'Many people, particularly the wealthy, have structures in place but little idea how they are set up, and therefore little idea how to protect themselves against issues that can, and do, come up over a lifetime.'

Estate Law

A woman once came to see me about purchasing an annuity and, to make sure I could offer her the best advice, I began asking a few questions about her financial circumstances.  She told me her income largely came from commercial properties owned by a family trust and, when I questioned her further, it turned out that she had split with her husband 15 years earlier and even though she was a director of the trustee company, her ex-husband was the sole appointor of the trust which she didn't realise.  This meant that her ex-husband was in total control of the trust.

I decided to dig a little deeper and when I saw copies of all the documents it confirmed two things that were a problem. Firstly, as he was the sole appointor of the trust, he could hire and fire the trustee, get rid of the trustee company and even install his new partner - with whom my client shared a mutual loathing.  On top of that there was no reference at all to what happens if her ex-husband died - would his new partner take control of the trust - who arguably wouldn't continue paying income to my client?  This type of example is incredibly common.

Those who own assets in a Family Trust must ensure their adviser has recently read the trust deed to make sure that the deed continues to be appropriate for the present time.

Everyone needs to ensure that they understand the nature of ownership of all of their assets and how differing forms of ownership can impact the ability to control those assets both while you are alive and upon death.

'If you own assets through a legal structure (such as superannuation or a family trust), make sure you understand exactly what it is and - just as importantly - what happens to that legal structure in the event of the death of any one of the parties.'

 

Published in Making A Will

We recently provided advice to a young couple Rob and Simone who were both around 40.  They have two young children under the age of 10 and Rob has a daughter from a previous marriage who is now 20 and financially independent.

Rob was diagnosed with a terminal illness and given only a short time to live when he saw us and he wanted to ensure that his financial affairs were in the best condition they could be before his death.  Rob’s will simply left all of his assets to Simone but upon exploring the family structure it became clear that Rob’s adult daughter may seek to contest Rob’s estate which could prove costly and stressful (other than to lawyers).

This situation reinforced the need to be clear on ownership of assets when estate planning and yet we are constantly amazed at those who seek to undertake estate planning without regard for ownership.

Their assets consist of:

Asset                                                     Owner                                  Value

House                                                   Joint (Joint Tenants)       $600,000

Car                                                         Simone                                 $25,000

Superannuation                                  Rob                                        $650,000

(including insurance)

Shares                                                  Rob                                        $30,000

Unused Leave                                   Rob                                        $50,000 (after tax)

The key issue at stake was to limit the value of assets paid to the estate that could be subject to a legal contest.  We would add that prior to Rob’s ultimate death, his adult daughter openly discussed how she would like to use his superannuation monies to buy a house with her boyfriend, completely disregarding her father’s wishes.

Let’s examine what could potentially be paid into Rob’s estate and we begin by confirming that as their house is owned jointly as joint tenants, ownership will pass to Simone.  The only assets that could pass to Rob’s estate could be his superannuation, unused leave and his shares.

In order to restrict the assets paid to the estate, we ensured that Rob completed a binding death benefit nomination to his superannuation fund that directs the trustees of the fund to pay the superannuation benefit to Simone.  If this was not done, the decision about who to pay superannuation proceeds to, would be made by the trustee of the super fund.  In the event of a dispute between Simone and the adult daughter, this could lead to the trustee taking the view that they simply pay the superannuation to the estate and remove the possibility of being caught in the middle of a dispute.

Rob’s shares were sold and the proceeds paid to Simone.  The alternate course of action would have been to simply transfer ownership to Simone, but Rob wanted to sell the shares anyway.

This effectively meant that the only asset that was to be paid into Rob’s estate was his unused Leave entitlements.

Whether Rob was sufficiently insured is not for discussion in this article.  We are focussed solely on ensuring that the ownership of assets was such that they were not to be paid into Rob’s estate and subject to a legal contest.  With the exception of unused leave entitlements this has been done.

Effective Estate Planning is all about ensuring that your assets go to where you intend, in the most tax efficient manner and the most effective manner.  When planning your estate it is critical that your adviser consider the ownership of your assets in addition to your family structure.

Note: Advice contained in this article is general in nature and does not consider your particular situation or needs. If information contained is not appropriate to you at this stage please pass on to family and friends who may benefit. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

 

Published in Making A Will

Estate planning is not just about executing wills and distributing assets upon an individual’s death, it should also include the possibility of mental or legal incapacity during a person’s lifetime.

If you lose the capacity to make decisions without an enduring power of attorney or guardianship appointment in place, control of decisions over your property, medical treatment and lifestyle may be handled by an unsuitable or unsatisfactory person. Alternatively, such control may have to be determined by a state or territory tribunal.

A power of attorney is an important, practical and useful legal solution that not only provides peace of mind, it can also avoid costly and complex legal problems. It is a legal document that allows a person, company or body corporate to appoint an agent to act on their behalf. The person delegating the power is known as the principal (or sometimes donor or grantor) and the person receiving the power is known as the attorney (or donee, grantee or even agent). The relationship between the principal and attorney is that of principal and agent.

As with wills and intestacy law, legislation governing powers of attorney is state and territory based, and each jurisdiction has its own act. This can present a problem where a power of attorney granted in one state may not give the attorney the power to act in another jurisdiction (or restricts those powers).

Once an unlimited power of attorney is granted, the attorney – and it can be more than one person – has the exclusive power to act in the capacity of the principal. Therefore, the attorney can enter into contracts, buy and sell property and make other decisions regarding the principal’s financial affairs and property. Powers of attorney can be quite broad or very restrictive in what powers are given to the attorney.

A power of attorney does have some exclusions. For instance:

•     a principal cannot instruct a attorney to do anything illegal

•      an attorney does not have the power, on behalf of the principal, to prepare a will, to vote in an election or referendum, or consent to marriage, and

•      once nominated, the attorneys cannot appoint someone else to assume their powers or responsibilities, unless this has been specified in the power of attorney.

There are two main types of power of attorney available in all states and territories:

•      general powers of attorney, and

•      enduring powers of attorney.

General powers of attorney

A general power of attorney can be set up to give the attorney the authority:

•      to do just one thing,

•      to do a restricted range of things, or

•      to allow the attorney to make any financial or legal decisions on the principal’s behalf.

A general power of attorney with limited powers is usually granted to cover a specific event for a fixed period of time. For example Sam, who intends to travel overseas, may want to make a general power of attorney, and the person (or organisation) appointed as attorney can make financial decisions on his behalf while he is away. This could include selling shares or property or signing a legal agreement. The general power of attorney would normally be revoked after Sam returned.

 General powers of attorney remain valid only while the principal has mental capacity. If the principal becomes mentally incapacitated and therefore legally incompetent, the power of attorney ceases to be active.

Enduring powers of attorney

An enduring power of attorney is more important for estate planning purposes. These appointments can help people plan for the future when they have lost the power to make rational decisions – in other words – to understand consequences, take responsibility and weigh up risks and benefits.

Unfortunately, nobody knows when illness or injury will strike and whether this event will impact on mental capacity. With the prevalence of motor vehicle and other accidents along with Australia’s increasingly ageing population combined with the impact of Alzheimer’s, dementia and other diseases, it is clear that enduring powers of attorney will become even more important in the future.

Enduring powers of attorney may apply to financial, medical and lifestyle decisions. It all depends on the jurisdiction. All Australian states and territories have enduring powers of attorney for financial matters. The legislation in each jurisdiction varies significantly when it comes to medical and lifestyle decisions. In South Australia and Victoria a person can appoint a medical attorney. In New South Wales, Queensland, Tasmania and

Western Australia a person can appoint an enduring guardian who can make certain medical decisions on behalf of that person. The Northern Territory currently has no medical powers of attorney or guardianships, but an Office of Adult Guardianship and the Public Guardian that can appoint guardians after a person has lost legal capacity.

All jurisdictions in Australia now recognise valid Advance Care Directives, which document a person’s decisions about future medical, surgical and dental treatment and other health care.

Who can make a power of attorney i.e. the principal?

In general, a principal must be 18 years of age and legally competent. In other words, the principal understands the nature and effect of the power of attorney, in terms of what the attorney can do when the attorney can make decisions and what kind of decisions, and the impact of this decision making.

Who should be appointed as the attorney?

Firstly, in some jurisdictions, the attorney must be at least 18 years of age. This a requirement if the attorney is required to sign contracts, for instance. The one standard requirement is the attorney must be legally competent. In choosing an attorney for an enduring power of attorney, some points need to be considered. This person is being given considerable power and the choice should not be made lightly.

People often appoint relatives, a close friend or an independent person such as an accountant, lawyer or doctor as the attorney. You can also appoint a trustee company, but there will invariably be fees associated with this. You don’t usually pay a relative a friend to be an attorney, but a professional person would normally charge for this as for any service. An attorney should be a person whom you trust and who understands the decisions you would be likely to make in certain circumstances.

Will the person be available when needed?

An enduring power of attorney may not be exercised for many years, so an older person may not be the right choice. Don’t make assumptions. It may be difficult for a family member or close friend to be objective about making decisions, particularly where a medical enduring power of attorney (or power of enduring guardianship) is available. On the other hand, it may be prudent to appoint an adult daughter, for instance, who is prepared to look after an elderly parent in her own home, where not setting up a power of attorney may lead a state tribunal to place that person in a nursing home to preserve family harmony, if another adult child thought that nursing home care would be better.

Check that the person you want to appoint is happy to be an attorney. There is no point selecting someone who does not want to take on this role. Check whether you can appoint more than one attorney. In most jurisdictions, you can appoint more than one and they can act either:

•      jointly, where both attorneys must agree for the decision to be valid

•      severally, where either attorney may make a decision independently of the other, and/or

•      as a substitute or alternative attorney (who can make a decision if the original attorney is unavailable or no longer able to perform this role).

When can an enduring power of attorney be revoked?

In most states and territories an enduring power of attorney can be revoked upon:

•      the death of the principal or the attorney

•      revocation revoked by the principal, or by a later enduring power of attorney

•      the legal incapacity of the attorney

•      the retirement of the attorney (in some jurisdictions this can only be done with the leave of the Supreme Court)

•      the bankruptcy of the attorney and (sometimes) principal, or

•      the order of a Supreme Court judge.

As with all important legal documents there are certain other formalities to be observed with powers of attorney, which again differ according to the jurisdiction, including: who can and cannot witness, when the document needs to be registered, and whether an attorney needs to formally accept the appointment.

With regard to powers of attorney executed in other states or territories, most jurisdictions have now passed legislation recognising these powers of attorney, to the extent that the powers they give do not contradict the local relevant

Important information

This information was prepared by The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 (CML).  Any taxation information, social security information or examples are of general nature only and should not be regarded as specific advice. It is based on the continuation of present laws and rulings and their interpretation as at the issue date of this article. CommInsure is a registered business name of CMLA.

Published in Making A Will