plane crash – not a nice thought I know!) is it the case that the older spouse is considered to have predeceased the younger spouse, thus transferring jointly held assets into Client 1’s estate? If this is not correct, could you explain what may be the likely outcome?

Thanks in advance guys.... If you need any further information let me know!

Lloyd.

 

Transfer

The secured property can be transferred via the will but the bank will not realease the guarantee (and allow the property sold) until the laon is paid off. this will mean the survivor will have to find the money, or refinance if they can or sell their PPR to release the other property. Quite simply your clients may have a funding shortfall on death so they will need to think through what that means.

Solutions may involve some insururance even if it is expensive, selling the second property now and making other provsions in the will for the kids or accepting that upon death the main residence will have to be sold. There is likely to have to be a compromise here with either the kids or new partners accepting a less than ideal outcome. Over time the longer the marriage goes the balance of intentions may shift so the estate planning needs done in a flexible way.

Changing the tenancy arrangements is often a good idea and normally does not involve stamp duty or CGT depending on the history of the property, the state it is in and if the partners are married or not.

Your put call option is likely to be possible from a legal standpoint but there is a huge amount of risk in giving those rights to a partners family when one is in ill health. There will be a better solution.

Its not possible to answer your question definitively without a lot more information but I'd suggest you refer your client to a financial planner who has experience in estate planning in combination with a good legal adviser.

 

Hi Lloyd

The best way for these assets to pass to her children is to die last!

Ownership could be transferred now. Whether stamp duty and CGT would apply would depend on the ownership proportions now. If it is owned 50/50 then there should only be nominal stamp duty and no CGT. Maybe even if owned other than 50/50 CGT may not apply:

see s 108.7 ITAA 1997
INCOME TAX ASSESSMENT ACT 1997 - SECT 108.7 Interest in CGT assets as joint tenants

Changing it now to Tenants in Common (TIC) would mean that the asset will be able to left in a will. JT assets don't fall in the will so the problem with the situation of one of them dying first is that the survivor will inherit the asset automatically. So if client 1 dies, client 2 can change his will and therefore Client 1's family can miss out.

A possible solution is to use a mutual will where each agrees leave the other assets with provision for the assets to go to each family in equal share once the last one (or client 1 and 2) dies and a contractual agreement not to revoke the will.

There are many problems with this however. eg. client 1 dies, client 2 then sells assets so that nothing is left to go in the will. What happens if client 2 mortgages the assets up further and invests etc. Client 2 can also change his will after the death of client 1. It would then be up to the beneficaries who miss out to sue the estate.

There may also be problems with children suing the estate under the Family Provision of the Succession Act. If a step parent doesn't make adequate provision to step children then they may not have standing to make a claim ie not meet the definition of 'eligible person' under s57 - whereas children would. This would vary from state to state.

A life tenancy could be incorporated into a mutal will. Options may be another idea as these could lock in the property to the children in equal shares. Granting is an CGT event and and options are complex. Testamentary trusts could be incorporated too under a mutual will agreement.

Transferring existing property to a discretionary trust now is also an option.

As for dying in an accident together, under s35 of the Conveyancing Act (NSW) there is a presumption, where evidence is inconclusive, that the older person dies first. This would apply for an accident where it could not be determined who died first.

For a beneficiary of a will there is a presumption that beneficiaries must survive a testator by 30 days to inherit . This can be varied by specifying a shorter or longer period in the will. eg. A client 1 wills her shares to client 2. client 2 dies 29 days after client 1. Client 2 would not inherit.

Also for someone dying without a will there is a rule that a person must survive the testator by 30 days or they are considered to have predeceased them. eg you have no will and die, 29 days later your wife dies. You estate woudl bypass the wife. If she dies 31 days after you then the estate would go to her (subject to all the intestacy rules).

 

Thanks

Hi guys, thanks for your responses to these questions. It is much appreciated.

In my research I have found that there is an exemption from Stamp Duty on transfers such as the one described.

On Life Tenancy agreements, I contacted one of the 'tech gurus' from my Licensee (am a Financial Planner) and he directed me to this very interesting article.

The Dead Hand: why you don’t want to grant a life tenancy under your Will | Talbot Olivier

Interesting points raised by all, which illustrates the need for quality advice in Estate Planning, and in turn an opportunity for appropriately trained/skilled advisers.

Not many people would understand a client's family situation from a financial perspective like a good financial planner would, especially given people's reluctance to seek costly legal advice after having seen a planner (perhaps unless it can really be explained to the customer why it is so important - which in my experience many planners are not 'skilled up' to do).

I have for some time been of the opinion that this is a massively overlooked area of crucial advice.

Thanks all