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News Bulletin : ADA News Bulletin October 2010
29 OCTOBER 2010 one property to repay debt and continue to hold all remaining property in the testamentary trust so that the beneficiaries will enjoy a lifetime income stream (as well as still enjoying capital growth). An investment-shy executor might have instead opted to sell all property which would have never been your intention. A letter of wishes may also inform the executor which advisors you trust to assist with carrying out your Will. Essentially, it’s a handy document to have and doesn’t need to be drafted by a lawyer – it’s something you can update from time-to-time. OWnInG PROPERTY AS JOInT TEnAnTS There are two ways you can own real property with another person – either as joint tenants or tenants-in-common (TIC). The difference between the two is that with TIC you can actually attribute a fixed ownership percentage to each owner whereas with joint tenants, there is no divisible ownership share. Owning property as joint tenants can create estate planning problems. In the event of the death of a tenant, the ownership of the property passes to the remaining tenants. For example, if three friends own an investment property together and one of the friends dies, the remaining two friends will become the owners of the property. However, if the property is held as TIC, the share of the property would pass into the deceased person’s estate. The general rule is: if you own property together with anyone other than perhaps your spouse or de facto, it is nearly always best to own that property as TIC (not joint tenants) so that your estate will benefit from your share of ownership. This would be a common issue where siblings own property together. Consider the situation where a brother and sister inherit a property together (joint ownership), brother dies, property is therefore solely owned by sister, sister gets a divorce and property is subject to a marital separation. In this case, due to the ownership structure, the property is exposed to the perils of a relationship breakdown. If you have ‘family’ assets (that you want retained in your blood family and pass down to successive generations), make sure you take appropriate actions to protect these assets. COnTROL Of TRUSTS If you have a family trust, the assets of the trust will not form part of your estate as no one really owns the assets until the trustee elects to distribute them. Instead, it is the control of that trust that must be addressed (transferred) in your Will. The controlling position within a trust is held by the appointer. The appointer has the power to hire and fire the trustee (the trustee operates the trust on a day-to-day basis in accordance with the rules of the trust – contained in the trust deed). Normally, the trust deed allows the appointer to nominate a new appointer in their will. If you hold the position of the appointer, this is exactly what you will need to do. Be careful if any loans existing between you and the trust as these will need to be addressed in your Will (as these will be personal assets and/or liabilities). InvESTMEnTS HELD In YOUR PERSOnAL nAME The problem with assets owned in your personal name is that often it’s very difficult to allocate equal or specific values to beneficiaries without first liquidating them (selling the assets for cash). Consider the example where you have two children and you buy two investment properties for $400,000 each with the view that each child can have a property each upon your death. The problem is by the time you die, the properties might be worth significantly different amounts. Often the best solution is to insert a testamentary trust into your Will and ask that all assets owned in your personal name are transferred into the testamentary trust upon death. A testamentary trust is similar to a discretionary trust except that it’s not created until the testator dies. A testamentary trust will have specified beneficiaries (as specified in your Will). The benefit of a testamentary trust is that it gives the executor of your Will more options. For example, returning to the example in the above paragraph, if both properties were transferred into a testamentary trust the executor/trustee might elect to sell one property and retain one. This would allow them to distribute some cash initially to beneficiaries (from the sale). The beneficiaries would also share the rental income derived by the remaining property. A testamentary trust is a valuable planning tool to have in your Will – particularly if you own assets in your personal name. SUPER CAn GO AnYWHERE The trustee of your super fund can pay your super to whoever it deems appropriate (according to the super fund’s rules) and the trustee does not have to follow your Will. To address this risk, many super funds allow you to complete a binding or non-binding death benefit nomination form which essentially provides instructions to the super fund in regards to where they should pay your superannuation benefits. For most funds, these nominations need to be updated every three years. Therefore, there are two pieces of advice. Firstly, contact your super fund and ensure that they have a valid nomination form on file – we find many clients don’t. Secondly, consider nominating a financial dependant, i.e., your spouse/de facto or children instead of your ‘personal legal representative’ which is often suggested. The benefit of this is that superannuation death benefits received by financial dependants are often received tax- free. In COnCLUSIOn: DOn’T ALLOW THE ‘URGEnT’ TO GET In THE WAY Of THE ‘IMPORTAnT’ Hopefully, making sure that our estate plan is correctly in place isn’t urgent for most of us – fingers crossed! However, it is very important. Unfortunately, we all lead busy lives and often attend to the ‘urgent’ tasks at the expense of the important ones. Don’t let this be the case in your situation. Make sure you speak with your financial advisor or estate planning lawyer to ensure that all your estate planning issues are correctly addressed. Estate planning is an important subset of financial planning. Given many property investors do not have a financial planning relationship, we often notice that they are wildly underprepared in this regard. How many of the six things above apply to you? Estate plans should be reviewed regularly – at least every two to three years and certainly if a major change occurs in your life. I hope this article has gone some way, once again, in demonstrating the value of intelligent financial advice. To watch a presentation on estate planning matters go to www.prosolution.com.au/ep Stuart Wemyss is a qualified Chartered Accountant, financial planner and mortgage broker. Stuart founded financial advisory firm ProSolution Private Clients which helps dentists maximize their net worth by providing financial and mortgage advice. ProSolution will be exhibiting at the Australian Dental Congress 2011. Contact: firstname.lastname@example.org business perspectives
ADA News Bulletin September 2010
ADA News Bulletin November 2010