In these Complex Times, Will a Simple Will Cut the Mustard?
In this interview, George Hatzis responds to the question.
As our lives get more complex, it’s only common sense that so too will our estate planning. For people who have a business or are in a blended family, experience divorce and the like, will a simple will suffice in 2016? In this interview, George Hatzis, of Hatzis Lawyers discusses what is becoming a very topical issue for many Australians.
Interviewer: George is it the case that gone are the days of a simple Will?
George Hatzis: At times, there is and certainly, with what you suggested with blended families. There’s two aspects, I guess, is that our personal lives are becoming more complicated, such as second and third marriages with kids along the way. What our wish is, at times, to provide for our kids, sometimes conflict with the way we hold our assets. There are some technical rules that go with that.
Interviewer: Is there a hard and fast rule, George, that somebody, perhaps, would deviate away from a simple will and be coming to you or your law firm to talk about such things like a testamentary trust. Is there indicators in a person’s life that, oh hang on, the will down at the local newsagent isn’t going to cut this?
Interviewer: Yeah, no. Great example. The newsagent’s will kit for twenty-nine bucks will not cut the mustard. You have to think of where you’re at in your stage in life. You mentioned testamentary discretionary trusts. A lot of clients come and see us and they talk about that, but they don’t really understand them, Dan. A testamentary discretionary trust is your normal family trust that people conjure up, which is supported by a forty or fifty page document that sets up a family trust. Well what you’re trying to do is create something akin to that, but by virtue of your will. There’s certain benefits there, both from a taxation aspect, as well as a risk-management aspect.
Interviewer: George, is it as complex as what it would be setting up a family trust? You mentioned forty, fifty pages. Is drawing up a testamentary trust in the estate planning scheme of things as complex as what it is to set up a family trust?
George Hatzis: Not by way of the documents, but the will becomes a lot more complicated. The will becomes a lot more complicated because what we’re trying to achieve is where we’re setting that asset or income-producing asset, or just monies in bank … What we’re saying in our will is that, “Look, I have three kids, I have a partner. I want my trustee to look after my kids and my partner at the trustee’s discretion.” Now that works similarly to how a normal family trust document would work. However, you’re doing it pursuant to your will, so therefore, it kicks in on your death.
Now from a tax aspect, a minor beneficiary, being someone who’s under eighteen, who normally would only have available four hundred and eighteen dollars plus Medicare rebates by way of a tax-free threshold, all of a sudden has available the full eighteen thousand tax-free threshold that an adult does, but it’s only when you use a testamentary discretionary trust. The accountants love that tool when they’re looking at splitting income and money coming through to the family. From a lawyer’s perspective, there’s a different aspect to that, Dan.
Interviewer: George, are there circumstances in a person’s life that would indicate to them that they do need to come and see a lawyer to talk about testamentary trusts? For example, if the husband or a wife are involved in a business, or there’s been a split in the family and there’s now blended children from different relationships in the mix, are they warning signs that a more, perhaps, holistic look at the estate planning for them is necessary?
George Hatzis: Definitely, Dan. Definitely. The latter subject matter, always. If there’s a marital breakdown of any sort, whether for themselves or whether for their kids, they need to revisit their asset planning, because of course, on a person’s demise, the benefits that the beneficiaries receive under an estate may well be jeopardized pursuant to their ongoing obligations to a third party. That’s where a testamentary discretionary trust comes into being very, very effectively. What we attempt to do, we’ve talked about what the accountants look at by way of the tax-free threshold, but from a lawyer’s perspective, we look at trying to make sure we can manage risk as much as possible.
One of those little bells or alarms that should go off in people’s heads is not only when they’re going through some trouble and strife, but when their kids get to an adult age, they need to consider what they’re provided in their will. Whilst they’re little kids and going to school, then if something happens, well you might say, “Okay, I’m putting this aside for the kids,” but what needs to be given is some further thought to that. We don’t know, when our kids get older, turn eighteen, turn twenty-one and on, as to what sort of relationships they’re getting into, or what business ventures they may choose to go into.
If we have left them a large sum of money … Remember Dan, we’re worth far more dead than alive, unfortunately, with superannuations and life insurances. If we then leave them classically under a will which says, “I leave everything to my spouse, but if something happens to her or him, then I leave it all to the kids,” well, that means the kids get that share no matter what. In the eyes of the law, they have a third or a fourth or half, or whatever it might be. That’s available to attack either through a failed relationship they may be in or a failed business venture they may be in. The TDT, or the testamentary discretionary trust is a great tool to try and protect that asset through that generation.
Interviewer: Are they expensive instruments?
George Hatzis: They are more expensive than a normal will. You do tend to complicate your will up, so you are spending more money on that as opposed to an essential or simple will. An example of the latter being, “I leave everything to my partner. If something happens to her, then I leave it to the kids.” When you’re doing up a TDT, you are setting up a trust, a discretionary trust, so you have to give thought to the appointment of the trustee. You have to give thought that, “Hey, if I’m going to set this up, maybe I go a generation further and have something that theoretically can carry forward.” Now that doesn’t mean it has to last that long because it’s at that trustee’s discretion. A great tool, but yes, a lot more complicated than a normal will and hence, a bit more costlier.
Interviewer: Yeah, I was about to say that the reach that a testamentary trust gives, you just can’t compare with a simple will, can you?
George Hatzis: No, not at all. How do you compare something that might protect the assets, ongoing, for decades, if done properly? As opposed to a will that could be open to attack because you can’t predict the future? The money that you’re going to spend may well be a comparison of three or four hundred dollars compared to fourteen, fifteen hundred dollars. That is more expensive, but, jeez, you’re getting a lot more for it.