Wills

Can someone please explain the difference between a testamentary trust and a living trust?
(Yes I have asked Google).

We are in the process of creating our wills and have small children. We told the lawyer that if both of us were to pass we would like a testamentary trust for our children.

We were advised that T Trusts are not needed for our situation. T Trusts are used for people who are incapacitated or would not use the funds wisely. (This contradicts what I have read on SS and the net). We were advised the way to go was a living trust. I questioned this and asked whether a T Trust is better due to the tax treatment of minors and I was told it was not necessary to consider Tax. The Living trust would pay all the children's expenses from its earnings and therefore there would be no tax for the children to pay. It really wasn't a very explanatory conversation - sort of this is how its done. As a non-lawyer how do I equip myself with the right knowledge to ensure my lawyer writes my will in the correct manner. We are in Victoria. Why would the lawyer have advised this?

 

A testamentary trust is a trust set up in a will.

That lawyer has given negligent advice that is incorrect. Probably lack of knowledge. Income from a living trust will still be taxed even if expended on children's expenses. Children can only receive $416 before they are taxed at 66%.
See my legal tips here where I had written a bit about testamentary discretionary trusts. Income to a minor from a testamentary trust is taxed at adult rates, so each child could receive approx $20,500 pa without needing to pay tax = a big difference.

Also transferring assets into a trust now can result in CGT and stamp duty. Neither apply if you die first!

 

Hi Terry
I have read your posts on this - thank you. I wasn't expecting the lawyer to respond how he did. When he mentioned the living trust - trying to seek clarification I asked if a living trust was a bare trust (which I read was a no no) and he he said no, a bare trust is for SMSF.
In terms of the living trust - there was no mention of transferring assets now into a living trust.
Also are there joint/ marital wills as opposed to separate wills for my husband and I?
At this point do I call his office and ask for my 1hr bill and inform them I am not proceeding, then try the next lawyer? We asked for Financial and Medical Power of Attorney's to be drawn up as well.
I assume I am getting a standard will - despite my asking for different.

 

Hi Owlet

Sounds strange. What was the proposed benefit of the living trust? To benefit it would need capital and have an income stream. Perhaps he was thinking future assets.

Each person has to do their own will. It is not possible for one will between 2 people (ie one document), but you could have wills which are mirroring each other - she gives to you and you to her sort of thing with the same terms.

 

Hi Terry

I believe it is a mutual will - which means to change the will we each need the consent of the other. Yes terms mirror each other.
If both of us go - we nominated two joint executors. One of those executors is also the guardian. (One person is good with money not so good with the kids, the other good with the kids not so good with money).
In a simple will - is it assumed that all assets will be sold and then the money goes into trust for the children until they are 18 (or the age specified). Lawyer said under 18 can't directly inherit property. The guardian controls the money but is kept honest by the executor.

My question is - as we don't currently have any wills at all, do we proceed with a will drawn up in this manner. Then when we have a clear understanding of the T Trust and can find a knowledgeable lawyer, then do we create a new will and/ or amend the current will.

From what I have read there is a little bit involved in the trust and trust deed.
I think we need a T Trust so that the IPs can be transferred without stamps and immediately payable CGT. Can this only happen if the IP is unencumbered? What happens with IPS with debt? Super and Life Insurance would get paid direct to the beneficiary. Will they pay tax on those - or just the income earned from that money? If under 18 - the children can't get it so the guardian would. Does the guardian then pay out the IP loans?
One of our supers has instead of lump sum - a pension payment to two children until they are 21. Do kids pay tax on that pension?

The Lawyer I think thought it was all a bit overkill and that I was controlling. He stopped short I think of saying - you will be dead, what does it matter. For us - we have worked hard and made sacrifices. There is no point the kids paying 66cents if there is a better B option.

 

Has anyone with small children set up a will. Would you care to share the path you have taken.

It seems easier to spend everything you earn, have a lot of OS holidays, get a government pension, a simple will and probably a delayed death as there you have saved yourself the stress.

 

These are complex issues

When someone dies they can will the property. But the loan to the property needs to be paid out. This can be done by selling the property and paying out the loan, the beneficiary qualifying for a loan, or other funds used to pay out the loan. It needs to be accounted for in the will. If there is no mention of what happens to the loan then usually the loan will be paid out from the property - sale or the beneficiary paying it off. Also there is a trap, loans secured against property A but used to buy property B = this would be paid for out of property A.

tax on a reversionary pension will vary depending on the age of the person at death and the age of the child. If over 60 it will be tax free.

you can change you will at any time while you have capacity so you could do a simple one now and fix it up later. But no point in doing a will that doesn't reflect your wishes.

 

If the pension is reversionary then the kids would receive the pension instead. Its not automatic and needs to be checked as part of the estate plan. Yes a reversionary pension can be commuted. The tax kids would pay on rev pension is highly concessional and may be as low as zero % and would be determined based on the pension balance/s.

One problem with rev pensions is they can expire...First problem is if one spouse dies before other. Can affect issues. But dealing with rev pension to kids...Once kids aren't SIS dependants or turn 25 the rev pension may also become invalid and leave a problem that the super now becomes a estate benefit that will be taxed.

 

I know a lawyer who felt a Deed of Mutual Wills was a important estate planning option. Not an important tool for oldies who have love and affection aged 90 but for couples and early death and blended families where terrible consequences can follow so that intended beneficiaries (kids) end up with nought and the new remarried partners family stand to benefit.

 

Thank you for your replies Paul and Terry. I spoke with a different Laywer today as well. I know what I need to do.
Before getting the second opinion I asked for the proposed will to be put on hold / paused until I digested the information. (At the end of the consult I was told he would get a draft typed up and emailed out to us to review) I didn't receive a response to my request to put things on hold. There was 4 business hrs between the meeting and my emailing this request.
I was advised today not to proceed with this current will, ask to be billed for the consult and move on. I am expecting a bill of $330.00 - 400 (time in meeting was approx. 45 minutes - first consult). However, if someone had started work on typing up the will - will I be charged for this also. The quote for the will and financial and medical power of attorneys were fixed prices - this included the consult.

 

Depends on your contract with the lawyer. You should expect to be charged for work completed.

 

I will be charged $200. After no response I followed this up this morning. I didn't have a contract. I asked for something and was persuaded of something else - which as you mentioned was negligent.

I don't mind paying for work done. As I was persuaded into a simple will - this draft probably took 20mins with our names inserted in the relevant proforma.

The issue is being incorrectly advised by an expert and then charged for it.

Ten years ago we employed an architect to design and project manage our extension. He measured up. Designs were approved by us and ready to go to council. I excitedly got a spray can and painted a box on the end of our house so I could physically see the space we were gaining. Guess what - the house ran 1.5m into the garage (which was staying). This had big implications on the design.
We amicably sorted the situation and moved on - mistakes happen. However, I still to this day disagree with being advised at the time that we would be expected to pay for the designs that were done - despite there being incorrect. Why should a client have to pay for the professionals mistake.
Had this not been picked up by me - the headaches when the builder started would have been hugely stressful and no doubt more costly.

 

And the architect said what when you queried the error ??

I would think most professionals accept responsibility for their own errors and charge clients when its the clients fault. I have always found that it is far more palatable to frankly admit to a error and correct it at my own cost than it is to defer blame and make up excuses. But if its a fault outside my control I would discuss with client to ensure they appreciate the rework etc may have a cost.

That said I don't make mistakes. I thought I did once but I was mistaken.

 

We worked it out. The architects rectified at their expense - that was the only option available to us. So we redesigned, had it built and sold it. The alternative was pay them 8k for drawings and work done and keep house as it is. If they measured correctly, the preliminary drawings would have revealed inadequate space. The CG was made before the extension. We didn't net anything extra upon selling. We were too stubborn to part with the 8k and chalk it up to lessons learnt.

 

Thank you Terry for your valuable information and Paul for your input.

We reviewed draft wills this evening. They look so boring in Word. I was hoping for a calligraphy script and a waxed stamp!

Once we sign and it is witnessed is that it?