The Estate Planning for the Wright Family - Essay Example

llE plan for the Wright family Put in here are the objectives of client's key e planning: The main objective would be in terms of securing a comfortable lifestyle for himself and his wife Margaret, and nurturing their future child, without both of them having to go for work at the same time. One of them needs to be at home to take care of new child's needs. Tom also needs to secure the lives of his present wife, Margaret and his unborn child in the event of his death, possibly through a will. It could also be seen in terms of reducing debt burden arising due to settlement of divorce proceedings with Tom's former wife. Contextually, it could also be to circumvent any future challenges posed by his former wife on his assets, joint or individual. From the point of view of Margaret, the driving force of the plan would be in ensuring that only her husband, Tom benefits from her assets, and not his ex-wife and/or son. It is also necessary to have estate planning in place in order to overcome the sudden and unexpected death of spouse, in that it could provide for safety and comfortable living for the remaining members of Tom's family, should such an eventuality occur, especially if the spouse dies intestate (without providing a will) or testamentary documents. Will formation, a part of estate planning is an important and crucial exercise for all married couples and families, since the advantages and benefits associated with a person dying with a will or probate outweigh the risks and detriments associated with dying intestate. Another important aspect would be the appointment of a guardian for taking care of the new child, in the event of Tom's death, Margaret's death, or both dying at the same time. Circumstances: Tom is an accounting partner in a medium size accounting firm. While his earnings have been satisfactory, Tom's earlier marriage was annulled and he had to make heavy borrowings to pay off the divorce settlement. He has an eight year old son from his previous marriage and the upkeep expenses of his son are routed through a Trust, funded by an advance of his inheritance from his parents. As per current Australian tax laws, the capital amount of this trust has been earmarked for the benefit of his son "as a result of family breakdown." (Income tax assessment act 1936- sect 102aga n.d.). Current personal circumstances: Tom's present wife, Margaret has completed her medical studies and internship, and is currently employed in a local clinic for the last two years. She is competent and confident of gaining partnership status in her present employment. She proposes to be back in her clinic on part-time basis, after a period of six months after delivery of her first child. With her savings and amount received as inheritance from her parents, she has made investments in property in her individual name. Her main intentions are that her income and assets be shared only with her husband and not enjoyed by his former wife and son. Beneficiaries' circumstances: Tom's present beneficiaries are his wife, Margaret and at a later stage his children. His former wife and son have been adequately provided for by his settlement and the trust created for child support of the boy. He is not keen on making any more separate allocations to them, seen they have been well provided for, under divorce settlement. Current assets and liabilities and how owned: Tom's assets: 1. Goodwill in the accounting firm where he is partner 2. Share in the assets (Plant and Equipment) of the trust which he solely controls. 3. Equity in the Life Insurance policy on Tom's own life 4. Balance of superannuation funds 5. House property owned jointly with spouse, Margaret 6. Trust which has been earmarked for son of earlier marriage Tom's liabilities: 1. Mortgage payment on house property owned jointly by him and Margaret. This house has been 80% mortgaged and bills need to be paid. 2. Trust payments for maintenance of his son. 3. Life insurance premium on own life 4. Debts incurred for divorce settlement from former wife. Margaret's assets: 1. Personal savings 2. Investments in property in her own name Margaret's liabilities: 1. Mortgage payment on house property owned jointly by him and Margaret. This house has been 80% mortgaged and mortgage bills need to be regularly paid. Treatment of balance of Superannuation and Death Benefits: It is seen that there is still a portion of superannuation funds lying in his account after divorce settlement. Therefore it becomes necessary to also consider the fate of this Superannuation fund in the event of Tom's untimely death and its tax implications. Since it is a job related superannuation fund, it would not come within the scope of Self Management Trust Fund (SMTF). Thus the choice would vest either to be treated under SIS Act or Tax Act. The former is not in line with Tom's and Margaret's long term interests since under SIS, his former wife and son could also become claimants. (Topic 9 Superannuation and Death Benefits). Any person under live-in relationship could also become claimants under SIS Act. However, under Tax Act, his legal representative would become the virtual claimants. This would pass on to his estate after his death and would be distributed as per his Will. Thus, in this case, it would be appropriate for Tom to bring the superannuation benefits under the provisions of his will and assign legal heirs and beneficiaries according to his wishes. Social Security Implications: Receipt of inheritances may change social security entitlements, especially in the event of the death of one spouse, the level of income and assets of the other may be considerably eroded or even totally wiped off if sufficient care is not exercise in protecting the social security entitlements. Further it is possible that the deceased may have left all their assets to their surviving spouse, and thus, not only do the partners have reduced earnings and assets parameters, but are also amenable to high incomes that could be tax assessed , and thus being deprived of Centre sponsored payments. (Topic 7 - Social security estate planning implications). If the surviving partner will continue to receive a social security payment, it's important to look at their ability to cope with Centrelink. The person who passed away may have taken responsibility for dealing with financial matters and reviews for example, so the surviving partner might need to nominate a relative to handle the Centrelink entitlements, with that relative then becoming a Centrelink nominee. Funding: Are there any funding needs here to meet their objectives Most certainly, there would be funding needs to ensure proper provision for their new child and the need to live a comfortable life without both having to go to work at the same time. The needs of the child and household have to be met on regular basis. Options and impediments: Go through all the issues you can see arising from planning their estate e.g. ownership of assets, business succession, super asset protection, family trust It is first proposed to take up the ownership of corporate assets owned by Tom. Firstly, goodwill in firm comes under the purview of Capital Gains Tax (CGT) and thus provision for payment of tax in the event of its arising needs to be met. In the event of Tom's death, the other partners would inherit his share, according to the terms of partnership agreement or other standing covenant. Thus, the impact of death on the partnerships would be decided by the standing partnership agreement, or by Australian law. His ownership of assets under trust would be according to Trust deed, and in the event no trust deed is present, by Australian Trust laws. Coming to the ownership of assets, the house is jointly owned by Tom and his wife Margaret, possibly under joint tenancy. Assets owned under joint tenancy, does not pass on to the estate of Tom, but goes on to the living co-owners. Under Western Australian laws, it would be as follows: Deceased survived by spouse and issue. Spouse takes: household chattels; $50,000 + interest at prescribed rate; and 1/2 balance if one child, or 1/3 if more than one child. balance.Issue takes: (Topic 2 - wills, powers of attorney and guardianship n.d.). Assets protection could be done by way of Tom/Margaret making out a will or probate, in which any person above 18 years could make out a will setting forth and specifically identifying the beneficiaries to his assets and the manner in which his assets shall be shared by all beneficiaries named in the will. While wills could cover personal assets owned by Tom/Margaret, shares in companies, shares in assets as tenants-in-common (not assets held in joint tenancy), interest in partnership assets, etc., it would not cover assets held in trusts, superannuation death benefits and so on. (Topic 2 - wills, powers of attorney and guardianship n.d.). It is also necessary to provide clear justification and causes for deliberately leaving out any person from one's will, in order to avoid future complications. This reasoning could help address any future challenges that may arise regarding the distribution of assets of the deceased in the manner in which s/he wanted it to be shared. In this context, it is also necessary to highlight the risks that occur when a person dies intestate (without providing a will). In such cases, it is seen that the assets need to be distributed according to the standing laws of he state in which the assets are existent, and in the event assets are located in different states, the differentiating laws of various States in Australia need to be enforced. This may not meet the prime objectives of the Trust document or Will, and sometimes may give rise to controversies and disputes among various claimants. It is widely believed that death is a significant tax planner for most citizens, and nobody should miss the opportunity of getting major tax benefits, albeit after death. The main idea behind wills and codicils is that it clarifies and categorises the wishes of the will maker in no uncertain terms and is a legally validated document. It could also be altered and destroyed and a new will could supersede an earlier one, especially if the will maker develops dislike or animosity to a beneficiary named in the will, whom s/he may disinherit, should it be so thought. In Tom's case, there is a genuine threat from his ex-wife and son (upon reaching the age of 18 years) in terms of challenging Tom's will and claiming a right to his property. Thus it would be necessary for Tom to clarify all matters, important or otherwise, in his will and give clear instructions to the executor on as to who inherits what and how, including the rights of his ex-wife and son. This could save a lot of litigation and disputes at a later stage for Tom's spouse, Margaret. Similarly, taking the case of his spouse, it is seen that the property investments are in her own name, carried out through inheritance from her parents. She needs to make it clear as to who should inherit her properties and assets- her husband, children, or anyone else. In the event of Trust, the trust deed would need to be adhered to. In the case of trusts, it is created when a person /trustee holds property held in trust for the benefit and security of nominated clan or section, subject to certain conditions and inuring for common benefit of the trust representatives, or anyone mentioned in the Trust Deed, as beneficiaries. In this context it needs to be said that, except for charitable trusts, others do not exist for perpetuity, and it is often seen that maximum of 80 years from its formation could be seen as maximum period under South Australian laws. (Topic 5 - The use of trusts in estate planning n.d) In this case, there is already a trust operating for the benefit of Tom's son from his previous divorced marriage and the corpus of the trust would inure for the benefit of the child. In the case of Tom's family "trusts provide family groups with a great deal of scope in allocation of tax burden among family and protecting family assets. Therefore, any family group with either capital growth or income-generating assets needs a family trust structure. However, in order to serve its purpose effectively, the family trust should be maintained and reviewed regularly." (Topic 5 - The use of trusts in estate planning n.d). Therefore, it is necessary that Tom needs to establish a trust for which he and his wife may be appointed as joint-trustees to oversee their estate and route all monetary transactions, including the inheritances they have received from their parents, payment of taxes, and other matters relating to expenses and incomes of the joint and several properties. Strategies: Self explanatory - what do you recommend they do to address the issues above: They need to consult a lawyer to draw up a will for distribution of the property and assets in the event of their death. This will or codicil needs to show the share of property held individually, and also demarcate the successors to their assets. It is also necessary to appoint an Executor to oversee the drafting of the will and ensure that it is done according to the wishes of the couple. It is also acceptable if Tom or Margaret individually prepare the wills themselves, in which case it would still be necessary to seek legal opinions on the language and interpretations of clauses and sub-clauses in order to make sure that it is interpreted in the very way the couple had intended it to be read and understood. Thus, legal assistance in drafting and making the will is important, since otherwise, wills could be misinterpreted and misread to suit individual requirements. It is also necessary that the will be registered, if possible and kept in safe custody of the lawyers. Another important aspect is the safety and security of their new child. For this it is essential that a Guardian is nominated who could take good care of the child, in the event the parents are not in a position to do so. There are lot of aspects regarding guardianship, including the fact that, in the event of legal separation, where the child is in the guardianship of a single parent, and s/he dies, the other parent could not routinely claim custody of he child, but needs to submit an Application to the Court, who would study the merits of the case, including the aspect of joint guardianship, before passing a final verdict. The major aspects that need to be seen in the context of Tom is that the estate planning needs to address issues of debts, handling of jointly owned house property, share in partnership accounting business,(Partnership Deed or other covenants) and trust corpus held in favour of son. The trust aspect would be governed by the Trust Deed and legal dictates, but needs to be clarified in the Will. Similarly, Margaret's present and future assets needs to be protected through will ascribe beneficiaries for her savings, and investments in properties, now held in her individual name. In her will, she should also lay down her views on the role of Tom's ex-wife and son in the determination of her assets, in order to circumvent disputes and litigation at a later stage. This aspect is important, since the Courts would not only take cognisance of the moral obligations that Tom may owe to his ex-family, but also in terms of their present pecuniary circumstances, the terms of the divorce settlement and also the present wealth and value of Tom's estate. It would also be necessary to take view of the relationships between Tom and his ex-wife, before and after the divorce settlement. Implement - see lawyer etc but a step by step process so it is clear who does what: By far, the most important aspect in this case will have to be the protection of the future lives of the constituent of Tom's preset family-his wife, Margaret and new child. Thus, in order to safeguard their future lives, it is important that guardianship for the child is made and wills prepared by the lawyers of both Tom and Margaret, setting forth the claimants and beneficiaries of their properties, including assets held in individual and trusts. It is also necessary that to reduce debts, future savings needs to be monitored and a substantial portion of their incomes should go towards meeting debts and providing incomes for their growing family. Review- Why and how plan needs reviewing and how regularly: The estate plan needs reviewing from time to time, to adjust to current demands and changing economic scenarios of this young couple. It could be in terms of Margaret's promotion as partner of the clinic, better job for Tom and overall improvement in the economic situation of the couple. It could also be seen in terms of changes in Australian tax and trust laws, which could either be beneficial or detrimental to tax assesses. Property laws, tax laws and other major governmental regulations could also affect the estate planning and management, especially for individual holding. The regularity of the estate plans are needed to provide for current changes or amendments in the estate planning data, may be deleting matters that are not important or have been rendered redundant and incorporating aspect that could better serve the business and economic interests of the couple. All said and done, it may well be concluded that estate planning and management, including Will formation is an important and crucial exercise for all married couples and families, since the advantages and benefits associated with a person dying with a will or probate will surely be far more than the risks and detriments associated with dying intestate. It is possible that that the law takes over full charge and nothing substantial would remain with the legal heirs or beneficiaries and it would also be in congruence with the intentions of the concerned person or his estate. References Income tax assessment act 1936- sect 102aga n.d., Commonwealth Consolidated Acts, viewed 15 May 2009, http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s102aga.html Topic 2 - wills powers of attorney and guardianship n.d., (provided by customer) Topic 5 - The use of trusts in estate planning n.d., (provided by customer) Read More