Will and Estate

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Why is a Smarter Will better than a Simple Will?

Reason 1:

Better protection for your loved ones

Options for establishing a Testamentary Discretionary Trust
Protecting properties and assets from creditors and predators
Reducing unnecessary tax
Preserving Centrelink benefits

Reason 2:

Better protection for your wishes

Includes everything in the simple will
Appointing guardians for your children
The ability to exclude any persons
Reducing the risks of potential court applications

What are the benefits of a Smarter Will?

1 Flexibility
2 Using income streaming to save taxes
3 Asset Protection
4 Comprehensive protection by excluding people
5 Preserving Centrelink entitlements for your beneficiaries
6 Reducing tax for foreign beneficiaries

Stop worrying! Protect your wealth today!

Frequently Asked Questions

A Smarter Will is a comprehensive Will with the option to create a Testamentary Discretionary Trust. For the people receiving your estates (Beneficiaries), this will give them better protection and more flexibility.

A trust is a common and powerful structure that separates the “legal” and “beneficial” ownership of an asset.

While the trustee will have the “legal ownership” of the asset, the beneficiary will have the “beneficial” ownership of the asset. The trustee holds the asset for the benefit of the beneficiaries. Income earned from the assets is passed to the beneficiaries via the trustee.

A discretionary trust is a type of trust where the beneficiaries have no fixed interest in the assets – whether or not a particular person can benefit under the trust is entirely discretionary to the trustee.

It is common practice to set up a family trust as a discretionary trust.

A testamentary discretionary trust is a special type of discretionary trust that is created according to a person’s will.

The trust is created once the will-maker passes away. Instead of passing the assets directly to the beneficiary, the executor puts the assets into a testamentary discretionary trust. The intended recipient becomes a beneficiary under the trust and can control the identity of the trustee.

Benefit 1: Flexibility

Simple Wills force your beneficiaries to take all of their allocated estate directly, transferring all the estates to their name immediately. A Simple Will generally does not allow for the estate to be held in the name of a trust on behalf of your beneficiaries.

In essence, when compared to Smarter Wills, Simple Wills are too rigid. They don’t give the executors room to make adjustments to deal with unintended scenarios.

Smarter Wills give your beneficiaries the choice as to whether to take the estate directly or via a testamentary discretionary trust. In other words, a Smarter Will allows the beneficiaries to receive the assets in the way that best suits their personal situation at the relevant time.

Please see the below example:

In 2022, John and Kim will each receive $50,000 as rental income from their father’s estate, namely a couple of investment properties. To receive this rental income, both Kim and John must pay taxes.

If their father used a simple will, because the properties belong to John and Kim, they are likely to pay the following taxes:

John’s income tax from annual salary of $65,000 $11,000
Additional tax from $50,000 rental income $13,000
John’s total taxes $26,000
Kim’s income tax from annual salary of $0 $0
Additional tax from $50,000 rental income $6,700
Kim’s total taxes $6,700

If their father used a Smarter Will, because the properties are held in a Testamentary Discretionary Trust, then both John and Kim can have much more flexibility:

  • Unlike the simple will, which forces both John and Kim to receive all of the rental income and pay taxes
  • John and Kim can take out any preferred amount during any year, depending on the tax rate they are facing during that financial year.
  • John and Kim can use income streaming to save even more on taxes (more on this below)

Benefit 2: Reducing tax with income streaming

In a Simple Will, your beneficiaries must receive your estate in their own name. When your beneficiaries receive rental income from those estates, they must pay the income tax rate of the corresponding year.

A Simple Will does not allow your beneficiaries to take advantage of the power of income streaming from setting up a testamentary discretionary trust using a Smarter Will.

If you use a Smarter Will, it can put all properties of your estate into a newly created Testamentary Discretionary Trust. This will allow your loved ones to make use of income streaming, saving thousands in taxes.

When a trust has income to be distributed to the beneficiaries, the trustee can distribute the income in the most tax-efficient way possible.

A trust can minimise tax by splitting the income and distributing it according to who has the lowest income tax threshold for that financial year. A common example is to distribute income to children, as children are entitled to low and middle income tax offsets.

Please see the below example:

In 2022, John will receive $100,000 as rental income from the investment properties of his father’s estate.

  • John is married to his wife, Sofie, who looks after their son and daughter.
  • Sofie, their son and daughter do not have any employment.
  • John earned a total income of $65,000 from his job during 2022.

If John’s father used a Simple Will, then John will have to pay the following taxes

John’s income tax from annual salary of $65,000 $11,000
Additional tax from $100,000 rental income $35,000
Total taxes $46,000

If John’s father used a Smarter Will, then all rental incomes are held in the testamentary discretionary trust. This allows John to use the power of income streaming, streaming the $100,000 to Sofie and the children.

$50,000 streamed to Sofie $6,700
$25,000 streamed to the daughter $1,300
$25,000 streamed to the son $1,300
Total Taxes to accept rental income $9,300
Savings compared to Simple Will $25,700

Benefit 3: Asset Protection

When a Simple Will is used, your beneficiaries will receive the estates all in their own name. By transferring the estates to the name of your beneficiaries, it will make these estates vulnerable to your beneficiaries’ creditors and family law disputes (if any).

This means that if your beneficiaries are facing bankruptcy, the creditors can come after your estates.

This also means that if your beneficiaries are involved in family law disputes, their ex-spouse may make a claim against those estates.

When you use a Smarter Will, the estates for your beneficiaries will be held in a testamentary discretionary trust. This means that these estates are not owned by your beneficiaries. These estates are owned by the testamentary discretionary trust.

This means that creditors cannot access those estates, as the estates belong to a trust.

In terms of family law matters, if your beneficiaries are not named as trustees in the testamentary discretionary trust, it is much more difficult for their ex-spouse to make a claim against those properties in a family law property dispute.

Please see the below example:

In 2022, John will receive an investment property, valued at $1.2 million from his father’s estate. However, John is involved in a family law property dispute with his ex-wife.

If John’s father used a Simple Will, then John’s ex-wife can make a claim against the newly inherited investment property.

If John’s father used a Smarter Will, and John is only a beneficiary, and not a trustee in the testamentary discretionary trust, then it is much more difficult for John’s ex-wife to be successful in making a claim against the investment property. This is because the investment property belongs to the trust and not John, as John is only a beneficiary, he does not have any control over the property.

Benefit 4: Comprehensive protection

When you pass away, any “eligible person” may apply to the court for a family provision order. If those people are successful, the court can adjust your will. This means that those people can get a piece of your estate even if it is against your wishes.

Broadly speaking, this may include anyone to whom you had a responsibility, potentially including:

  • a current or former spouse or de facto partner
  • children
  • grandchildren
  • other dependents and
  • persons living in your home (except in WA).

A smarter will can achieve comprehensive protection, because a smarter will:

  • allows you to expressly exclude certain people from your will, and
  • provide reasons for the exclusion.

If you expressly exclude people who may be eligible persons in your will, and provide the reasons why they have been excluded, this can reduce the chances of success for those people to apply to the court.

  1. 1.There is sufficient provision that was made for the excluded person during the will-maker’s lifetime so that any further gifts would be unfair to the included beneficiaries
  2. The testator and the excluded person have had no contact for a long time and no relationship of love/affection exists between them
  3. The testator has had no responsibility for the welfare of the excluded person for many years
  4. The financial circumstances of the excluded person are much better than those of the included beneficiaries
  5. The excluded person has received, or is likely to receive, significant assets from the estate of another person

Please see the below example:

In 2022, John will receive $45,000 from his father’s estate. However, John’s father also had another son from a previous marriage, Danny.

If John’s father used a Simple Will, then

  • Danny can apply to the court, he might get a piece of John’s estate.

If John’s father used a Smarter Will:

  • John’s father expressly excluded Danny from his will with the 2 reasons
  • Reason 1: He and Danny have had no contact for a long time and no relationship of love exists between them. This is because John’s ex-wife moved to another country since Danny was 1 year-old. There has been no contact between Danny and John’s father ever since.
  • Reason 2: Danny is likely to receive significant assets from the estate of his mother.

This will greatly reduce the chances of success for Danny, and thereby, give your estate more comprehensive protection.

Benefit 5: Preserving Centrelink Entitlements for your Beneficiaries

When a Simple Will is used, your beneficiaries will receive the assets all in their own name. Centrelink will perform a new asset test and a new income test to evaluate the welfare amount for your beneficiaries. These newly acquired assets will be considered under the tests, which will likely reduce their welfare amount significantly.

When you use a Smarter Will, it can create the below special trust structures:

  • Beneficiary Support Trust
  • Special Disability Trust

These trusts do not allow the beneficiaries to have control over the allocations of estates. Because of the special nature of these trusts, Centrelink is unlikely to include these trusts in the income test or asset test, thereby preserving Centrelink Entitlements for your Beneficiaries.

It is also called a “Protective Trust” or “Capital Protected Trust”, a Beneficiary Support Trust is a special type of trust created under a will for one particular beneficiary where the beneficiary does not have any control over the allocation of the assets.

This trust structure is especially useful if the beneficiary is unable to manage their own finances, due to having an intellectual disability or a problem with drugs, alcohol, or gambling.

When Centrelink performs the assets and income tests, it focuses on whether the recipient has control over the assets, so a Beneficiary Support Trust may reduce the risk of the beneficiary losing their Centrelink entitlements

It is a trust that is created for one particular beneficiary who has a “severe disability” (as defined by legislation).

According to the Department of Social Services, assets in the trust are exempt from means testing by Centrelink (up to a maximum of $657,250 for the assets test from 1 July 2017 – this amount is increased annually).

Please see the below example:

In 2022, John will receive $50,000 as a gift from their father’s estate. However, John has a serious mental disability due to a car accident. As a means of living, John receives Disability Support Pension from Centrelink.

If John’s father used a Simple Will, then John’s Centrelink benefits will be reduced, as he just received $50,000 to his name.

If John’s father used a Smarter Will, and created a Special Disability Trust for John, then:

  • John can receive his Disability Support Pension unaffected by the trust
  • John can receive his inheritance of $50,000.

Benefit 6: Reducing taxes for foreign beneficiaries

When a Simple Will is used, your beneficiaries will receive the assets from your estate all in their own name. If your beneficiary is a foreign resident for Australian tax purposes, then they must pay the higher capital gains tax aimed at foreign residents.

By using a Smarter Will, it will ensure that the estates for your foreign beneficiaries will be owned by a testamentary discretionary trust.

This means that for any foreign beneficiary, they will not need to pay any capital gains tax, as the trust is the legal owner.

This is important because although your loved ones are living in Australia now, they might live overseas at a later stage.

Please see the below example:

In 2004, John’s father made a will, giving John investment properties worth $1.2 million. During this time, John was living in Australia.

In 2022, John’s father passed away. John has moved permanently to Japan and has been living there for 5 years.

If John’s father used a Simple Will:

  • Because John is no longer an Australian resident for taxation purposes
  • John will likely need to pay the much higher capital gains tax aimed at foreign residents
  • If John’s father used a Smarter Will, and created a testamentary discretionary trust for John, then:
  • John will likely not need to pay any foreign capital gains taxes

Step 1: Contact Ascent Lawyers to arrange an initial meeting

Step 2: We draft your Will according to your instructions

Step 3: Attend a final meeting to sign and witness your finalized will.

Disclaimer: The above contents do not constitute specific legal and/or tax advice, are not intended to be a substitute for legal advice and/or tax advice and should not be relied upon as such. You should seek legal advice and/or tax advice from relevant/in relation to any particular matters you may have.
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