Legal Tip 248: Leaving assets on Death to one person on an informal trust

Discussion in 'Wills & Estate Planning' started by Terry_w, 28th Oct, 2019.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    I have encountered a few people who were beneficiaries of an informal trust set up under someone’s will.

    It goes something like this:

    I want to leave all my assets to family members, but instead of naming them all in the will I will leave everything to one person and they can share my assets with the others.


    The issues with this are

    a) It is vague as to who is included and who is not,

    b) There is stamp duty consequences,

    c) There are CGT consequences, and

    d) There are Asset protection consequences.

    Money and time will be wasted.


    Example

    Barney has no kids, but he has 5 nieces and nephews. He goes to make his will with a lawyer, but he cannot remember all the names of the nieces and nephews so he says in the will that he will leave everything to Bart.

    Later he tells Bart “when I die, you will get everything, but I want you to split it equally with the other 4 nieces and nephews” Barts says ok and intends to honour his promise to Barney.

    Barney dies

    The executor administers the estate, and the assets pass to Bart.

    Bart doesn’t like his 2 cousins so he keeps the secret trust secret from them. He tells his 2 sisters that Barney wanted him to give 1/3 to each of them.

    Maggie, Bart’s sister wants to live in Barney’s investment property. No worries says Bart, you just take that and he and Lisa will take other things from the estate to make up for it.

    Maggie has to pay stamp duty on the transfer, in full because it is a transfer not in conformity with the will.

    Bart or the estate has to pay CGT on the disposal of the property. He didn’t take this into account and now him and Lisa have less than 1/3 each.

    Not to worry though as Bart thinks

    Soon after Bart is getting divorced. His former spouse wants a property settlement, and wants to include those properties inherited from Barney taken into account. Bart argues they weren’t his and he never inherited them – but that is not what the will or the evidence says.

    Bart’s business fails at the same time and he goes bankrupt.

    The trustee in bankruptcy takes Maggie’s property from her. They said this was a gift from Bart as nothing was paid for it. Lisa also loses her 1/3 share (of the leftovers) of Barney’s estate too.

    Bart dies from all the stress. His children now make a family provision claim on the estate of Bart and a notional estate claim on the properties transferred for non-consideration.



    All this happened because Barney didn’t want to make an effort to provide the full information to his lawyer. He was worried about the extra cost, plus he was no aware of the potential ramifications.
     
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  2. VanillaSlice

    VanillaSlice Well-Known Member

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    Interesting read...thanks Terry!
     
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  3. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Isnt the role of executor really one of a trustee role ? Aside from the Bart / Lisa issue as above. So two trusts ? The explicit terms of the will may be one matter but not all wills are explicit. eg a will may refer to "the rest and residue of my estate", or not address matters like attributable tax liabilities when referring to specific or shared estate assets.

    Perhaps even three or more if TT wills re considered.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney

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    I should point out that I was not recommending informal trusts - they should be avoided. But i have seen at least 2 people recently who had their wills set up so one person gets the assets and it was up to them (non-documented) to distribute to the other family members = heaps of issues.