A recent article in the Wall Street Journal posed the question of whether parents should give their children their inheritance, in whole or in part, during their lifetimes, or wait until after death, when their assets will be dealt with according to the provisions of their Will. There are advantages to each approach, and which approach you choose will depend on your specific circumstances. This blog post gives an overview of these advantages; for more detailed succession and estate planning advice please contact us here.
Advantages of disposing with your assets during your lifetime
Providing financial assistance to your children during your lifetime
While estate and succession planning discussions entail much discussion around the most financially beneficial means of dealing with your assets, it is also important for you (and us as lawyers!) to consider your options from an emotional perspective. Making distributions during your lifetime allows you to see the benefits of your gifts to those you love the most at a time when these benefits can best be enjoyed (as compared in much later life when the additional economic freedom such assistance would have otherwise provided cannot be so readily enjoyed).
A client for whom Tony had prepared Wills for in 2011 recently died. At the time the Will was prepared, as part of the ‘succession plan’ for the will maker and his wife, they made a decision to lend sufficient funds to each of their children to assist them to purchase a home each. The decision to loan the funds (and not to give them the money) was to ensure if any of the children’s relationships were to break down then the capital made available would have a much better chance of not forming part of the matrimonial ‘pot’, as would have been the case if it were deemed to be a gift to the child and their partner.
The substantial increase in the value which each of the three homes enjoyed post-acquisition speaks for itself as to the wisdom of the parent’s generosity, which, in their case, was not without considerable financial sacrifice.
This asset protection can continue by stipulating in your Will that any outstanding loans are to be an ongoing asset of your estate and not necessarily forgiven on your death. The value of any such assistance during your lifetime can be ‘balanced up’ by the provisions of your Will to ensure that each of your children have been treated in like fashion.
Leaving sums to your children or grandchildren during your lifetime may also give you more control as to how they spend their inheritance. Many testators are worried that beneficiaries, particularly those in their youth, may dissipate their inheritance on frivolous matters such as luxury holidays or lavish weddings. Paying funds directly into important matters, such as buying your grandchild a reliable car or paying their university tuition to the university itself, may allay such concerns. Another strategy is to give them amounts when they attain a certain age to let them have experience in dealing with their financial affairs. Such a strategy can be adopted either during your lifetime or in accordance with the provisions of your Will or both.
Avoiding family provision claims
If you wish to exclude someone from your Will, such as a child or partner, you run the risk that the excluded person will make a claim for ‘further provision’ from your Estate. You can help to diminish (or even to avoid) such a possibility by ensuring that there is as little left in your Estate as practicable as at the date of your death to be the subject of such a challenge.
This strategy is assisted in Victoria, because unlike in other states, the Supreme Court in this State does not have the power to ‘claw back’ assets distributed during a testator’s lifetime for the purpose of a family provision claim, as the concept of a ‘notional estate’, where recently disposed of assets are treated as still being available for taking into consideration in such legal proceedings, is not a recognized legal concept. We therefore would recommend in certain circumstances that a person transfers some or most of their assets during their lifetimes, either into a different structure (such as a family trust) or to their beneficiaries directly.
One recent client wanted to avoid a claim against his estate by his son. His major asset was his home, which he wanted to leave under his Will to another family member. His son could make a challenge against our client’s Estate on his death; however, there would be little benefit in taking such an action, as we advised our client to transfer his home to his other family member during his lifetime.
We also assisted the client with ancillary documents to ensure his ongoing quality of life, including an agreement whereby he could continue to reside in the house after the title had been transferred to his family member until the date of his death.
Whilst transfers of real property during your lifetime (except to a domestic partner or Spouse) can attract stamp duty, after weighing up the cost of the applicable rate of 6% stamp duty versus the cost of litigation and the possibility of the amount of the judgement that the Court may have made in favour of the Claimant, the client and the person receiving the property decided that they would prefer to bear this cost during their lifetime.
Superannuation
Assets that you hold in superannuation must come out of the superannuation environment at a ‘reasonable time’ subsequent to your death. Whilst these member death benefits can be distributed after your death to your Spouse or partner or infant children tax-free, any distributions to adult children who are not classified as a “tax dependant” will be taxed at a rate of between 15% and 30%, depending on the makeup of your superannuation. If you have a self-managed superannuation fund that holds considerable assets, this could result in a large portion of your wealth being ‘lost’ to taxation after your death. However, if you are in full ‘pension mode’ (i.e. you are over 65 years of age) you can “draw down” on your member benefits on a tax-free basis (subject to certain thresholds) which you can then distribute (if cash) to your beneficiaries in your lifetime.
The benefits if the Trustee of your fund owns real estate can be considerable as the property can be transferred into your name without the need to pay stamp duty or capital gains tax and can be converted into cash as part of a plan to achieve the benefits referred to in this blog.
Advantages of disposing with your assets after your death
Testamentary Trust
Discretionary testamentary trusts (DTTs) are trusts that can only be established by a Will and not during your lifetime. A DTT has several benefits in terms of taxation and asset protection; your children can make distributions from the Trust to their children, which are taxed as if they are regular income, meaning minors who are not employed can receive up to $18,200 tax-free (as of the 2021-2022 financial year). Furthermore, if your assets are in a DTT controlled jointly by your children and one of them experiences a relationship breakdown, the Family Court would be less able (or indeed unwilling) to ‘reach inside’ the Trust for the purposes of a property settlement in fear of infringing on the other siblings’ entitlement. If you had left your children lump sums in your Will , such funds would not receive the same amount of protection in Family Court proceedings.
Your ongoing maintenance
Of course, unless in the unfortunate occurrence of contracting a terminal illness, it is not possible to identify with certainty the date of our death. Therefore the adoption of a succession plan (i.e. during your lifetime) which involves the divesting of assets prior to your death needs to be balanced so that you can continue living in the manner to which you are accustomed. Aged care accommodation bonds in particular are usually hundreds of thousands of dollars and you may require the sale of your home or the realization of other substantial assets to fund your transition into aged care. On your death, this succession plan becomes part of your estate plan when the bond is returned to your Estate and be held or distributed in accordance with the provisions of your Will.
Creating a comprehensive plan for disposal of your assets requires careful consideration and a bespoke approach. Our firm specialises in creating succession and estate plans that move away from the ‘cookie cutter’ approach where ‘one size fits all’ and are tailored specifically to address your individual wants and needs so that the provisions of your Will are indeed your ‘Testament’. If you are looking for specialist advice on when (and how) to deal with your assets, contact us today.