Estate planning is more than just making a will. It involves a careful analysis of your personal relationships, financial structures and business interests and consideration of your intentions for the disposal of your estate.

Careful thought also needs to be given to the current taxation and superannuation laws and other relevant legislation such as the Succession Act 2006 (NSW), which could adversely impact on the size of an estate and the entitlements of the named beneficiaries.

A “simple” will leaves the estate to particular beneficiaries in their personal capacities. Whilst such a will may be simple to administer, it does not recognise the potential opportunities to provide significant tax savings for beneficiaries and the potential to protect a beneficiary’s inheritance from bankruptcy or family law claims or from vulnerable beneficiaries.

So what is it?

A testamentary trust is a trust established by a will. A testamentary trust can be optional (the beneficiary can choose not to use it), discretionary (the beneficiary decides who will benefit) or fixed or a combination of these. Optional, discretionary testamentary trusts are widely recommended for use in modern wills because of the taxation and asset protection advantages they can offer when compared to a “simple” will.

Why have a testamentary trust?

The use of a testamentary trust in a will provides beneficiaries with maximum flexibility in dealing with their inheritance. The effectiveness of a testamentary trust will depend upon the specific needs and circumstances of the beneficiaries. It is important that the terms of the testamentary trust are sufficiently wide to offer beneficiaries as many options as possible so as to provide freedom and flexibility. Two of the many advantages include asset protection measures and income splitting opportunities.

Asset protection for the benefit of beneficiaries

Testamentary trusts are recommended in estates where there is a need to protect a beneficiary from claims from others (such as a former spouse with divorce or property proceedings either expected to be filed or on foot; or a personal insolvency situation where the trustee in bankruptcy will take any inheritance to distribute to creditors; or even where there may be a child or beneficiary with specific needs, such as a special disability who will need to be taken care of after you pass away). There is little point in distributing an estate by a simple will when the beneficiaries in fact need the benefits and asset protection measures offered by a testamentary trust.

Income splitting / tax minimisation opportunities

Testamentary trusts can also allow income splitting such as where there is an investment property or a share portfolio that is providing income. If the income that would otherwise be coming to a beneficiary who may already have an investment or a job and is paying tax could be ‘split’ to that person’s spouse and/or children, the tax savings could be significant – year after year.

Contact us

We can assist you with establishing wills incorporating testamentary trusts to assist in minimizing the prospects of successful claims against your estate and protecting your estate’s assets from family law or creditor claims for the benefit of your beneficiaries whilst allowing the use of tax minimisation strategies.

Call one of our Estate Planning Lawyers for free initial telephone advice on your particular circumstances on (02) 9525 8688.

Structuring and Asset Protection Advice / Business Succession Planning

A real concern of many people, particularly business owners, is protecting assets from creditors.

At some stage during its life, a business will be indebted to numerous creditors and the business owner may have signed a guarantee in respect of those debts.

There are several methods of protecting personal assets from creditors if debts cannot be repaid. The following list is not comprehensive but highlights several possibilities that business owners may want to consider in order to protect assets from creditors. They include:

Placing assets in a spouses’ name or in a discretionary trust

In most circumstances, creditors will not be able to make a claim upon assets owned by a spouse or held by a discretionary trust, provided that you are not the trustee (or the appointor of the trustee). If your spouse is the trustee, then he or she is the person who will usually decide how to divide up the income or capital of a trust (or not to). Stamp duty and capital gains tax issues need to be considered.

Encumber assets if you cannot transfer them

An asset that is mortgaged to its value is not as attractive to a creditor. The mortgagee in such a case is the only entity that will benefit from the subsequent sale of the asset.

Business structuring / single director companies.

It is possible to establish a company with a single director / single shareholder. In doing so, the law creates a “veil of incorporation” by which members and directors of the company have liabilities only to the amounts unpaid (if any) on any issued share capital. This liability is usually only $1.00 or so.

Only in limited circumstances can the corporate veil be lifted. The courts may be prepared to lift the veil where:

• where the company has traded while insolvent;
• there has been fraud or deception;
• there has been avoidance of contractual obligations;
• where there are good public policy reasons;
• where associated companies or groups of companies are involved; or
• under certain provisions of the Family Law Act 1975 (Cth.)

Registering fixed and floating charges over company assets to secure loans to your company

Before making a loan of money to your business (for example, an individual loaning money to a company in respect of which he / she is a director and member), a charge should be created to secure repayment of that money (in preference to unsecured creditors) in the unfortunate event that the business fails.

A fixed charge is one that fastens on ascertained and definite property or property capable of being ascertained and defined (for example a mortgage over a property).

A floating charge, on the other hand, is shifting in its nature, hovering over and so to speak “floating” over the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten (usually called “crystallisation”) on the subject of the charge. Most charges are both fixed and floating.

Avoiding Personal Guarantees

A guarantee is a contract whereby the “guarantor” promises to answer the default or miscarriage of another person’s debt to a third party. The most common example involves a bank. The guarantor usually promises to fulfil the loan between the bank and a borrower if the borrower defaults.

Becoming a guarantor can be extremely risky, particularly when guaranteeing large debts. A common example is where parents provide a guarantee to assist children to obtain a mortgage.

Under most contracts of guarantee, the guarantor becomes immediately liable to repay the defaulted debt (that is, the guarantor is primarily liable to the banker for the debt and the bank does not have to wait for the borrower’s default before calling on the guarantee).

As a practical matter, many businesses cannot obtain finance unless a personal guarantee is provided. If this is the case, whenever the loan is repaid, the guarantee should be discharged so that the guarantor cannot continue to rely on it at a later date concerning subsequent transactions.

Superannuation contributions

In many circumstances, superannuation entitlements can be protected from bankruptcy trustees. This can be a useful protective tool so you may wish to consider discussing this with your lawyer and/or accountant. One issue with putting funds into superannuation is the restriction on accessing those funds until retirement.

Wills and powers of attorney in succession planning

What happens to a business upon the death of its principal or upon the principal losing mental capacity? The answer can be determined before these events by having a will or power of attorney.

Wills contain provisions dealing with what is to happen with your house, car and personal items however, it can also deal with the succession of your business. The type of entity which you choose to run the business (for example a company, partnership, sole trader or trust) will determine the clauses needed to effect transmission of the business in your will. Therefore it is important to seek legal advice in drafting a will to meet the object of transmitting the business. A standard form of will is normally insufficient.

A power of attorney has the effect of giving the legal powers of an individual (for example, the power to enter into a contract to sell land or obtain money from a bank account) to other persons. In this way, if the principal loses mental capacity, the business can still be operated provided the document is appropriately drafted. If the business is a company, that company may need a separate power of attorney (as the director cannot delegate his duties as a director to an attorney personally).

In addition to the above, an important personal matter than people often overlook is the appointment of an enduring guardian to make medical and lifestyle choices for you should you lose capacity. A power of attorney does not normally assist in this regard.

Contact us

We can assist you in relation to the establishment, amendment to or termination of any business structure (whether a company, partnership, sole trader, joint venture or trading trust) so as to best protect your assets from creditor claims and can liaise with your accountant, tax advisor and/or financial planner to implement any tax minimisation strategies and estate planning measures.

Call one of our Estate Planning or Commercial Lawyers for free initial telephone advice on your personal and business circumstances, estate planning and business succession planning needs on (02) 9525 8688.