When preparing a Will, one should ensure meeting the lawyer personally and, preferably alone, at least once, if not at the time of signing the Will so that the lawyer can establish the instructions represent the Testator’s own wishes and that the Testator has the capacity to understand, and make the Will.
It is critical for the Lawyer preparing a Will to establish the Testator has the mental capacity to make a Will. The legal tests of capacity are that the Testator must:
1 Understand the nature of the Will and its effects;
2 Understand the extent of the property which they are disposing of; and
3 Must comprehend and appreciate the claims to which they ought to give effect and the claims of those they have excluded from the Will.
It may be shown that the mental capacity of the Testator was quite satisfactory at the time of giving instructions for the Will but was greatly reduced at the time of execution of the Will. It has been consistently held that the crucial date for determining capacity is the date on which the instructions were given.
One should never assume that the Testator has a perfectly sound mind, memory, and understanding, should therefore ask relevant questions concerning the assets and liabilities of the Testator’s estate and details of the family situation. Full notes should be kept of the interview and the Will should be read over to the Testator it he is sick or infirm to ensure that he understands the document before it is signed. If there is any doubt about the mental capacity of a Testator it is advisable to arrange for the attending doctor to act as one of the witnesses to the Will.
ASSETS WHICH MAY NOT FORM PART OF THE ESTATE
It is common for a Testator to regard everything he has accumulated during his life as belonging to him, but often lawyers discover that some assets are not owned by the Testator and therefore cannot be dealt with by the Will. Some of these are:
JOINTLY OWNED ASSETS
On death, they pass to the surviving owner. It is important to establish whether property is owned as a joint tenancy or as a tenancy in common.
LIFE INSURANCE POLICIES
The Testator may have nominated a beneficiary to receive the proceeds of the policy on death or the policy may have been transferred. This asset would not form part of the estate as it is in the form of a contract between the insurance company and the policy owner to pay the proceeds on death to the named beneficiary.
These are controlled by a trustee in accordance with the superannuation trust deed. The Testator may have nominated a beneficiary and, on his death, the trustee of the fund will consider the nomination but the trustee may be required to pay the funds to the dependants of the deceased and this may not have been the Testator’s intention. Unless the superannuation funds are paid to the estate, the Will cannot deal with this asset.
For example, assets held in a discretionary family trust are controlled by a trustee, which is often a company, which in turn is controlled by the Testator. The Testator owns shares in the company, which is the trustee of the trust. The assets of the trust are registered in the name of the company. It is the shares in the trustee company, which are the assets that can be disposed of by the Testator in his Will. He should carefully consider the beneficiaries to whom he leaves these shares, as the shareholders can appoint directors and control the decisions of the company relating to distributions of capital and income from the trust. One must check the terms of the trust deed and the constitution of the company and copies of the Australian Securities & Insurance Commission returns about the directors and the shareholdings in the trustee company.
One must ensure that any power to appoint appointors or guardians of the trust after the death of the current appointer and guardian is exercised in the Will. Most trust deeds contain a default provision appointing the legal personal representatives of the estate of the last appointor as substitute appointors. As the appointor can remove the trustee of the trust and appoint substitute trustees, the Testator may not wish the executors of his Will to control the trust.
FAMILY BUSINESS OWNED BY THE TESTATOR
Shares may be owned by the Testator in the trading company and each share may have a value far greater than its face value. One should examine the constitution and search at the Australian Securities & Insurance Commission to establish the true nature of the shares, in particular whether they are a special class of shares involving voting rights.
The Will should contain specific powers for the trustee to carry on a business otherwise, the trustee may have to sell or wind up the business immediately, which may be to the detriment of the estate.
It may be necessary for the trustee to carry on the business and employ staff until a purchaser can be found. Trustees are personally liable on all contracts they enter into but they have a right to indemnity out of estate assets, provided the contracts are authorised by law, the Will or the court. The Will should provide for the trustees to be indemnified against losses and liabilities and possibly renumerated for their services. If the Will contains no authorisation and indemnity, the trustees can be personally liable for the loss if the business fails. The power to carry on a business can restrict the trustees in using only business assets to continue the business, or could be expanded to allow the trustees to use any estate assets to continue the business.
The partnership agreement governs a business in which the Testator is a partner. A bequest of a share in a partnership passes to the beneficiary all the rights, which the Testator could dispose of in the partnership. The gift of a small business must provide for the payment of the debts and liabilities of the business – possibly by the beneficiaries indemnifying the trustees in respect of repayment of any loans comprised in the liabilities of the business and any interest or outgoings connected with the business.
The gift of a pecuniary legacy in a Will is over time adversely affected by inflation. The best remedy for this is regular review of the Will by the Testator. Gifts of $5,000.00 now may, in 10 or 15 years time seems an inadequate amount. Apart from regular review of the Will by the Testator other remedies would be:
a) To leave a percentage of the residue of the estate e.g. 5% rather than a fixed sum of money;
b) To link the amount of the legacy to the consumer price index at the date of the Will and the date of death;
The Will should always include an advancement clause as one of the powers of trustees, where there is any possibility that minor children may be beneficiaries. That is, the trustees can advance part of a beneficiary’s share in the estate for his or her maintenance, welfare, and education. The Will can also include the power to the trustees to allow any person who is a beneficiary to occupy or use any property forming part of the estate on such terms as to rent, payment of outgoings etc. As the trustees think, fit.
A Testator may wish to leave a life interest in his principal residence to a dependant and, if the property is left to the trustees on trust for sale, with the right of the beneficiary to use and occupy the property for his or her life, this will avoid the provisions of the Settled Land Act which gives powers to the life tenant to sell, mortgage or lease the property – powers which the Testator perhaps did not intend. If the Settled land Act is avoided by, leaving the property upon trust for sale, then the trustee will retain control of the property.
One should consider the possibility that the life tenant of a property, who perhaps also receives income for life from the residue of the estate, may have the need in later years to enter a special accommodation home or nursing home and so a capital payment may be required for this purpose. If the Testator wishes, the trustees can be given the power to advance capital from the estate for this or other purposes, even though the interest of the remainder beneficiaries will then be depleted. Life interests can cause hardship because of their inflexible nature, so consideration should be given to providing the discretionary power to advance capital for such purposes to the life tenant. This may avoid an application to the Court by the life tenant for further provision from the estate under part IV of the Administration and Probate Act (Victoria).
If a property is left to a beneficiary for his lifetime, consideration should be given to providing in the Will that the personal chattels in the house be left to the life tenant absolutely. A life interest in personal chattels should be avoided if possible because of the need to have lists prepared, valuations and insurance arranged and because over time items of furniture may become damaged, worn out or lost.
One should avoid referring to lists of chattels in Wills they prepare. Any list referred to must be in existence when the Will is made. It is useful to provide in the Will for a gift of personal chattels (as defined in the Administration and Probate Act).
An alternative is that personal chattels can be left to a trusted person absolutely, with the request that this person distribute the chattels in accordance with what they believe are the wished of the Testator. The risk of this alternative is that the trusted person may not distribute the chattels at all but may retain them.
REVOCATION OF WILLS BY MARRIAGE
Wills are revoked by a subsequent marriage. An exception is a Will expressly made in contemplation of a particular marriage and that marriage takes place. If the Testator is living in a de facto relationship, he should understand that even if he is not contemplating marriage to his partner at that time, if he wishes to benefit the partner in his Will, then it should be expressed to be in contemplation of marriage to the partner and that it is not conditional on that marriage taking place. This would then prevent the Will being revoked if the Testator married his partner at a later date.
If the Testator were to die without leaving a Will, then the de facto spouse would not be entitled to a share of the estate under the intestacy distribution provisions, which can often cause great hardship.
Maintenance of dependant beneficiaries can also be provided for by setting up a discretionary trust in the Will where the income of the trust is advanced at the discretion of the trustees and income not advanced can be either accumulated for that beneficiary or distributed to other persons, and the capital on the death of the beneficiary can be distributed to other members of the family.
The discretionary trust can be used to protect the assets of the trust against the spendthrift child, against possible bankruptcy of a beneficiary and still has the taxation advantages of splitting of income between various beneficiaries, and the concessional rates on income distributed to child beneficiaries, despite the change in the taxation laws affecting trusts, (in that trusts will be taxed at company rates).
All States and Territories have legislation giving each parent the right to appoint a guardian by Will or deed to act after death. In Victoria, this provision is in the Marriage Act 1958 (Section 135). The Family Law Act 1975 can make laws about guardianship of “a child of a marriage.”
The surviving parent becomes the guardian of the child on the death of the other parent. However, a testamentary guardian can be appointed by the Will of the parent who dies, to act jointly with the surviving parent.
A testamentary guardian is needed to consent to a child obtaining a passport, a loan, opening a bank account, having an operation etc. the appointment of a testamentary guardian does not necessarily mean that this person will have the care and control or custody of the child, which could be decided by the Family Court.
Consideration should be given to providing in the Will for financial assistance from the estate for those persons who have the care and custody of the children. The trustees’ power of advancement could be used to advance funds to the guardian for the welfare, education and maintenance of the child but, some testators may wish to make separate provision for funds to be advanced to the guardian from the estate.
It may be preferable to have executors who are separate and independent from the guardian.
One of the disadvantages of appointing a testamentary guardian is that it may hamper the efforts of the family to care for the children. Older children also may have definite ideas, which will have to be respected.
CHOICE OF EXECUTORS
Executors should be younger than the Testator should, (where the Testator is elderly) for obvious reasons. A Testator can appoint more than four executors, but the Courts in Queensland, Tasmania, Victoria and Western Australia will not grant Probate to more than four executors. From the point of view of convenience it is preferable to have no more than two executors and preferable that the executors reside in the area where the estate assets are situated.
It is a good idea, where there are several executors, for the Will to provide than in cases where the executors fail to agree, that the decision of the majority will prevail (in the case of an uneven number of executors), and where there is an even number, that the decision of the oldest executor will prevail. This will avoid situations of deadlock where the executors cannot agree.
A Testator should avoid appointing a person as executor, who may have a conflict of interest e.g. a business partner of the Testator. Where there is a life interest in the Will and the life tenant is appointed as one of the executors, it is advisable to appoint an additional executor to avoid conflict and to endure impartiality.
CAPITAL GAINS TAX IMPLICATIONS
One should be wary of incorporating gifts in Wills of specific assets which are subject to capital gains tax (such as real estate property and shares) to tax exempt beneficiaries (usually charities) and to overseas residents. Such gifts are deemed have been disposed of by the deceased immediately prior to the date of death and so a taxable capital gain can be generated in the hands of the estate. One should consider including the provision in the Will that the beneficiary of the asset bequeathed, rather than the whole estate, should bear any capital gain e.g. the gift could be made net of any capital gains liability. This may sometimes be difficult for the beneficiary to comply with, if cash is not also part of the gift.
What amounts to undue influence in relation to the making of a Will?
What is the legal test for capacity?
Which assets will not form part of the Testator’s estate?
What issues should the Testator consider in relation to partnerships, companies, and family businesses of which he is part?
What should a Testator do in relation to pecuniary legacies?
What are the benefits of setting up a discretionary trust in the Will?
Consider leaving a life interest in property to a beneficiary.
What effect will marriage and divorce have on a Will?
NEED MORE INFORMATION
Behan Legal assists and advises on these important issues. For an appointment, call 03 9646 0344