Fred and John (not their real names) have enjoyed a good financial planner-client relationship. As part of his duty of care, Fred asked John about his estate planning, to ensure that his client had a current Will, among other necessary estate planning tools. What he discovered was an unusual situation.
John who is 53 has been estranged from his wife for the past 15 years and has not formalised a divorce. He has two children from a previous relationship. John now has an aggressive brain tumour and may have as little as three months to live, but he assures Fred that he has a current Will.
Despite this, Fred senses that there could be an estate-planning problem and encourages to seek specialist advice.
John revised his Will shortly after the separation from his wife, in order to appoint his brother and sister as executors of his estate and to give his entire estate to his two children, in equal portions. He does have a current Will but, at this point in time, no assets will form part of it.
Why the Will can’t deal with John’s assets
John has two main assets – his home and his superannuation. He owns the home as joint tenant with his estranged wife. When he dies, the Will cannot address this property. Survivorship dictates that the home will go straight to her.
There is no guarantee that John’s superannuation will flow to his two children, as he forgot to make a binding death benefit nomination. All that is in place is a nomination that lapsed several years ago, in favour of his estranged spouse. This leaves a strong chance that some or all of the superannuation proceeds will flow to his estranged spouse.
John’s Will clearly states that he would like his assets split between his children. However, if he were to die with the current arrangements in place, his estranged wife could receive everything, and his children nothing.
What can John do?
Though John is suffering terribly under his illness, there are certain steps that he can take.
At the urging of his financial planner, John consults an estate-planning specialist, who makes a number of recommendations:
- John should take steps to divorce his estranged wife – although it must be recognised that the divorce may not go through prior to his death.
Divorce only solves one of two problems. The jointly-held property would continue to be jointly-held, whether or not he is married to his estranged spouse. However, once the divorce occurs, John’s estranged spouse would no longer be a dependant under superannuation law and would therefore be incapable of receiving any part of the membership entitlements directly from the fund.
- John should immediately take steps to change the ownership of the house from joint tenants to tenants in common, in equal shares. There would be no stamp duty cost in doing this. The only cost would be the legal fees for preparing documentation and the registration fees at the Titles Office. The advantage of severing the joint tenancy is that John’s Will would at least be able to deal with the half-share interest he holds in the house, rather than it going to the estranged spouse by way of survivorship.
- John, with the assistance of his financial planner, should create a fresh binding death benefit nomination in favour of his two children. This is an immediate and temporary step (just in case John should pass away while taking the fourth step set out below).
- John, once again with the assistance of his financial planner, should then take steps to gain full early access to his super lump sum payments (this would be a similar before tax amount payable by the fund upon the death of John). This has multiple advantages.
The first advantage of John gaining early access based on his terminal illness is that the payment to him is completely tax free (see section 303.10 Income Tax Assessment Act 1997). He can then deal with that asset that he has received prior to his death under his will and of course the beneficiaries under his Will will not be taxed either.
As John’s children are no longer financially dependent upon him and are over the age of 18, if he hadn’t gained early access of his super prior to him passing, the super lump sum would be taxed no less than 15% on the taxable component and 30% on the untaxed component.
The second advantage is that John could give his full super lump sum payment that he has received prior to him passing to his children now, rather than waiting for the asset to be dealt with under the Will. It’s important to note that this may not work under New South Wales law. In every jurisdiction of Australia except for NSW, such gifts would not form part of John’s estate for the purposes of a family provision claim. John could enjoy peace of mind if he were to allocate his super lump sum payment received prior to death to his children now as it means that even if his Will were contested, those proceeds would be safe from litigation.
John’s financial planner, Fred, is not an expert in estate planning. However, he sensed that John needed expert advice, because of his particular situation Fred knew that assets held as joint tenants cannot be dealt with under a Will; and nor can one’s interest in a superannuation fund, unless it is paid to the estate.
Thankfully Fred referred John to an expert who offered good advice, which John followed. If Fred had not pushed John into getting advice, nothing may have formed part of his estate upon his death and, in all probability, his two children would have received nothing.
Bryan Mitchell is managing director of Mitchells Solicitors Australia (mitchellsol.com.au). Anna Hacker is national manager of estate planning for Equity Trustees (eqt.com.au).
This article appeared in the July 2015 edition of Professional Planner. Read more at professionalplanner.com.au