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Beyond the Will – Practical Considerations in Estate Planning
Substantive Law| What area(s) of law does this episode consider? | Simon speaks to us, not only, about the need to have a will, but the importance of taking a holistic approach to estate planning. This includes incapacity planning, succession planning, superannuation planning, as well as of course, estate planning. |
| Why is this topic relevant? | The probate list in the Supreme Court of NSW is without a doubt, one of the busiest lists. 2019 saw the lodgement of 27,438 applications for a grant of probate. While the large majority of these applications were uncontested, 310 were listed as contentious matters. When you think about it, that is 310 families who, after the difficult loss of family member, had the unpleasant task of litigating a contentious probate matter.[1] Given the number of probate applications lodged each year, and the expectation that those numbers will increase, it is important to understand, at least to some degree, the basics around estate and succession planning. This will assist those of us, who are not specialised in this area, to identify when a client is in need of specialised advice and referral to an estate planning specialist. |
| What legislation is considered in this episode?
| This area of law is one in which a number of different pieces of legislation intertwine:
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| What are some examples considered in this episode? | Simon gives us a number of examples of clients he has come across, and their experiences in this area. Here are just a few examples:
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| What are the main points? |
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| What are the practical takeaways? |
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[1] Supreme Court of New South Wales Statistics (revised at 5 June 2020) < http://www.supremecourt.justice.nsw.gov.au/Documents/Publications/2019%20statistical%20data%20(revised%205%20June%202020).pdf>
| David Turner:
1:00 | Hello and welcome to Hearsay, a podcast about Australian laws and lawyers for the Australian legal profession, my name is David Turner. As always, this podcast is proudly supported by Assured Legal Solutions, a boutique commercial law firm making complex simple. Just a quick note before we begin, the episode of Hearsay you’re about to listen to was recorded in the midst of the Coronavirus crisis and as a result of social distancing measures we had to conduct this interview over remote technology such as Zoom or Google Meet, the audio quality might be a little different than what you were expecting. Still we think it’s pretty good in the circumstances and we hope you enjoy the episode. Joining us today to talk about estate planning is Simon Bennett from Southern Waters Legal. Simon, thanks so much for joining us on Hearsay. |
| Simon Bennett: | It’s a pleasure. |
| DT: | Now as the old saying goes ‘only two things in life are certain – death and taxes’ and it seems in your practise you deal with both. Simon, does everyone need a Will? |
| SB:
2:00 | Yeah everyone does need a will but I think saying that, in and of itself, is not enough. Everyone needs an effective estate plan, so more than just a will. With today’s society, the way in which it’s managed, the way in which we complicate our lives, justifiably, the way in which we go about that, we need more than that. So we talk about estate planning as opposed to just the will and we talk about incapacity planning. So what happens if you were incapacitated, unable to manage your own affairs. We talk about estate planning and that’s all the assets in your own name, but beyond that, we also have to look at superannuation, death benefits. So your superannuation is governed by federal law. Your will is governed by state law and they don’t necessarily talk to each other, so with the government encouraging you to put all this money into super, you need to cover off on that as well. And we see a lot of clients who justifiably have put in additional structures as well, so family trusts, companies etc. and they’re not automatically governed by your will as well. So we’ll talk about succession planning with those types of assets as well. So yes, everyone should have a will, particularly every adult but they should have more than that. They should cover off on the incapacity planning, the succession planning, the superannuation planning and the estate planning. |
| DT: 3:00 | I think something that answer really highlights is maybe a conundrum about when to do all of this, because certainly in terms of planning for incapacity, you never really know when that might happen but even so far as some of those other assets you are describing, there can be pretty dramatic changes to your life that are unexpected, that might impact your planning around those. I guess particularly thinking about business succession planning there. When is the right time to start thinking about these things? |
| SB:
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8:00 | Well look, I joke that as an 18th birthday present, you should get given a power of attorney but it actually really is important to get those documents in place ASAP and they can be very simple with a simple life and as your life gets more complicated, you can expand upon the documents and what they cover. TIP: A power of attorney is a special type of deed which allows one to nominate a person, trustee or organisation to manage one’s assets and financial affairs and make decisions on one’s behalf. This area is governed by the Powers of Attorney Act 2003 (NSW). A general power of attorney ceases to be valid upon the death of the principal, or on loss of mental capacity. However, an enduring power of attorney continues to have effect even if the principal loses the capacity to manage their own affairs. The reason why it’s really important is you may think a power of attorney is really important for someone elderly and it is, but if that person loses capacity, the likelihood of them surviving for a significant period of time, if they are quite elderly, is quite small. Whereas, if someone young loses capacity, they may not have, they may still have a long life but someone needs to look after them, and if you don’t choose that person yourself, you need to go to the government body, guardianship tribunal, and the guardianship tribunal will decide who is to manage that process for you. TIP: Let’s pause here and unpack this a little. Simon previously spoke briefly about ‘incapacity planning’. One aspect of incapacity planning involves the appointment of an enduring guardian. Many people plan ahead for their financial and business affairs by appointing a Power of Attorney, but an Enduring Guardian is important in the event one is unable to make lifestyle and medical decisions, due to illness or accident. An Enduring Guardian is someone appointed to make lifestyle, health and medical decisions when one loses the capacity to do so for themselves. An Enduring Guardian only comes into effect when or if you lose capacity, and will only be effective during the period of incapacity. Guardianship is covered by the Guardianship Act 1987 NSW. The Act provides when an appointment of a guardian has effect (s 6A); who is eligible for appointment as a guardian (s 6B); the functions of enduring guardians (s 6E); the revocation of guardians by their appointers (6H) The Tribunal Simon mentioned is the Guardianship Tribunal, and under s 14 of the Act, they have the power to make guardianship orders where an application has been made and the tribunal is satisfied that the person subject of that application is in need of a Guardian. I’ve got a good example of this. I had a client many years ago who was in a car accident. He was only young, I think he was 20. He had a $4,000,000 settlement as part of that car accident. His parents at the time got some probably poor advice, that it would be too hard for them to manage so they just let it go and the public trustee was managing it. Fast forward maybe five or six years, a property comes for sale directly behind mum and dad’s property, and go ‘how wonderful will this be. We’ll knock down the back fence, we’ll make this house completely accessible for our son, he will start to have a little bit of independence but we can look after him. There’s $4,000,000 sitting in the bank, so we could make it work’. The guardianship tribunal or the public trustee, the government came back and said ‘Yep, we’ll support you buying it. Here’s a letter.’ That was six weeks after the auction finished; 10 to 15 calls by the family to try and access the money and make it happen. So in that circumstance, a power of attorney would have been saying, mum and dad have got the power and the discretion to deal with it. It’s just but one example and they’re going to be involved in that process for most likely another 40-50 years, it’s a long haul. So it’s an obvious answer to your question but realistically, every adult in Australia should have this stuff covered and it doesn’t have to be complicated. They just need to have choices as to who would look after them if they were incapacitated and where their assets go. |
| DT: | And it’s such a frustrating example because it’s not even a matter of a difference of opinion, you know, the right call was ultimately made. The frustrating thing was it was just made too late to be of any effect and that’s really the difference between having a motivated person who’s interested in your welfare, being that decision maker and someone who’s disinterested and then perhaps managing hundreds of thousands of these. |
| SB: 9:00
10:00 | Yeah it’s a huge example. Another example for young people is a lot of people don’t realise but with your superannuation, depending on what fund you’re in, you often get automatic life insurance. So the question is, well I don’t have any assets, I don’t need a will. But you might be sitting on $5000 in your superannuation fund, plus an automatic life insurance policy for $100,000 or substantially more, you never know. So in circumstances like that, we’re looking more at superannuation planning but we need to cover that off. An interesting thing with superannuation planning is there’s only a limited class of people you can pay your super to. So you can pay it to a spouse, you can pay it to a child, we can pay it to someone who’s interdependent upon you but, I would have lost count the amount of times people have come in and nominated their sister or their brother, or their mum or their dad, that would fall away and again, we’re taking it out of your control, you deciding where that money goes. In this case, it’s not going to the guardianship tribunal or the public trustee, it’s going to the board of that Superfund. Now if you’re in a public fund, that board might sit down in a big office in Melbourne and they’re going to make a decision as to where your assets are going to go when you pass away, with no understanding of your family circumstances, situation, etc, so it’s important to have it all covered. |
| DT: | You mentioned before that the superannuation provisions are dealt with by Commonwealth legislation which doesn’t always interact easily or well with state legislation. Talk for a minute about some of the challenges that inconsistency brings. |
| SB:
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14:00 | Yeah, so the wills and drafting a will, everyone knows about drafting a will, and the legislation that’s dealt with that, and whilst it’s been updated, is substantially outdated in terms of the way society acts now as opposed to… it contemplates everyone having a plain vanilla situation where they own all the assets in their own name, but superannuation is governed by the Superannuation Industry (Supervision) Act and we call it SISA. What that says is if you’ve got money in super at the time of your death, it’s called a death benefit, your death benefit is paid pursuant to the rules as set out in a trust fund. Now most trust fund deeds will allow for you to make what’s called a ‘death benefit nomination’, so this is a nomination as to whom you want it to pay to, and one of your choices there is to say I want it to be paid into my will and then your will can deal with it, but until you’ve done that, it’s at the trustees’ discretion as to where it goes amongst this limited class of people. Your will is a ‘choose your own adventure’ novel, you can choose whoever you want it to go to; it can go to the old cat’s home, it can go to someone you met in Zimbabwe, it can go to whatever relationship, whatever person you want to have it. Whereas your super is very definite, it can only go to definite people, unless it goes into your will. TIP: Many clients, and in fact, many of us listening may not be aware that super does not form part of your estate. Section 59(1A) of the Superannuation Industry (Supervision) Act 1993 provides that a member of a superannuation fund can give notice to the trustee of the fund, requiring the trustee to provide benefits in respect of the member to the person mentioned in the notice, being a legal personal representative or a dependent or dependents of the member. That is clearly, a very limited number of people. For some people, this works – and they can fill out a binding death benefit form, generally available from their superannuation provider – and hey presto. What about those who would like to provide the benefit of their super to, as Simon so wonderfully puts it, the old cats home, or someone you met in Zimbabwe? Clearly the death benefit nomination form won’t cut it here. That’s where the terms of the will come into play. Again, a circumstance I had many years ago, we had a young person pass away unfortunately and they’d gone through a pretty messy separation. That separation involved children, that partner was often calling the deceased, arranging childcare issues, etc. She passed away and unbeknownst to everyone, she had a $350,000 life insurance policy and super. He came out of the woodwork and said ‘we were getting back together, here’s all the phone evidence to say that we’re getting back together because we are in a relationship, she didn’t tell anyone because she wanted to keep it a secret until we were 100% back on board, etc’, and the family were adamant that was not the case, but it wasn’t their choice. It was this board of this public fund that made a decision based on the facts that were presented to them. So having an effective estate planning capacity plan etc, it’s really about taking control. |
| DT:
15:00 | Earlier we were talking about how the provisions of the Succession Act and the common law in this area doesn’t really recognise the way many of us hold assets in modernity. We may hold them through entities that hold them on our behalf that we might have the beneficial interest, superannuation is definitely an aspect of that dynamic but there’s also other challenges that arise when you might hold assets through a trust or through a corporate structure. What are some of the issues that those structures create when you’re giving estate planning advice? |
| SB:
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19:00 | So there’s a number or I’ll give a few examples I think that will highlight what they are. So, for example if you own a company, ABC Pty Limited and you own all the shares in ABC Pty Limited, you kind of think it’s one and the same and any assets of ABC are your assets and you just treat them the same but they’re not. I had a client come and see me and he had bought 3 properties, and what he had said with those three properties was: he’s got three children, he wants this will which wasn’t drafted by me, it was drafted by someone before me and he said I want to give property A to child A, property B to child B and property C to child C. My child A has helped me in the business so I want to give him the shares in the company that ran the business. All makes sense, except for he didn’t own properties B and C, the company owned properties B and C. So if you run that through from a legal perspective, the shares in the company were going to Child A, they were going to have 100% ownership of the company which had 100% ownership of properties B and C. So in that scenario, Child B and C were going to miss out. So a corporate structure is a separate entity. So we’ve got two particular issues; one is what assets do they own and you can’t give those assets away in the will because you don’t own those assets, the company does and the company lives on, even if you pass away as a sole shareholder or sole director, that company still lives. The second issue is control. So who is going to have control of that entity when something happens to you, and control generally runs in two levels. At a company level, you’ve got shareholder level and director level. If you own the shares individually, you can give your shares under the will, so that’s okay but who will end up as the director and one of the issues here, which we see, is again this distinction between different areas of the law. So we’ve got the Corporations Act. The Corporations Act says if a sole director company, if that sole director passes away or becomes incapacitated, the legal personnel representative of that sole director can take control of the company. So that’s okay, you’ve passed away, you’ve got a will, there’s an executor named, they can step in straight away. Well actually they can’t, because just naming someone as the executor of your will, doesn’t make them the executor. Probate needs to be granted before they are officially the executor, so there’s a period of time that might be 3- 4 weeks, if you’re extremely lucky. Between, up to three to four years if it’s quite convoluted between someone passing away and probate being granted. TIP: The executor of an estate is responsible for collecting and realising the assets of the deceased, paying any debts and distributing the sale of assets. Now before an executor can begin this process, a grant of probate must be given by the Supreme Court. During that period of time, no one has the legal right to manage that company and we’re seeing companies going into administration because of this one mishap. There are ways and means come around that, and ways you can look at the company constitution, the company itself can grant a power of attorney that would take effect if someone was to pass away or lose capacity and there are ways to manage it, but it’s a good example of why company assets need to be dealt with significantly differently. There’s also some issues which we talk about with both company assets and trust assets that deal with the balance sheet. So often with external entities, the accountants say ‘here’s your tax bill for the end of the year, we’ve moved all the money around’. You go ‘ok, that’s fine, I don’t really need to know that, I just know that I need to pay this amount of tax’. But what happens is you might end up owing a debt to the company or the company might end up owing a debt to you or the same with the trust. Now we’ve talked about control, and that entity existing beyond your existence, so if something happens to yourself, and I’ve had examples of this for example; second relationship, dad passes away and says I’m going leave all my assets to you three kids but I’m going leave the company or the trust to my new partner and they’ve got this particular asset and so everything’s good. Then the kids look at the balance sheet and say actually the company trust owes me or owes the estate all of this money, so that $500,000 property you were going to give to your ex-spouse or your spouse, second spouse, which is in our mind, the evil step mom, we’re owed $500,000 or the estate is, and we get 100% of the estate, so we’re going to call that debt in. |
| DT: 20:00 | I can imagine the opposite could just as easily occur, where the director owes quite a large liability to the company, and those liabilities have to be paid out of the estate before it can be distributed, with the consequence that those three children’s interest in the estate is largely eroded. |
| SB:
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24:00 | Yeah correct, it swings both ways. It’s a huge issue that needs to be considered and then, we’re talking I suppose about succession planning and holding assets in different entities. One of the huge benefits of having a family trust is the fact that you do not have a fixed entitlement, and the fact that you do not have a fixed entitlement means that you are somewhat protected from an asset protection point of view, because the courts look at it and say what are you entitled to, what could I take from you if you are being sued or there was a judgment against you and if you don’t have a fixed entitlement, you can say, well you can take my non-fixed entitlement but the trustee has the discretion to pay money out. TIP: The family trust structure is a popular type of discretionary trust. In this type of trust, the trustee has the ability to decide which beneficiary or beneficiaries receive the trust’s net income and capital gains each year. The beneficiaries to whom income can be distributed are usually defined by reference to a primary beneficiary that’s the matriarch or the patriarch of the family and then a class of second beneficiaries, defined as being the relatives of the primary beneficiaries. Sometimes it also includes relatives of those relatives, which can end up being quite a broad class. This is obviously different to a fixed trust structure, where the beneficiaries’ proportionate entitlement to the distribution of trust income and capital gains is fixed according to the number of units they hold. The family trust structure can offer advantages, as Simon has touched on, such as:
So that discretion provides a great deal of asset protection and it also provides for some taxation benefits as well, because at the end of the year, you can decide between your family unit, who is most worthy of receiving it but also you may, in that consideration, consider what the taxation consequences are of payments amongst your family and maybe someone, for example, who’s on maternity leave who’s not receiving income this year, there may be someone who’s carrying forward a capital loss from a bad investment and the trust has made a capital gain this year. It allows for discretion to be made in those choices. But it’s a classic case of ‘you can’t have your cake and eat it too’. So when you build up all of these assets in the trust then you say, well if something happens to me, I want these assets to be distributed this way. You can’t say that because you can’t fetter the discretion of the trustee. You can’t change the trust from a discretionary trust to a fixed trust without suffering from some taxation consequences, it’ll be a resettlement of the trust. So all you can really do there is pass over control, and we talk about passing over control with some guidance and that guidance might be for example, a memorandum of wishes, and what I say to my clients is, that guidance is not legally binding. What we’re hoping is that it’ll be morally binding, that you’ll make the right choice and big questions need to be asked as to who takes control. You might say, I’ve got three children and child number ones the most responsible, fiscally, emotionally, etc I’m going to put them in control. But if you put them in control, they will have the discretion to pay 100% out to themselves. Now you may think they wouldn’t ever do that. In a perfect world for me, I would like to change wouldn’ts into couldn’ts. So whilst they probably wouldn’t ever do it, it’ll be nice if they couldn’t ever do it and setting up the structure, the succession structure in terms of who controls that and whether they can manipulate things in their favour, particularly in a blended family or family with more than one child, becomes something that needs to be considered. |
| DT:
25:00 | Just going back to some corporate structuring questions for a moment, that’s a topic that’s really interesting to me because I don’t do estate planning work but I do do business structuring work and many of those considerations come up in my practise, probably nearly as often as they do in yours. Similar to your advice that everyone needs a power of attorney at a fairly early stage, my usual advice to any company that has two or more founders is that you need a shareholders agreement to manage those sorts of change of control events, and a common one is death or incapacity, and it’s not uncommon for companies to take out policies of life insurance on their founders to finance the buyout of those shares if that’s necessary and sometimes, I’ve also found that using different classes of shares you can separate control rights and economic rights so that you’re able to pass on those economic rights to the beneficiaries under a will while leaving the control rights with perhaps an earlier generation if it was a family business, with those control right shares being bought back compulsorily or redeemed on that sort of event. So I think that’s a really interesting dynamic there and in terms of trust issues, I suppose you can compound those issues as well because frequently the trustee of your discretionary trust will be a corporate entity. |
| SB:
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27:00 | That’s correct, yeah. So we often have, you talked about classes of shares. One of the classes of shares, it’s not a typical class of share, it’s one we sort of create, you are not necessarily going to find it in an off the shelf constitution, but we create a class share called director appointor shares. So these classes of shares have no financial rights, you don’t have a right to receive, I think they might be worth a dollar, so you get your dollar back but no right to a dividend, no right to a distribution of capital. They do have a right to appoint a director, that’s the sole right that sits with them. So as an example, I’m one of seven children. If we wanted to set up a structure like this within my family and let everyone have an equal say, in my opinion it’s not enough to say all the shares are split equally because you still need a majority to appoint a director and directors can make decisions, as long as there’s not fraud on the minority or adverse decisions, they can make decisions which could adversely impact the other shareholders. Whereas, if everyone has the right to appoint themselves as a director, now they don’t have to take up that right, they can say well, Johnny’s great at it, let’s just let him manage it. But you know that old saying ‘justice must not just be done, it must be seen to be done’, I feel in a scenario like that, everyone then has the ability to say, well we do have the right to have an equal say, at both levels; director level and shareholder level, so that’s just, I suppose, one of the tricks we used to try and get that equal control. |
| DT: | And it gives you, quite literally, a seat at the table. You might not have control because you are still one of 7 directors, but you have a power to see the books and records of the company, you have the power to call meetings, and that I suppose, as you say, gives the appearance even if not the reality of a more equitable management of the company. |
| SB:
28:00 | Yeah and I think, whilst you don’t have control, you have an equal say. So you know, there can still be factions I suppose within family units and within other units but, you still in that scenario, have a 1/7th say, at a director level and a shareholder level. One of the tricks that we have to do is split shares, so there’s different ways you can get new shares out there. Obviously, you can issue new shares etc. but we quite like splitting shares so there’s no adverse consequences of that, but often we’ll have a mum and dad and they either have one share, or they might have two shares, one share each but then they got three children. Right then what happens to both you that the kids can’t have 3 into 2, it’s just not going to work, 2/3 of a share each. So we would split their shares and instead of their shares being one share each, they might have three shares each, as an example. Still 50/50, there’s no changes from a tax point of view, you need to notify ASIC obviously, but it just means when the succession planning comes into place, it can just flow nicely and simply. |
| DT:
| It sounds like along with some of those other instruments we were discussing before, particularly if you have a business, a trading business I should say and I’ll come on to that in a second, but it sounds like a shareholders’ agreement or at least a bespoke constitution, is almost an important estate planning document in itself. |
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31:00 | Yeah I think so and you mentioned before about life insurance and shareholders and it’s probably a topic for another day but there are significantly different tax consequences as to whom holds a life insurance policy, who gets paid, how it works etc. and shareholders’ agreements cover a lot more than just that, but I think it’s quite important that that be factored in and it’s still done unfortunately in the legal industry but it shouldn’t be. In my opinion days have long since passed where solicitors should be order takers. I can come in and say, I want to leave everything to my wife and then my three kids and lawyers don’t necessarily ask the question. My opinion is, you need to always go back to the source documents, so if someone comes to you and says I’ve got a company and these are the assets, you should be asking for the balance sheet, you should be asking for the constitution, you should be asking for the trust deed and any subsequent amendments and its balance sheet as well. You should be doing company searches on ASIC, you should be doing property searches to find out all of these things. We had a case many years ago where this gentleman had passed away and the daughters came in and they said we need your help with this will. And we said, ok what’s the issue and they said well Dad’s passed away and he hasn’t left anything to Mum and as far as we knew, and as far as Mum knew, they were in a loving, happy relationship and had been going for a long period of time, we weren’t aware of any problems, Dad had left everything to us and we don’t want it, we want to give it up and give it to Mum but we don’t know why. So we rang the solicitor and we said, look we’ve got to get your file and find out what the notes are, are there any reasons why and his recollection was, I didn’t even ask if he had a wife, he just came in and said I just wanna give it to the kids, and our thoughts are he just probably thought it automatically went to his wife and what he was really saying was, well if something happens me, obviously my wife gets it but what I want to happen is if something happens to both of us, I want it to go the kids but the guy was, unfortunately he was an order taker. So he’ll listen to you, take your order and I don’t see that as our role. We need to go to the source documents, we need to advise people and like you say, if it’s a shareholders’ agreement or a company constitution, we need to be in a position to be able to say, actually we need to change this and these are the reasons why. |
| DT:
32:00 | Yeah, I really love that Simon and I completely agree that our role is really as advisors and counsellors and that good advice is rarely given by uncritically accepting the first instruction you get. And I also agree with you that you do need to look at the source documents and really understand quite apart from your instructions, the financial position of a company or person that you are advising and I think that’s probably a topic for another day about solicitors needing to have the ability to read a balance sheet and read an income statement. We’ve talked a bit about companies and trusts and many of the issues we’ve described come up if that vehicle is used to make an investment or hold a particular asset, are there any issues that come up that are unique to a trading business? Where a company is used to run a family business or perhaps it’s a trading trust? |
| SB:
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37:00 | There’s a multiple number of issues that can come up there, probably the simplest one is that issue I raised before – if we don’t have succession control of a trading entity and we don’t have the documentation in place, if we had a sole director that passed away, under the Corporations Act we don’t have someone who’s legally able to manage that company until probate is granted and that can take a long time, and that business can go under. No one is legally able to do it, someone might work their way around it but they’re not legally able to do any of those things, so that’s critical that we have succession control provisions. TIP: Here’s a scenario that you might not have considered. What happens to a company where the sole director and shareholder dies? What happens to the functioning of the company? The Corporations Act can assist here. Under section 201F(2), where a company’s sole director and shareholder dies, and a personal representative or trustee is appointed to administer the personal estate or property, that’s the executor in this case, that personal representative or trustee may appoint a person as a director of the company. Of course, this will require a grant of probate to be completed, which as Simon said, can take weeks. Beyond that, family business is really an interesting one. A number of times we have situations where a son or daughter has gone into the business, it was worth $2,000,000 at that point in time. Mum and/or dad have sort of slowly weaned their way out of the business, the business is now worth $12,000,000, there’s two other kids that aren’t involved in the business, child predominantly involved in the business thinks they should get it all, parents are quite confused as to what’s right because they want to treat everyone equally but how much is that child contributed to the growth of the business, what’s that worth, transfers inter vivos or during a lifetime are often excluded because, when I say excluded, they’re rejected as a proposition because of the substantial tax consequences that would flow from them, whereas tax consequences of just gifting in under your will, it just postpones the tax to a later day. So there’s substantial issues around there and then, one of the things I love and it’s hard to convince a client necessarily to do it cause it is a bit of work, but one of the things I love doing is sitting down with the client and getting a memo of wishes about how they business should be run. TIP: Simon briefly mentioned the memorandum of wishes earlier, but now is a good time to really delve into this concept. A ‘memorandum of wishes’ doesn’t particularly sound like your usual legal jargon, but it is a useful tool in the world of wills and estates. A memorandum, or letter, of wishes does not form part of the will itself, nor is it legally binding, but it is considered to have some level of moral sway. It is a unique and personal document which can convey a range of information about the testator’s wishes after they die. For example: 1. It can provide guidance on how a testator would like trustees to apply any part of a beneficiary’s inheritance during their infancy; 2. How a testator would like beneficiaries to apply any part of their inheritance once they attain a specified age; 3.Instructions in relation to a testator’s digital assets such as social media accounts; or 4. Even how they would like funeral arrangements to be handled. I like to get it out, on a piece of paper, as an instruction manual, how would someone run this business if you weren’t around. And it can go so far as to say, well we’ve got Mary sitting there in the corner who would run this business perfectly but she’s quite shy. We’ve got Johnny sitting over there in the other corner who’s quite ambitious, who would come up and say, I want to run this business. I will run it, I’ll do the great deed but you might know that Johnny would be the worst person to run it, but no one knows that because it’s sitting inside your head. So this comes out on a piece of paper, no one needs to see it but it just, it provides guidance and whilst it might not necessarily legally bind someone to do something, in many respects, it’s one of the most powerful documents because it articulates why that business has been successful, how it can continue to be successful, who has made an offer for it six months ago, what they offered you for it because maybe it is something that needs to be sold but if that’s not out there on paper, no one knows. I had a situation again a few years ago where this gentleman ran a very successful mechanic business doing work for buses and he passed away suddenly, unfortunately, and the widow went to sell the business, and their 2IC just up and left and set up shop 3 doors down the road and took all the business and that business ended up being worth nothing, and that was a business that was worth millions of dollars, and an effective succession plan, maybe wouldn’t have eliminated that risk entirely, but I think it would have minimised that risk substantially. |
| DT: 38:00 | I really love that idea of the memorandum of wishes, that it’s not just legally enforceable documents that are important, that this is really about planning for the future and not all plans are legally enforceable orders. Sometimes it’s a matter of recording what you’ll lose when that person no longer has capacity or dies. I’ve certainly seen some difficult structuring decisions in terms of recognising that member of the second or third generation who’s very involved in the family business. Sometimes the business is so long standing that the shares in the company, or some of the property it owns, are pre-CGT assets and there’s some kind of tricky attempts to give shadow equity or bonuses that look very much like equity to those children without affecting the pre CGT status of the assets. I don’t think there’s an easy answer to that conundrum but it’s a fraught issue. |
| SB: 39:00
40:00
41:00 | And there are some challenges as well around generational transfers. We had a situation a few years ago where a grandfather had created a business, quite a big successful business, well known within Australia. His two sons were running it. They were starting to differ in opinion but they were still managing to run it. They’re getting elderly, they wanted to pass it down to the next generation which is four children on one side and three on the other, and how do you manage going from two sons having equal say, to 7 cousins managing it? Again, you can be creative and we got a family constitution that dealt with all of that. Essentially, each side of the family has one vote but each child has one vote within their one vote, so the 4 have got to come to an agreement and then that person will represent their side and the other 3 have got to come to an agreement. But it is tricky, it is tricky, and then who is that person who represents, and all those things, and there’s no right or wrong answers in this area, and in this field, and I think what you said before, you know, what I said this memorandum of wishes, these non-legal documents often can provide substantial guidance to the next generation as to how and why. And another example of that, and we will probably get into the wills in a bit, but one of the things that happened for me personally was; I’m a father of three children, I had my first child and I remember the first day we went out without our child. My wife wrote an A4 list of instructions for our babysitter, which was one of the grandmothers; if this happens, then this, and if this happens, then this and if this blah blah blah. So an A4 piece of paper and yet I was at work writing wills for people saying, well who’s going to look after your kids if you die? Ok you’ve named the person and then that’s it, there’s nothing more. This doesn’t ring true, this is not the right way of doing things. |
| DT: | Yeah, so instructions for a day but not for a lifetime. |
| SB:
42:00 | So we’ve created now this memorandum wishes about raising children and again, in my opinion is one of the most powerful documents we do, but again it’s not necessarily legally binding, it’s just a guidance and we break it up into general, from baby to the preschool years, the primary school years and then the high school years. It’s quite challenging if you’ve got a little primary school child and ok, I’m saying lets tick off some boxes about the high school years, when do you want them to start driving, when do you want them to get a job, when are they allowed to have a member of the opposite sex sleep in the same bed as them? My little baby, but most people have a great level of comfort knowing that’s written down, and you know it’s broad issues, Catholic school? Public school? Private school? This religion? No religion? Through minute issues and again, it is the concept of intellectual property that sits inside your head, getting it out, because if something happens too suddenly, no-one’s able to get it out. So no one may know that little Johnny gets really anxious and he’s got trouble with his handwriting or this or that. Some things the teachers might know, but some things may be completely personal between you and your child, but they’re very important that someone does know about them so that if something happens to you, that they can manage that moving forward. |
| DT:
43:00
44:00 | I really like the way you characterise this whole exercise as there being no right or wrong answers, I mean obviously there are some legally correct answers but, in broad terms, in terms of goals, there is no right or wrong answers and it’s really about making sure that your wishes are known and so far as possible, that they are carried out, but let’s move on to wills. Wills aren’t always carried out to their letter and family provision claims under the Succession Act are a common reason why that might not be the case, tell me a bit about that regime. TIP: The law relating to wills in NSW is governed by the Succession Act 2006. In the absence of a will, called intestacy, property is distributed to family members according to an intestacy provision set out in Chapter 4 of the Act. Now as many of our listeners will know, in other cases, even where a will has been made, the will may be challenged on the basis that it leaves inadequate provision for a spouse, child or someone else who had a close relationship with the deceased by way of a Family Provision Order. This is quite a sensitive area of the law, given that it is already a difficult time for families who are dealing with the recent passing of a loved one. An application for a Family Provision Order is made by way of a summons in the Supreme Court and is accompanied by an affidavit setting out the circumstances of the applicant’s life, including why provision should be made for them from the deceased’s estate. The application is then served on the executor of the estate. Mediation is mandatory in family provision proceedings. It’s only if they don’t reach a resolution where the matter proceeds to a final hearing. Section 60 of the Succession Act outlines the matters considered by the Court with respect to a Family Provision Order. There are quite a number of considerations, but just to give you an idea, some include:
|
| SB: 45:00
46:00 | I think to understand this you need to understand the history behind it. To some extent. Family provisions have been around for a long time, centuries, and it’s a government initiated law and in essence it looks like this; you bring someone into this world, so a child into this world or you marry someone and you make a promise to stay with them for the rest of their life, then you leave this world and you’ve got enough money to sustain them, but you don’t because of whatever has happened in that relationship. That person is unable to sustain themselves, they then go to the government and say can you sustain me. So the government’s thoughts are well, hang on, you brought them into this world, you’ve got the money there for them, you should provide for them, and that’s the whole basis of this law and where it’s come from. I don’t love this law. I think in black and white situations it makes a lot of sense, but there’s a hell of a lot of grey now with different types of relationships etc. What this law says is, notwithstanding what you’ve drafted in your will, if you have not made sufficient provision for someone within an eligible class of people whom we believe you should have made provision for and who, most importantly has a need, then we will amend the will to make provision for this person. Now there’s a lot of mistruths out there about this area of the law. A number of times I have clients come in and say, well my old lawyers said look just leave them $50,000 and then they can’t make a claim. That’s not true. You could leave someone any amount of money and they could still make a claim. Are they going to make a successful claim? The successful claim is going to come down to a competition between the competing interests of the other beneficiaries and how much need you have as well, and also your relationship, to an extent to the deceased as well. |
| DT: 47:00 | Just on that point about some of the misconceptions around this regime and how you might avoid it. I remember a case that, it’s a really surprising one, but it illustrates that there’s nothing about this regime that’s really about the wishes that you set out in your will. It was a case of whether the plaintiff was eligible to make a claim on the basis that they had a, I think it’s a personal relationship is that third tier below, interpersonal relationship, and the will said ‘and to this person I leave absolutely nothing because I’ve had a very bad relationship with them for the last years of my life’. But the court said, ‘well in determining the question of whether this person is an object of testamentary recognition, it seems clear they must be because the person specifically took the time to draft in their will that they were not to get anything, and if they were to do that, then it shows that they were thinking that an ordinary observer might think that they were entitled to get something’. |
| SB: 48:00
49:00
50:00
51:00 | Yeah and it’s an interesting area. Let’s say, I had a client who came in who’s in their 80s and they want to cut out a child. That child might be in their 50s or 60s. That child might have been a loyal, happy member of the household and a loving child for 53 of their 55 years. For the last two years there’s been a falling out and the person wants to cut them out. Is that necessarily fair? Well I don’t necessarily think that it is, but no one is entitled to an inheritance. People should understand that you are not entitled, just because your parents made money doesn’t mean they need to leave it to you. That said, and this is where the law, I think leaves a bad taste in my mouth at least, if you are the loving child, you’ve done the right thing by a parent, you looked after them all your life, you’ve made good because of the sacrifices your parents have made, you are now financially, completely independent, you are able to look after yourself, you’re actually travelling really well but you love and care for your parents and you’ll be there for them all the time. And your sibling is a drug addict or alcoholic, or has been fighting with your parents all the time, has borrowed money from them and failed in businesses, has stolen from them, this is a needs based jurisdiction. So child A in that scenario, doesn’t have a need. Child B does even though they’ve been a ratbag, they have a much higher chance of success in claiming against the estate on a needs basis then Child A, who has been the loving child. So it’s one of those ones where people hear about it, they’re not comfortable with it and not happy about it, are there ways to avoid it? Well there’s one way you can avoid it, you can get a release under the Succession Act. TIP: The release Simon mentioned here is a release under section 95 of the Succession Act. Let’s break this down a bit further. Section 95 of the Succession Act states that a person eligible to make a Family Provision claim may release his or her right to do so, subject to the approval of the Supreme Court. As Simon will explain shortly, this can be very difficult to do, and is naturally quite rare. In deciding, the Court must consider: 1. Whether it is to the advantage, financial or otherwise, of the person making the release; 2. Whether it is prudent to make the release; 3.That the terms of the release are fair and reasonable; and lastly 4.That the person making the release sought independent advice and gave due consideration to that advice. Without the Court’s approval, any informal release is not binding on the parties and is merely considered a statement of the parties’ intentions. In other words, it doesn’t prevent future family provisions claim in the future. |
| DT: | It’s quite a difficult process, isn’t it? |
| SB:
52:00
53:00 | It’s very rare to get that. I say it’s rare. It’s not rare in relationships of breakup, it’s very common for a husband and wife going through a divorce or de facto partners to get that release. It’s also, I wouldn’t say common but possible in scenarios where you say, look I’m going to give you an early inheritance. Here’s the consideration for giving up your right to inheritance in the future, I’ve seen a few of those go through, but to say I’m going to cut out my child because they’ve been a ratbag, I want to get a release from the Supreme Court and my child is going to sign off on it. One, even if your child did sign off on it, the Supreme Court probably wouldn’t because there’s no justifiable consideration for it, so it’s quite challenging to do it. There is another section of the Succession Act which deals with any statements you might make that can be taken into consideration by the court, and this one I find quite powerful because I say, if we are going to fight about this in the future, you are not going to be there because we’re fighting about your estate and that means you’re dead. So your voice is not going to be heard unless, we, again get the intellectual property out of your head, onto a piece of paper, in the prescribed form or in a particular type of form, so if we do go to court, your voice can be heard. People can understand why you’ve made that decision, factors that no one else might know about, that $100,000 you gave a child for that failed business that no one knew about, the abuse you might have suffered, the whatever the case may be, if we want to get it out there, the fact that they are financially secure and they’ve gotten investments here or there, let’s get it out there so that we’re aware. Those documents can be very powerful and can minimise the chance of someone making a successful claim. |
| DT:
54:00 | You said this area can kind of leave a bad taste in your mouth and I don’t think that’s a position that you’re alone in. Certainly, it’s a very busy area of the court, it’s one of the busiest lists in the Supreme Court of New South Wales and I think perhaps something that people do struggle with a little bit is, it is a needs based jurisdiction, that as the cases of say, it’s not just the bread and butter that the court is seeking to provide to the plaintiff but also the jam and cream, I think is the metaphor that’s used in some of the cases, and in largest estates, and in many states involving a property in the Sydney Metropolitan area in excess of $1,000,000, those needs can be a little bit more attenuated than the bare necessities, and I think that’s where we sometimes see cases like those reported in the newspaper where some of the needs that are claimed are jewel encrusted guitars and brand new Range Rovers and things like that. |
| SB:
55:00 | I think a lot of it comes down to the lifestyle to which you become accustomed, and particularly if that lifestyle is based around the support of the deceased. So if you raised a child and they’ve always had a new car every two years, and they live in the Eastern Suburbs or Lower North Shore of Sydney, and are used to living in a five bedroom home and they’re used to having a personal chef, there is argument to say they have a need for that because that’s the lifestyle to which they’re accustomed. It is very hard for the general public to understand that, but often, and not always the case, but often, interestingly the percentage of the estate that those people might end up with is less on a percentage basis than other people might end up with, but on a gross figure sum, it just seems obscene. |
| DT:
| Yeah and I think something else that people have a difficulty understanding is, you might say well I don’t understand this, Dad provided so much for them during their lives, they paid for their phone bill, they paid for their gardening, they paid for their groceries but all of that is evidence that they need to continue to do that after death, not that the amount should be reduced by that. |
| SB:
56:00 | It is hard to swallow because it is counterintuitive. The more dependent you are and the less you have going on for yourself, in terms of your own independence and ability to manage your own financial circumstances, the more likelihood you are to succeed in a claim. Whereas in life, it’s typically the other way round, the more of a go-getter you are, the more you’ll achieve yourself whereas this is definitely not the case. |
| DT: | Simon, thanks so much for joining us on Hearsay. |
| SB: | Pleasure. |
| DT:
57:00 | You’ve been listening to Hearsay The Legal Podcast. I’d like to thank our guest Simon Bennett from Southern Waters Legal for coming on the show. Now if you like this episode about estate planning, try listening to my interview with Adeline Schiralli about elder law. Or for something different, listen to my episode about ethics and professional indemnity claims with claims solicitor Jennifer McMillan. If you’re an Australian legal practitioner, you can claim 1 continuing professional development point for listening to this episode. Whether or not something entitles you to claim a CPD unit is self-assessed, but we suggest that this episode constitutes an activity in the substantive law field. If you’ve claimed 5 CPD points from audio content already this CPD year, you may need to access our multimedia content to claim further points. Visit htlp.com.au for more information on claiming and tracking your points on our platform. The Hearsay team is Tim Edmeades our audio engineer, Kirti Kumar our researcher, Araceli Robledo our head marketer, and me, David Turner, your interviewer. Nicola Cosgrove is our executive producer and brings it all together. Hearsay The Legal Podcast is proudly supported by Assured Legal Solutions, making complex simple. You can find all of our episode summaries, transcripts, quizzes and more at htlp.com.au. That’s HTLP for Hearsay The Legal Podcast.com.au. Thank you for listening. |
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