There are certain essential things that every person should do during their lifetime. One is to insure real estate against destruction and fire. Another is to insure all vehicles, at least against damage that yours does to somebody else’s. Do you really want to foot the bill after you run up the back of that brand new Aston Martin? Another is to pay off your home mortgage as fast as you can. The only person who wins from a 25-year home loan is your friendly, local bank manager. And another is to execute a properly-drafted and legally-binding Will as soon as you turn 18.
Over the years, I have seen countless, painful situations that have arisen for the families and friends of deceased persons because that person was too busy or not wealthy enough to make a Will during their lifetime.
Many people believe that you have to own significant assets before a Will is worthwhile. Wrong. Many people also believe that it is pointless making a Will because the people left behind will just sort it out anyway. Also wrong. Many people also believe that making a Will merely complicates what should otherwise be a fairly straightforward exercise of the passing of assets from one generation to the next. Wrong again. And many people also believe that even if there is no Will in place, assets will simply pass to the next of kin in any event. Strike four. Game over.
A Will is a document, executed during the lifetime of a person, which clearly states what is to happen to that person’s estate after death.
As such, it should cover, either individually or as a whole, the entirety of the assets and liabilities in which that person has an interest as at the date of their death.
If it sounds straightforward, that’s because it is. A Will can be as complicated or as simple as you like. In fact, more often than not, a Will reads something like, “I leave all of my estate to my husband and, if my husband dies before me, then I leave all of my estate to my children.” That’s it. Nothing more. No bells and whistles. Pretty non-eventful, but incredibly important.
I am often asked if a Will can just as easily be prepared using a Will kit. I always begin my answer by saying if the choice is between using a Will kit and not having a Will at all, then choose the Will kit by all means. However, if the choice is between using a Will kit and having the Will drawn up professionally by a lawyer, then that’s a different question entirely.
You can use a Will kit to prepare your Will if you like. It will be cheaper than having a solicitor draw up the Will for you. You can also change the tyres on your car yourself or you can pay to engage the services of a suitably-qualified motor mechanic to do it for you. In both cases, the consequences of choosing the cheaper option are potentially disastrous.
Most people will leave substantial assets behind after they die. Usually, the combined value of the family home and superannuation entitlements nudge $1million. More often than not, those assets are willed to children and grandchildren – or, at least, that’s the intention.
Picture this: After a lifetime of hard work, saving and investing, you have amassed a total fortune of, say, $2million. However, instead of all of that money going to your children and the other beneficiaries you have nominated in your do-it-yourself Will kit, which costs you $65, the law decides who will benefit because the clauses in your self-prepared Will are ambiguous. As a result, your intended beneficiaries are forced to launch costly and time-consuming legal proceedings against your estate in order to get their rightful inheritance.
While it is true that you will not be around to worry about it, is it really what you want? The alternative is to spend a few hundred dollars on a solicitor and get it right – the first time.
So what’s the big deal? Why is a Will so important? Why does it matter whether or not assets are left according to a Will or according to law?
Actually, the answer to all of these questions is pretty simple – because you keep control.
After you die, all of your assets and liabilities are gathered together. Properties, shares and other physical assets are usually sold and turned into cash. Tax is paid and the resultant money is pooled together. Liabilities are then quantified and, where necessary, paid from the pool of money created from the sale of assets. Everything left over is known as your residuary estate.
Once all other liabilities have been met, such as the payment of any outstanding personal income tax or the payment of tax incurred by the estate, the estate can then be distributed to beneficiaries.
The two largest portions of any estate are usually real property (home, investment property, holiday home) and superannuation entitlements (sometimes including death benefits). But what happens if the estate consists of an interest in a business? What if the deceased owned his own security company? What if he wanted his business interest to pass, not to his wife, but to his children or grandchildren? What happens if there is no Will in place? Will his children or grandchildren inherit that asset or will the law step in to thwart that intention?
Firstly, it must be mentioned that it is much easier to answer these questions in a theoretical sense now, rather than through the fog of grief, after a loved one dies without a Will.
Sometimes, family members such as children or grandchildren, work in a business that the family patriarch has started and built from scratch during his lifetime. When that person dies, it is his intention that the surviving family members carry on the business just as he had done. If, however, he dies without a Will, his interest in the business will, almost certainly, pass to his surviving spouse. Of course, that’s fine if that’s what he wanted anyway, even though it passes by fluke instead of good management. But, if the intended beneficiary was a child or grandchild, the estate will not be so fortunate. Why? Because by dying without a Will, the deceased allowed the law to dictate what was going to happen to his estate. Control over that question was taken entirely out of his hands and put in the hands of the lawmakers.
Now, some readers might be thinking that it’s no big deal – that the surviving spouse will simply transfer her newly-inherited interest in the business to her children or grandchildren and will thereby achieve the same thing that the deceased wanted anyway. Well, it’s not quite as easy as that because there’s a substantial sting in the tail if that’s what the spouse does: Tax.
If you inherit assets under the terms of a Will – assets which would normally attract nasty things like Capital Gains Tax (CGT), may be exempt as the Australian Taxation Office will not assess CGT because the Will provided for that inheritance. But, in the case where there is no Will, the spouse must pay CGT on the business interest that she inherited from her deceased husband.
However, that will only apply once. If she then transfers the business interest to her child or grandchild, then, guess what? The spectre of CGT will come knocking on her door and she will give the ATO lots of money, whether she likes it or not. Of course, if the deceased had made a Will during his lifetime and had gifted his interest in his business to his intended beneficiary, then that transaction would not have attracted an immediate CGT liability, and all parties would have been happy.
The same will be true for any other item of property owned by a deceased at the date of his death and which has the potential to attract tax on transfer. For example, shares or real estate. If they are inherited from a deceased person pursuant to the terms of his Will, then they do not attract tax.
However, if they are received outside the terms of a Will, even if they are gifted by someone who inherited them under the terms of a Will (or by operation of law if the deceased died without a Will), then tax will be payable. Just as the initial transfer takes place beyond the wishes of the deceased, so too is tax applied beyond the wishes of the deceased. However, in both cases, the people that the deceased left behind have no say in it – the law applies whether the deceased and his descendants like it or not.
When you think of it from the child or grandchild’s point of view, it is doubly unfair. Here we have a child or grandchild working everyday in the family business on the basis of an unwritten promise that “one day, all of this will be yours.” As it turns out, that was not the case.
Because of the frustration caused by this rather unpalatable situation, the child or grandchild launches a legal challenge to the estate, claiming that the deceased had promised him the business during his lifetime and claiming that as his rightful inheritance. Let’s assume that the claimant is not on very good terms with the spouse of the deceased and that, as a result, he is forced to take his action all the way to a courtroom in order to get what he believes he deserves.
Let’s also assume that his claim is ultimately successful, and that the court orders that the deceased’s interest in his business should pass to the claimant, either in part or in full. Who pays for that? Where does the money come from to pay for the hours upon hours of work done by the claimant’s lawyers, not to mention the costs of a long trial? You guessed it. In almost all cases, the costs of a challenge to an estate are paid for, not by the challenger, but by the estate.
So, in that case, what would have otherwise happened in a very simple, straightforward and matter-of-fact way, had the deceased executed a Will prior to his death, has cost tens of thousands of dollars in legal and other costs (not to mention the stress and heartache) to achieve exactly the same result as the deceased had always intended.
While some people believe that the cost of preparing a Will is too great, can you really afford not to have one? Most simple Wills should cost in the order of $400 to $500, plus GST. If you are being asked to pay more than that, then maybe you should change lawyers. Of course, the more complicated the Will and the more detailed the mechanisms put into it, the more it will cost and that should come as no surprise to anyone.
But, what should come as a surprise to those who do not have a Will, particularly business owners, is that if you die without one, you will leave a huge legal and financial mess behind, and it will be left to those that you love the most to clean it up.
Are you really too busy or not wealthy enough to make a Will? Think again.