8 common mistakes to avoid when drafting your Will

When preparing a Will, it is crucial that it is prepared in accordance with the relevant laws – in New South Wales, that law is the Succession Act 2006.  Otherwise, your Will is at risk of being an invalid document, or even capable of a number of different interpretations if not worded correctly, and therefore once you have passed away, your family may not be able to rely upon it as evidence of your wishes as to how you would like your Estate to be distributed.

Common mistakes found in Wills that are home-made, or even Wills that are made using a pre-filled document purchased online, are as follow.

Handwritten Will

Leaving your Estate to your spouse and your children, but not nominating any other beneficiaries

It is an unfortunate possibility that your spouse and your children will pass away at the same time as you.  And if you have not nominated any other beneficiaries in your Will, then you will be considered to have died intestate.

To avoid this, we always recommend that you nominate at least one more group of beneficiaries – whether it is your siblings, closest friends, or even a charity – so that there is at least one person or entity that can receive your Estate in the event that the main beneficiaries have passed away before, or at the same time as, you.

Appointing your spouse as your executor, but not nominating any other executors, or nominating the wrong executors

As per the above example, there is always a risk that your spouse will pass away at the same time as you.  Therefore you should have at least another person, or even 2 more people, nominated as your alternate executors.

The executor is responsible for the administration, distribution, and carrying out of your wishes as set out in your Will.  It is an important job, so you need to appoint someone who is able and willing to take on the role.

Keep in mind, too, that if your Estate will be gifted to your children once they turn a nominated age, then the executor usually also fulfils the role of trustee, and has the responsibility of looking after the assets held in trust for the children until they reach the nominated age.  So considering that the trust relationship may last for a significant period of time if your children are quite young at the time of your death, it may not be appropriate for you to, say, appoint your parents as the executors, because there is an increased risk that they will pass away before being able to fulfil their duties as trustee – it would be more appropriate for you to, say, appoint a sibling or friend as the executor.

Making specific gifts

If you want to leave a specific gift, such as your car or your home, to a beneficiary, then it is risky referring to the specific car (e.g. by detailing the make, model and registration plate) or the specific property (e.g. by its address).  If you no longer own that specific car or property at the time of your death, the gift would fail.  Rather, it is recommended that you describe such assets with reference to the type of asset it is – that is, “any motor vehicle I own at the time of my death” or “my principal place of residence at the time of my death”.

Not specifying a guardian for your children

Under the Guardianship of Infants Act 1916 (NSW), the surviving parent becomes the guardian, unless there are exceptional circumstances or orders in place (e.g. the deceased parent has sole custody).  If the other parent is no longer alive, or able to care for your children, and if you have not nominated a guardian in your Will, then the most suitable person to be the children’s guardian would need to apply to the Family Court for a parenting order under Part VII Division 5 of the Family Law Act 1975 (Cth), to grant them the right to care for the child.  Of course, making an application to the Court could be avoided by nominating a guardian in your Will.

What does your Estate consist of?

Jointly held assets may not be able to be gifted under your Will.  Take this scenario – you own a property with Family Member A as joint tenants, but you would like Family Member B to inherit your entire Estate.  You will be only able to gift to Family Member B those assets that are owned in your name outright, or owned with someone else but as tenants-in-common (in which case you have a distinct share in the ownership).  The rules around joint tenancy provide that upon the death of a joint tenant, the remaining joint tenants automatically become the owners of the property, despite what is provided for in your Will.  Therefore in the above scenario, Family Member A would become the sole owner of the property upon your death.

Not keeping your Will up to date

We always remind clients to revisit their Will every few years, to make sure that it remains current and relevant.  Have any named beneficiaries passed away since you drafted your Will?  Has there been a breakdown in relationships which may warrant appointing different beneficiaries?

The Will has not been signed and witnessed correctly

Not only must a Will be worded correctly, and cover all necessary points, but it must also be signed and witnessed correctly.  Too many times we see Wills that clients have prepared previously themselves, which have not been signed correctly, which have been witnessed by a named beneficiary, or which have been subsequently amended and “initialled” at the time of the amendment – the client believing that such an amendment is valid.

Where is the original Will?

Even if the Will has been drafted, signed and witnessed correctly, it’s not worth anything to anyone if no-one can find it after you pass away.  Ideally, the original Will should be kept in a fire-proof safe, and the location shared with your named executors – as well as some other trusted family members.  Shire Legal is able to hold its clients’ Wills and other important documents in its safe custody, at no charge.

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It is for the above reasons that it is so important to ensure that when drafting your Will, you obtain proper legal advice and have the Will prepared by a lawyer.  Otherwise you run the risk that it is not a valid document, and your Estate may not be gifted in accordance with your wishes.

If you have questions about planning your estate, contact the team at Shire Legal on 9526 3444 or info@shirelegal.com.au

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Should I have a corporate trustee for a family trust?

QuestionMore and more clients are coming to Shire Legal to set up a family trust, usually on the advice of their accountant or financial adviser.  But this begs the questions – what is a trust?  And why is it recommended that you set up a company to run the trust?

What is a trust?

A trust is a relationship where the trustee carries on business and/or holds assets on behalf of the beneficiaries of the trust.

A trust set up for the benefit of family members is typically set up as a discretionary trust, meaning that the distribution of income earned from the assets is distributed each year at the discretion of the trustee.  Otherwise, the trust would be set up as a fixed trust, where each beneficiary has a fixed interest to the distribution of income.

Who are the parties to a trust?

When establishing a trust, there are a number of appointments that you need to decide upon:

  • the Settlor is the person who initially “owns” the assets and property, and effectively “settles” the establishment of the trust, by transferring those assets and property to the ultimate holder of the assets, being the trustee;
  • the Appointer is the person who appoints, changes, removes and replaces the trustee;
  • the Trustee is the person in whose name the assets are held, on behalf of the beneficiaries, pursuant to the terms and rules set out in the Trust Deed;
  • the Beneficiaries are those named persons and/or legal entities, or classes of persons and/or legal entities, who receive income from the trust.  For a family trust, the beneficiaries are typically spouses, children, grandchildren, siblings, any company in which any of these individuals hold any interest, and even charities.

Why have a trust?

One of the main reasons that families establish a trust is because of the flexible options available to distribute income to minimise tax payable.  By way of example, if you are considering the purchase of an investment property, one option is to purchase it in your own name, then any income earned from the investment property would be treated as taxable income in your own name.  Combined with the regular income you earn from your main employment, this may or may not have the effect of essentially pushing you into a higher tax bracket.  On the other hand, if the property is held by a family trust, then the income from the investment property may be distributed to a lower income earner (such as your spouse), thereby minimising the total tax paid by the family for that particular year.

Other advantages of holding assets in the name of a trust are:

  • discounted capital gains tax for beneficiaries;
  • protecting the assets of any “high risk” family members (e.g. trading company directors and professionals, or family members with hostile family situations of their own);

Why should I have a corporate trustee instead of a personal trustee?

The trustee is the legal owner of the property.  The trustee therefore has the ultimate control over the assets of the trust.  The trustee can either a company, or one or more individuals.  With a corporate trustee, the directors of the corporation will have the day-to-day control of the trust (although the shareholders have ultimate control, as they are able to appoint/remove directors as required).  Arguably, the appointer has the highest power, because they are able to appoint/remove the trustee at any time.

Clarity of ownership – because a trust is not a separate legal entity, the assets of the trust need to be held in the name of the trustee.  A person acting as a trustee would thus hold assets both in their own individual capacity (that is, their personal assets), and also in their capacity as trustee (that is, the trust assets).  There is therefore a risk that personal assets will become intermingled with trust assets.  Whereas confusion as to what are the trust assets is minimised when held in the name of the corporate trustee.

Protection of personal assets – Trustees may become liable for any losses incurred as a result of a breach of trust.  So persons acting as trustees place their own personal assets at risk.  Whereas corporate trustees are generally “shell corporations” with no, if any, assets.  If there is any liability attributed to the trustee, then the liability doesn’t go any further than the corporation’s assets.

Indefinite existence – if a personal trustee passes away (or indeed becomes mentally incapacitated and is no longer able to act), then the ownership of any assets held in the person’s name on behalf of the trust would need to be transferred to the new trustee.  This can be a time consuming and expensive exercise.  Whereas with a corporate trustee, where the persons effectively controlling the trust are mere directors and/or shareholders of the corporation, then the ownership would not need to be changed in the event of anyone’s death.  Instead, a new director may need to be appointed, and the shares allocated in accordance with the Will.

Are there any disadvantages to a corporate trustee?

As a corporation, there are additional costs involved in establishing and running the corporation, although the main cost is only incurred at the time of registering the corporation with ASIC, otherwise the annual running costs are limited to the cost of the annual review.

Finally …

  • under the “law of perpetuities”, all trusts have a vesting day of 80 years, which means that 80 years after its creation, a trust will automatically cease to operate, at which point the assets of the trust must be distributed to the beneficiaries.
  • some trusts include a corporation as a potential beneficiary of the trust, which has tax advantages, as corporations typically have a lower tax rate than individuals.
  • if the trustee does not exercise its power to distribute income, then the Trustee Deed may set out who the default beneficiaries are.

Thinking of setting up a family trust?  Contact Shire Legal to ask any questions you may have about the process and/or the costs.