Over almost 2 decades, I have seen hundreds of broken Wills. The impact of a broken Will on family, business and the preservation of generational wealth can be devastating.
Occasionally, the public at large gets a glimpse of that devastation when a story leaps from the courts to our social media feeds and newspapers. But far more commonly the fallout is dealt with privately in the boardrooms of lawyers, accountants, and family offices across Australia.
My objective with these words is to share some points of analysis or prompts that I use when stress testing a Will or more broadly, an estate plan. But what should you do with the information?
To start, I suggest that you get your Will on a screen, hit “CTRL-F, and begin to search some of the key terms I mention and see what you can discover. Alternatively, call your estate planning lawyer and get them to do the job for you.
Executors: An executor is in charge of putting your Will into effect. Is the executor still up to the job? Can the executor drive the administration of the estate effectively? Will the executor seek appropriate legal and tax advice. This is critically important for high and ultra-high wealth individuals and family groups.
Foreign Residents: Does your Will contain an executor or a beneficiary who is or may become a foreign resident? Are you a foreign resident? Significant care must be taken in deciding who will be an executor, who gifts are made to and how they will be made in a Will. It is critical to understand how tax residency can affect your trust estate for tax purposes. In some cases, getting this wrong can result in almost punitive tax consequences.
Beneficiaries: Does the Will include or exclude step-children or adopted children? What about surrogate or artificially conceived children? Does the Will protect children or other beneficiaries who are at risk of relationship breakdown or bankruptcy. Are spouses included or excluded as trust beneficiaries? Is there a need for adjustment amongst beneficiaries to account for provision made during their lifetime or for other reasons?
Definitions: Does the Will contain modern definitions of ‘income’, ‘perpetuity period’ and ‘proper law’? Well considered definitions can be transformational. For example, a tailored ‘proper law’ definition will allow an estate trustee to choose the law which governs an estate trust when it is established and to change the ‘proper law’ while the estate trust is in operation. This is especially useful if beneficiaries move their residence to another State or country.
Powers: Are there powers contained in the Will that confer on your executors and trustees the necessary flexibility to administer your estate and any trusts that are set up? For example, are there sufficient powers to split income and to stream different categories of income and capital gains? Is there a power to split trusts, amend/vary the terms of a trust or to protect the capital of a trust under your Will?
Testamentary Trusts: Discretionary testamentary trusts, with or without capital protections / restrictions, can help achieve asset protection and other purposes over your estate assets that cannot be achieved with a straight gift.
Many Wills are prepared to take advantage of the benefit of adult marginal tax rates being applied to income distributions to minor beneficiaries. Older style testamentary trust Wills set up a trust on the death of the first deceased which later receives the estate of the second deceased.
This is now a problem as current tax laws prohibit the assets from the second estate being used to generate excepted income. Fortunately, there are a number of straightforward ways to fix this common and costly tax issue.
If your Will contains a testamentary trust and there is no power to bypass the use of that trust (in other words using the trust is mandatory), question why and also ask what will occur when the whole of your estate lands in the testamentary trust.
Certainly, this result can be intended and appropriate but commonly there are unplanned consequences such as the loss of land tax exemptions where the Will does not contain an express right of occupation in a WA private residential property outside of a testamentary trust. Another costly mistake.
Family Trusts: What happens to money owed to you by the family trust when you die? What happens to the control of your family trust when you lose capacity or die? Not necessarily questions that must be answered in your Will but addressing them in your estate plan is critical.
Asset Protection outside the Will: Rather than assets passing via your Will, is it better or necessary (for example if your estate is likely to face a claim) to restructure the way you hold assets, so they are protected for the next generation. For example you may wish to limit the extent of claimable assets in your estate by transferring interests to a family trust (ideally with a corporate trustee) or to another person or corporation as a joint tenant with you. This will ensure those interests do not form a part of your personal estate that can be subject to attack by a disgruntled beneficiary.
Coaching and Control: Consider whether your estate planning is effective as part of the ‘coaching’ and education process for the next generation. For example, your Will, family trust deed of succession, company successor director provisions or family office shareholder agreement are all documents where you can specify the conditions that will attach to the transfer of inter-generational wealth. Consider if your children or others should share control with experienced executives (learn on the job) before complete control is passed to them.
In sharing these points of analysis, I am conscious that I have not touched upon superannuation death benefit nominations, enduring powers of attorney or enduring powers of guardianship. All of these are deserving of your interrogation.
Make a start, find something that causes you to question and then ask your estate planning lawyer for an answer.
Do not forget that divorce and marriage revoke a Will unless the Will contains a specific provision to the contrary or otherwise there is clear and cogent evidence to the contrary. Finally, be careful if you do experience a relationship breakdown to ensure that your superannuation death benefit nomination, enduring power of attorney and enduring power of guardianship in favour of a former partner is quickly reconsidered and updated accordingly.