Introduction

Welcome to our e-book on estate planning.

Broadly speaking, estate planning is the process of ensuring that your wealth goes where you want it to after you die. Usually, this is more than just a simple matter of preparing a will – although a will is almost always a key part of effective estate planning. But the best estate planning also considers elements such as your superannuation benefits, family businesses, assets owned by legal entities such as family trusts as well as assets owned as joint tenants – the list goes on.

This e-book introduces all of the major areas of estate planning. We hope you like it, and as ever, please feel free to send a link to this e-book to any person that you think would benefit from having a good read!


Chapter 1: Wills

A will is a legal document signed by a testator or testatrix, or a ‘will maker.’ The will controls what happens to property owned by the will maker when he or she dies. Most people regard the will as the dominant estate planning document. This is true for most people. But for some people this is not the case: if sensible asset protection strategies have been followed then relatively few assets may be owned personally. The bulk of the assets may be in controlled trusts and super funds.

Only assets owned personally are controlled by a will. Assets owned by super funds and family trusts are not owned personally and are not controlled by a will. These have to be considered separately in any estate planning exercise.

Testamentary capacity

Only a person with “testamentary capacity” can make a valid will. A will that is made by a person without testamentary capacity will not be valid. Testamentary capacity will exist if the will maker is over age 18, understands the nature of the document being signed and is of full mental capacity. Testamentary capacity is not usually an issue for most people. However, as the population ages the question of mental capacity is becoming more and more of a concern. If an older person makes a will, it needs to be assured that the person still had sufficient legal capacity. Solicitors are expecting more and more challenges to wills on the basis that the will maker did not have testamentary capacity at the time the will was made.

If capacity is a concern it is a good idea for those involved in making the will to take steps to be able to prove full mental capacity at the time the will is made. This could include, for example, an assessment by a geriatrician or some other expert as to the will maker’s mental capacity and understanding of the will as a legal document.

Formal requirements to create a valid will

A will must be in writing and must be properly signed and witnessed to be valid. Normally two independent witnesses must see the will maker sign the will and must then sign each page of the will as witnesses. The witnesses should be independent and not be related to the will maker because a person who witnesses a will cannot be the beneficiary of that will. As a result, relatives are usually definitely ‘out.’

The witnesses must understand the general nature of the will but they do not need to read the will – their role is to attest that the will-maker signed the will. Usually witnesses do not read the will.

What happens if a will is not valid?

If a will is for any reason invalid, the most recent preceding valid will made by the will maker will govern the will maker’s estate.

If there is no such will then the estate will be governed by the rules for intestacy. These rules typically provide that the estate goes to the spouse and children and other close relatives in accordance with a set formula. Sometimes a will validly disposes of part of the will maker’s estate, but not some other part. This is called a partial intestacy and in this case the set formula applies to that part of the estate that has not been properly disposed of under the will.

Further, a possible invalidity may create bargaining power for a person interested in challenging the will: the executor will be interested in settling with the challenger rather than having the whole will found to be invalid.

Obviously none of these results are what the testator wanted. So it’s very important to make sure the will is valid and all the details are properly attended to.

What happens to the ‘old’ will?

Executing a new will automatically revokes the old will. Some wills contain a clause like “I revoke all earlier wills” or even specify the earlier will to make the position clear. But technically this is not necessary since revocation is automatic: the mere act of executing a new will is all that is needed.

That said, it is a good idea to either destroy all copies of any earlier wills or to mark them in a way that clearly indicates that a new will has been executed and this will is revoked and is no longer necessary.

Some basic rules for executing a will

The testator or will maker should read the will carefully and be 100% satisfied that it reflects his or her wishes. The testator should sign and date each page of the will in the presence of at least two adult witnesses (i.e. over age 18 and otherwise of legal capacity). The witnesses should not be family members or anyone else who may benefit under the will (this would invalidate the will) and do not have to read the will but must understand that it is a will.

The witnesses should sign each page of the will and print their names, addresses and occupations on the last page of the will.

Everyone should sign using their normal or usual signature. It is a good idea for the testator and each witness to sign using the same pen.

Any last minute alterations should be referred back to the solicitor who prepared the will, and fresh drafts prepared. But if for any reason this is not possible the testator and each witness should place their initials in the margin next to each alteration.

The will should not be stapled or pinned, or marked in any way.

Multiple copies should be signed and each copy should be kept separately in a safe place where they can be accessed quickly in the event of death. De Groots wills and estate lawyers have written an interesting article called “Protecting Important Documents When a Crisis Hits” and this article can be accessed here: Protecting Important Documents When a Crisis Hits.

Simple “standard husband/wife wills” (beneficiaries have fixed interests)

One of the most common wills for the average “nuclear” family is one where each partner gives their estate to their spouse or, if their spouse does not survive them, then to their children equally.

For people with minimal assets and relatively simple affairs a ‘simple will’ such as this is a perfectly sensible way to proceed, as it is simple and easy to understand. Assuming that the couple each appoint the other (if alive) as their executor, then the only real questions are:

  1. Who is to be executor and trustee i.e. the “reserve trustee” if the spouse does not survive?
  2. Who is to be guardian, i.e. the person with the day to day care of any children under 18, if the spouse does not survive?
  3. Who is to benefit if no spouse or children survive?

Only you can answer these questions for your situation.

Reserve trustee

The “reserve” executor should be a trusted relative or friend, or even better, two or more unrelated and trusted friends or relatives. We often suggest the testator’s siblings and the testator’s spouse’s siblings (i.e. “unrelated relatives”) be the reserve executor.

If the children are young then the “reserve” trustee should be someone with a financial background as the person may be in charge of a trust fund for the children until they reach 18.

The same person should not be the reserve trustee and guardian of children under 18. There is a conflict of interest between the two roles: it’s all too easy for the person who legally owns the money and who is responsible for the day to day care of the children to “confuse” things, with the result that the trust monies disappear and are not available for the children.

Separating the trustee function and the guardian function minimises the possibility of the trust monies being used and maximises the probability of the trust monies being there for the children when the trust vests. At the very least there should be two reserve trustees, and they should be unrelated and unlikely to collude against the children.

Who should be the guardian?

We usually suggest the testator’s siblings and the testator’s spouse’s siblings be the guardian. This is a simple approach that leaves the children in the care of their uncles and aunts, and indirectly their grandparents, if there is a double premature parental death.

This approach normally works, and has some inherent wisdom: uncles and aunts are a natural choice, and nominating all of them leaves the decision as to who should care for the children to those who are best placed to make the decision at that time based on the conditions that then exist. Nominating a particular uncle or auntie can be problematic if, at the time the will is enacted, that uncle or auntie is in prison or living out of the country.

Bear in mind that a double premature parental death is a very low probability event. And bear in mind that 85% of deaths occur with notice, in the sense that the person knows they have an incurable disease and will die within a certain period. This notice period allows an opportunity to re-consider the will and to nominate a more appropriate guardian if the situation calls for it. This means the odds of what we are talking about, i.e. now a double premature parental death, without notice, i.e. by accident, is an even less likely event.

For the vast majority of cases nominating the testator’s siblings and the testator’s spouse’s siblings as the guardian of any infant children (i.e. under age 18) is the most sensible strategy.

Exceptions can arise. For example, the uncles and aunts may all live overseas, or one of the uncles and aunts may be “inappropriate” in that they may have a mental illness, a drug addiction or some other condition which means children should not be in their care. But normally this approach works.

Who should benefit if no spouse or child survives?

This boils down to who should be the “default” beneficiary. This is a particularly low probability event too. We normally suggest “next of kin” or maybe parents, or in the case of a married couple each set of parents in equal proportions. Each case is different. But a common sense approach is needed because it is a very low probability event.

We typically suggest clients put a workable will in place even if they are not certain who the default beneficiary should be: it’s better to have a good will than to not have a perfect will. The will can always be changed at a later date if a more perfect option presents itself.

What does a will look like?

Financial planners should read and become familiar with the major clauses and the general construction of a will, so they can answer client questions and explain the wills competently.

The body of the will sets out:

  1. who the trustee or executor is. The trustee or executor is the person responsible for the administration of the estate. The full name, address and relationship of the executor(s) and possibly an alternative executor should be set out in the will. It is quite common, even recommended, that the executor engage a solicitor to handle these responsibilities, except in the simplest of cases. However it is often not wise to nominate a solicitor or other professional person such as a trustee company to be the executor, as this person can charge their normal professional fees and commissions for all work done in this capacity. This therefore tends to be an expensive option, and one which is sadly often abused. For obvious reasons it is a good idea for the executor to be younger than the will maker if the will maker is older than, say, 50, and in any event the executor should be likely to outlive the will maker;
  2. how the assets will be dealt with after the will maker’s death, that is, who gets what, how and when. The names and amounts or percentages of the estate going to each beneficiary should be set out clearly, as should the conditions attached to any bequests. This will frequently include the creation of a testamentary trust, and this is discussed in more detail below; and
  3. any special directions such as, for clients with young children, who should be the guardian of the children, i.e. who should have day to day responsibility for the children after the death of the will maker (and the death of any other parent). The guardian has an important role to play and careful thought is needed as to who should take on this role. The will maker’s siblings and spouse’s siblings are often the people most likely to have a maternal/paternal-like love for the child and to understand the will maker’s world view. They are the people best placed to make decisions for the child. The statistical probability of the premature death of both parents is low, so labouring to decide who else should do the job is probably a big waste of time. It is not a good idea for the executor and the guardian to be the same person(s): this is because of the potential conflict of interest, and if there is an actual conflict of interest, there is not much the children can do about it until they are age 18, and even then it will be a long shot.

What assets are controlled by a will?

Assets owned as joint tenants are not controlled by a will and on the death of one joint tenant these assets immediately pass to the surviving joint tenants. The most common example is the family home. This is typically owned by mum and dad as joint tenants and if dad dies his share automatically passes to mum irrespective of what his will says.

Assets owned as tenants in common are controlled by a will.

It is critical to establish what assets are co-owned and how they are co-owned. You can get surprising results, and often apparently wealthy clients emerge as having virtually no estates on death.
Obviously this means effective estate planning goes beyond mere wills and requires the planner to consider all controlled assets.

Only assets owned personally are subject to a will. This means assets in a family trust are not covered by the will. This is so even if the will maker controls the family trust. Assets inside family trusts are discussed below. So are assets owned as joint tenants and/or tenants in common.

Assets inside a super fund are not subject to a will. Assets inside super funds are also discussed below.

Who should be the executor?

The Equity Trustees outline the key issues to consider when choosing an executor. Their answer to this question is provided below. This information was extracted from their website on 27 November 2013.

The choice of executor is critical to ensure that obligations, legalities and family issues are handled professionally after your death.

Survival – An executor should be someone who is likely to survive you and be willing and able to handle your affairs after your death. Appointing a person of similar age without an appropriate substitute is often not practical. Appointing Equity Trustees guarantees that you will have an executor to survive you.

Experience – Your executor needs to have experience (or access to advisers with experience) in all of the matters listed in Duties of an executor. Equity Trustees has many years of experience in estate planning and management and can help to ensure the smooth and speedy administration of your estate.

Security – It is important to ensure that your executor is able to manage all aspects of your affairs with safety. If a private executor fails to maintain the value of your estate, or fails to transfer it to your beneficiaries, it may be difficult to recoup any loss from his or her personal assets.
When you engage a Trustee Company, such as Equity Trustees, you have far greater assurance that your assets will be properly handled. Trustee Companies have professional indemnity insurance and the resources to meet a claim if assets are lost.

Impartiality – Your executor has a duty to carry out the terms of the will and should not be subjected to pressures from various individuals or groups after your death. Your executor should not be swayed by prejudices and should always ensure that everyone is treated fairly in accordance with the terms of your will.

Discretion – Confidentiality, tact and discretion are three very important attributes of an executor.

Often those you leave behind are in an emotionally vulnerable state and it helps if your executor has the necessary experience to deal with any issues in a supportive fashion.

Where there is discretion to distribute income or assets provided in the will, your executor should also be able to balance the interests of the various beneficiaries.

Peace of mind – Knowing that your estate will be administered professionally, with a desire to maintain family unity and harmony.

What happens if you die without a will?

If a person dies without a valid will they are said to have died intestate. Each state has statute law controlling the division of assets, and essentially the assets are divided between family members and dependants under a statutory formula.

The government does not get anything unless there are no living next of kin, however remote. This is a very low probability event. It basically never happens: everyone is related to someone, however remote the relationship may be. The urban myth that ‘the government gets everything’ is just that, a myth, without any substance at all.

In NSW, for example, the relevant Act is the Wills, Probate and Administration Act and its rules for the distribution of assets can be summarised as follows:

  • to your surviving spouse (including a de facto spouse) and children. If there are no children, the spouses inherits 100%;
  • if there are surviving children and a spouse, the first $150,000 goes to the spouse, with the remainder shared equally by the children and the spouse;
  • if there are children but no surviving spouse, the estate is shared equally between the children. If a child has already died but left children of their own (i.e. grandchildren) the grandchildren get their parent’s share;
  • if there are no living spouse, child or grandchildren, any living next of kin. If necessary, a search will be made to identify any living next of kin, including parents, siblings, half-siblings, grandparents, uncles and aunts and half-blood aunts and uncles; and
  • finally, if there are no living next of kin, the estate goes to the Government.

There are many obvious problems connected to dying without a will. First, the probate process is slower, more complex and more costly, which means the client’s family inherits less wealth. Second, and more importantly, it’s quite unlikely that the statutory formula will be what you actually desire. For example, most married clients would want all of their estate to pass to their spouse, not just the first $150,000, and a share of the remainder. And finally there can be real problems where a married couple without children die together: the estate of each of them in effect passes to the next of kin of the spouse who died second (typically assumed to be the younger spouse when two people die in the same event). This is hardly fair or sensible. But it is what happens under the formula.


Chapter 2: Assets Inside Discretionary Or Family Trusts

Many people have assets owned in family or discretionary trusts. Assets held in a trust are not owned by any one person and cannot be controlled by a will. This is, of course, one of the reasons why family trusts are used so frequently: they provide for perpetual succession, in the sense that they go on beyond the life of one individual and allow for wealth to be transmitted between generations. They also protect family assets from the risk of divorce and bankruptcy of an individual family member, and one of the key principles here is that no one beneficiary has a right against the trustee that is recognised at law (and if you do not own it you cannot lose it).

So if a client controls the assets in a family trust it is not possible to deal with those assets specifically under the will. A will only deals with assets owned personally by the will maker.

The best that can be done with assets that are not owned personally and are owned in a family trust is to ensure that the correct people are given control of the trust. This is usually the same people who are expected to inherit under the will.

Most trusts will have a corporate trustee so a good start is to give shares in the company to relevant beneficiaries, who may also be surviving directors. In the simple scenarios discussed above, shares would form part of the estate and pass either to a surviving spouse or children or a testamentary trust. But just dealing with the shares in the trustee company is not sufficient.

Who controls the assets in a trust?

The real question is who has the power to appoint the trustee? This person, called the “appointor”, controls the trust. The appointor has the power to remove and appoint trustees and so has ultimate control of the trust. Usually the appointor’s role is shared between a husband and wife and it is only upon both of them passing away that the issue needs to be addressed.

Some wills use the word “guardian”, “supervisor”, “protector” or “principal” rather than “appointor”. Nothing turns on this and they are the one and the same thing.

The trust deed will specify who holds the power of appointment, and what needs to be done to exercise the power of appointment in favour of another person or persons if the current appointor dies, become incapable of acting as the appointor or ceases to wish to act as the appointor.

Usually this will involve a deed of appointment being exercised in which the new appointor is formally recognised, or appointed, as the appointor and in which the old appointor may resign or otherwise cease to act as the appointor.

Often the trust deed may provide that the power of appointment passes to the appointor’s legal personal representative on the death of the appointor. This is on the surface at least a common sense provision but it can create many other problems, and once again expert legal advice is recommended.

The trust deed may also provide a mediation process or other dispute resolution process to determine disputes between appointors.

The solution

A common solution is for the wills to provide that where a will maker is the sole remaining appointor of any trusts, then the will nominates the executors of their will (or the trustees of their testamentary trust if one is to be established) to be the appointors of those trusts.

That is, the will exercises the power of appointment, often using words like:

I direct that any power of appointment I hold in any trust be exercised in favour of my legal personal representative and that my legal personal representative deal with the assets in that trust as if they were personal assets subject to the control of this will and last testament.

More complex scenarios will require different and more specific arrangements to be made either in the wills or in separate trust documents.


Chapter 3: Superannuation And Estate Planning

Superannuation is another area often forgotten or misunderstood in the estate planning process.

A super fund member cannot just sign a will and assume that their super benefits will automatically be paid in the way set out in their will. The super fund trustees are not bound by the deceased member’s will and may pay the benefits to either the deceased member’s estate or to appropriate dependants as they see fit.

This means that, when you die, it is up to the trustees of your super fund as to what happens to your benefits.
In most cases problems will not arise. The trustees will do what you want them to do with your money. But problems can arise, for example, in same sex relationships, with “hidden” or multiple relationships, with “warring” children, and so on.

Moral and legal factors which may influence a super trustee’s discretion to pay a benefit to a person include:

  1. the relationship between that person and the deceased member;
  2. the person’s age and ability to look after themselves financially;
  3. the extent of the person’s dependency;
  4. the person’s financial circumstances;
  5. the history of the person’s relationship with the deceased member; and
  6. the strength of any other claims made by other people.

There is a further general restriction, and this is that the trustees can only pay the benefits to ‘certain persons,’ being a person who is:

  1. a “super dependant” of the deceased member which means:
    • a spouse,
    • a child (of any age); or
    • a person who was financially dependent on the member at the time of death; or
  2. the estate of the deceased member.

Binding death benefit nominations

Clients can override the trustees’ discretion by signing a binding death benefit nomination (BDBN).

A BDBN directs the trustee to pay the death benefits to a particular person. It allows the client to control the trustees’ discretion as to who gets the benefits on the client’s death. The trustee must pay the death benefit in accordance with the BDBN.

A BDBN may be used in conjunction with a so called “super will” to coordinate the payment of the deceased member’s super benefits with their other estate planning strategies.

A BDBN usually cannot be contested by an aggrieved person unless for some reason it is not valid. Possible reasons for a BDBN not being valid include:

  1. the fund’s trust deed does not allow BDBNs;
  2. the BDBN was not signed properly;
  3. the client was not of sound mind when the BDBN was executed;
  4. the BDBN is the result of a fraud or emotional or physical duress; and
  5. the BDBN is more than three years old.

What other issues impact the decision to pay benefits from a super fund?

The “other issues” basically relate to income tax planning and asset protection issues.

On the income tax planning side the definition of a “super dependant” means death benefits are only tax free if paid to:

  • a spouse of the member
  • a child of the member who is under 18;
  • a person who was financially dependent on the member at the time of death; or
  • the estate of the deceased member where the tax commissioner is satisfied that the funds will pass to, or be held for the benefit of, any one of the persons listed above.

On the asset protection side, the payment of a large death benefit to a person suffering either financial or matrimonial difficulties is ill-advised, since it is quite possible they will not end up with the intended beneficiary. For example, if you know that your adult daughter is having marital problems, then it might be better for assets to be paid in some other way than a direct cash benefit to her.


Chapter 4: Estate Planning And Family Law

If you are getting married

Marriage automatically revokes a will, unless the will specifically contemplates the marriage and names your intended spouse.

First marriages are generally straight forward. Upon marriage, each partner executes a will in favour of the other partner. The wills are usually simple and short, and unless there are already children, or children are expected quickly, usually would not create a formal testamentary trust.

But departures from this ‘simple format’ can arise. For example:

  1. one partner may be significantly older than the other;
  2. one partner may be significantly wealthier than the other;
  3. one partner may be in litigation-prone profession, such as a doctor; and/or
  4. one partner may in poor health with a higher risk of mortality.

In cases like this legal advice should be sought as to whether any specific provisions should be in the will to make the will better suit the clients’ circumstances. We can ensure you receive high quality legal advice, so please let us know if you are getting married (or thinking about getting married) and we can happily peruse your estate planning needs.

If you are getting divorced

Divorce does not automatically revoke a will. This means all clients who are getting divorced or who have recently divorced need specific legal advice as to the status of their will. As you divide your assets after a divorce, so you should also revise your estate planning.

Separation

Separation typically has no effect on a will. This is the case even if the partners have reached a property settlement.

This means, for example, that if a separated partner dies after reaching a property settlement and without making a new will his or her assets may still go to his or her spouse, and not to any other person, either under the terms of the earlier will or under the intestacy laws.

Blended families

Blended families are common and are becoming more common. They create their own issues for estate planning. In cases of blended families, expert advice is needed to balance the genuinely competing claims of spouses, ex-spouses and different batches of children if your client dies prematurely. We can ensure that you receive such expert advice.

The general goal will be to ensure that your wishes are achieved, at least as far as the law allows them to be achieved. A further goal is to help you through what can be a very difficult and emotional process. Sometimes awkward questions must be asked, but we do our utmost to ask these questions with maximum sensitivity.

Family law interacts with estate planning law, and some complex and surprising issues can arise.

Once again, please do not hesitate to contact us to discuss any such issues. We will ensure that you receive advice from an experienced person who can provide unfettered advice that is in your best interests.


Chapter 5: Estate Planning And The Family Home


There are two broad ways in which a person can own a family home. The first is as an individual, whereby they own the home outright. The second is as a co-owner. The form of ownership informs how the estate planning should proceed for the family home.

We will discuss individually-owned homes in the first section of this chapter and then look at co-owned homes in the second half.

Individually-Owned Homes

Where a family home is owned by one individual, either because they have always owned it individually or because they are the last remaining survivor (see below), the home typically forms part of the deceased person’s estate.
The simplest way for a person to therefore plan for this part of their estate to be managed is to prepare a simple will. Assuming they do so, the home will then be treated in accordance with the owner’s legal will.

For example, if a sole owner has a will that requires that their estate passes to their children in equal shares, then the house will transfer along those lines. This means that if the home is kept, the children will own it as tenants in common (unless they agree to change the ownership to one of joint tenancy). If the home is sold, the proceeds of the sale are distributed between the children.

Tax Treatment

If the home qualified as the deceased person’s principal place of residence, there will be no capital gains tax payable upon the sale of the home. The principal place of residence exemption applies if the home is sold up to two years after the owner’s death. This timeframe exists to allow the deceased’s executor to properly manage the estate without feeling time pressure to dispose of assets.

If a home qualified as a deceased person’s principal place of residence, and the inheritors decide to keep it, then they will be deemed to have acquired the asset at the time it was transferred to them. When eventually the inheritor disposes of the asset, the tax treatment will depend on how they used the property. If they used it as a principal place of residence, then they too will qualify for the principal place of residence exemption and not pay CGT. If, however, they did not use it as a principal place of residence (for example, if they rented it out while they lived elsewhere), it will be taxed as the disposal of an investment asset. This will typically mean that it will qualify for the 50% exemption on capital gains tax if the property is held for more than 12 months.

Importantly, the CGT is calculated from the time the inheritor took ownership of the property – not from the time the deceased person acquired it.

Expert Advice

The taxation of inheritances and deceased estates can be complicated. For that reason, wills can only be prepared by a solicitor. In complicated situations, taxation experts should also be involved. If you contact us, we can ensure that receive advice only from those people who are competent to provide it.

Co-owned Homes

There are two ways in which a home can be co-owned by more than one person. The method of co-ownership will determine what happens to the home when a co-owner dies.

The first form of co-ownership is joint tenancy. The second is tenancy in common. We will examine each of these in turn.

Joint Tenancy

Joint tenancy is the most common for couples to own a home. It is relatively rarely used by people who are not couples.

Under a joint tenancy, if an owner dies his or her interest in the property automatically goes to the surviving co-owner/s. The passage of the interest to the surviving joint tenant/s is known as survivorship. To take the most common example, if a husband and wife own a home as joint tenants, and the husband dies, the wife becomes the sole owner of the whole property.

If there are more than two joint tenants, and one dies, the deceased co-owner’s interest is shared between the remaining co-owners.

When it comes to estate planning, the key aspect of joint tenancy is that the deceased’s interest in the property does not form part of their estate. This is because that interest effectively ends when they die.

The principle of survivorship means ultimately there will be one remaining surviving owner of the property. This last remaining owner is not a joint tenant: they own the property as an individual. Accordingly, when that person dies, the property does form part of their estate and it is treated as described above for individually-owned homes.

Estate planning and joint tenancy

Joint tenants must still attend to their estate planning around their property. This is because there is a chance that they will one day own the property as an individual – their fellow co-owners might die first. In fact, in most cases one of the joint tenants will end up owning the whole property as an individual. (The only time this will not happen will be if the joint tenants sell the home before the second last joint tenant dies).

Accordingly, people who own their family home as a joint tenant should still prepare a will and plan for the disposition of the home in that will.

Because of the rules for joint tenancy, the order of death of the joint tenants is important. This is particularly the case where the wills of the joint tenants do not treat their estates the same way. For example, a couple in a second marriage might each leave their estate to their respective children from their first marriages. This could mean that the family home passes to the children of just one of the couple – the one who dies second. When the first member of the couple dies, the property passes to the survivor. When the survivor dies, the property passes to the survivor’s children.

In cases like this, there are a number of options. One might be for the property not to be owned under a joint tenancy, but instead for use to be made of a tenancy in common. As shown below, this would mean that the deceased’s person share of the property passes to their estate when they die. (This arrangement is usually qualified by allowing the surviving spouse to stay in the home until it is sold or they move elsewhere or they die). In cases like this, expert legal advice is typically needed when the estate is being planned.

In very rare cases, joint tenants will die simultaneously (perhaps in a car accident or similar). In such cases, the law usually deems that the older person died first. Under the rules for joint tenancy, this means that the home will be disposed of as per the estate planning of the younger joint tenant. Once again, if the joint tenants do not have the same will, this can lead to unintended consequences.

Taxation treatment upon death of a joint tenant

When a property passes from one joint tenant to the survivor/s, no capital gains tax event has taken place. CGT will only become an issue if and when the property is sold by the survivor/s or passes to their estate.

At that point, the proceeds of the sale will be subject to normal capital gains tax rules. For a family home, this will of course typically mean that no CGT will be payable, as the principal place of residence exemption applies.

Tenants in common

Under tenancy-in-common the principle of survivorship does not apply. Each co-owner’s ownership right is transferable. This means that a share of ownership owned by a tenant in common does form part of the deceased’s estate. That is, when a person who co-owns a home as a tenant in common dies, the interest in the home does not automatically pass to the other co-owner/s. Instead, it passes to the client’s estate and is distributed according to their wishes.

Tenancy in common is relatively uncommon when it comes to family homes. However, situations do exist for this type of ownership.

For example, consider a female client who owns a property with her sister as a tenant in common. Each of the sisters has a will leaving their assets to their own children. When one of the sisters dies, those children acquire the co-ownership rights to the property. They will then own the property as tenants in common with their auntie. If the remaining sibling then dies, her ownership rights will pass to her children. The home will now be co-owned by the remaining children of each sister, who are cousins of each other.

Where a home is owned as a tenant in common, it is most commonly planned for under the client’s will.

Taxation treatment

The inheritance of the share of ownership will generally not be taxable if the home qualified as the deceased person’s principal place of residence. The principal place of residence exemption applies if the home is sold up to two years after the owner’s death. This timeframe exists to allow the deceased’s executor to properly manage the estate without feeling time pressure to dispose of assets.

If a home qualified as a deceased person’s principal place of residence, and the inheritors decide to keep it, then they will be deemed to have acquired the asset at the time it was transferred to them. When eventually the inheritor disposes of the asset, the tax treatment will depend on how they used the property. If they used it as a principal place of residence, then they too will qualify for the principal place of residence exemption and not pay CGT. If, however, they did not use it as a principal place of residence (for example, if they rented it out while they lived elsewhere), it will be taxed as the disposal of an investment asset. This will typically mean that it will qualify for the 50% exemption on capital gains tax if the property is held for more than 12 months.

Importantly, the CGT is calculated from the time the inheritor took ownership of the property – not from the time the deceased person acquired it.

Specific issues to do with estate planning and the family home

Second and subsequent marriages

Marriages nullify most wills. That is, if a person marries, any previous will is typically voided. This is the case for all marriages, not just second and subsequent marriages. This can become an issue where one person entering into the marriage already owns a home. That person’s estate planning – contained in their will – might be for the home to pass to their children. The marriage invalidates the will and thus the passage of the home to the children might not occur.
The obvious solution here is for people getting married to also prepare a new will.

Residential aged care and the family home

Residential aged care generally occurs towards the end of a person’s life – but not at the very end. It is important that people plan for the how they wish their home to be treated if and when they enter aged care. It makes sense for those plans to also be consistent with the person’s estate planning wishes.