CHAPTER FIFTEEN:
Wills
"There's no reason to be the richest man in the cemetery. You can't do any business from there."
—Colonel Sanders
One of the unfortunate certainties in life is that we all die, a topic that most people avoid talking about. The birth of a new child is embraced, while the prospect of death is avoided. As death is inevitable it makes sense to prepare for it to ensure that if it occurs unexpectedly your financial intentions are clear. An unfortunate consequence of death is that the worst side of human greed emerges, with the result that families have fallen apart over a failure to outline personal intentions in a will.
In my experience of working in the law, it was not uncommon when administering estates to receive a phone call the day after the funeral from a beneficiary saying, "When will I get my money?" or, "I have purchased a new boat or car and need that inheritance money paid into my account".
In other instances, tensions boil over at the funeral before the deceased has even been properly farewelled. At university, my part time job for five years was that of a casual undertaker, which involved doing all of the general work associated with preparing for a funeral, including washing the cars, polishing the coffins, loading the coffins, collecting bodies, driving the cars, preparing grave sites, handing out hymn books and orders of services, and any other general task that was required. At one burial service, when tensions were very high, one mourner hit another mourner and the graveside service turned into a large fist fight. I suspect you are wondering what we did at this time. Well, given the number of fights going on and the size of the respective parties, we simply went and sat in the hearse, called the police and waited until the crowd dispersed. At that time, we resumed the graveside service in front of the two remaining members of the family that the police allowed to remain.
One important way of avoiding these issues is to have a will.
What is a Will?
A will is defined as a written document in which you outline how you would like your property distributed after your death. A person who has made a will is called a testator. A will allows you to have a choice about what happens to your assets after your death. Within a will, you nominate what is known as an executor. The executor is the person who is responsible for ensuring the terms of the will are carried out.
What Happens if You Die Without a Will?
In the event that you die without a valid will, in legal terms you are described as dying intestate. This simply means without a will. Where this happens the process is a little more complicated.
If you die without having a valid will, your assets will be distributed in a certain order, as set out in the relevant State legislation. The statutory formula set out in the legislation aims to provide a similar result to what would have been achieved if the deceased had made a will by providing for family members. These provisions provide as follows:
• The surviving spouse will receive the entire estate unless there are children from another relationship of the deceased
• Where there are children from a previous relationship (as is common nowadays) the surviving spouse is entitled to the following:
• Statutory spousal legacy of $350,000 (adjusted to CPI)
• Tangible personal property of the deceased
• Half of the remainder (if any). The remaining half of the estate is to divided between all of the children of deceased in equal shares
• Where there is more than one surviving spouse (for example a separated couple or de facto partner) each is entitled to share in the estate
The one downside of this statutory formula is that it fails to take into account a situation where the deceased is estranged from their family. It is worth noting that these provisions apply throughout Australia.
If you have died intestate or without a will, your next of kin will generally need to apply to the relevant State court for what is known as Letters of Administration. The granting of Letters of Administration basically allows the next of kin to distribute your estate in accordance with the statutory formula outlined above.
Who Can Make a Will?
Anyone over eighteen years of age with a sound mind can make a will. The test for whether you have a sound mind is that you must know that you are making a will, understand the nature and effect of the instructions you are giving, and the distribution of your assets must be according to your intentions, not those of a third party, for example a greedy friend. There have been some horror stories amongst the elderly with some relatives or friends strongly encouraging a vulnerable person to change his/her will.
If you are married and under the age of eighteen, you are also able to make a will.
The Legal Requirements of a Valid Will
The Wills Act in each State sets out the legal requirements for a valid will. These include:
• The will must be in writing
• The will must be signed by the testator at the end of the will
• The testator's signature must be witnessed by two independent adults. It is important to note that a beneficiary or a spouse cannot witness a will
• The witnesses must sign the will in the presence of the testator and each other
If these legal requirements are not met, a will is likely to be declared invalid. To eliminate the risks of having an invalid will most people have their will drafted by either a lawyer or Trustee company. The main difference between a lawyer and a Trustee company is that a lawyer will charge on a per hour basis whilst a Trustee company will often draft the will at no cost but will be appointed as executor when you die. As the executor, they will charge you a fee for administering your estate when you die. This is usually a percentage of your estate. Whilst getting a free will can be tempting, it can potentially cost you a lot more in the long term using a Trustee company when you die, so be careful.
Many people are now using free will documents downloaded from the Internet, or buying a do-it-yourself will kit from a newsagency in an attempt to save a few dollars. This is a dangerous strategy particularly if you have a considerable asset base. In most instances, a normal will is fairly straightforward and the costs are not significant when you consider the consequences of not getting it right.
What you need to consider when drafting a will
As your will enables you to decide how your estate will be distributed following your death, you will need to consider the following issues:
Who would you like to administer the estate and act as executor?
As a starting point it is important that your executors outlive you, so appointing your grandparents or parents to this role does not make a lot of sense. It is often easier from an administrative point of view if an executor lives in the same State as you. Most people will appoint two family members or trusted close friends together with a suitably qualified professional, such as a lawyer or accountant to act as the independent voice. If you cannot think of anyone who fits these criteria a trustee company may be suitable.
In the event that you do not have an executor when you die a court appoints an executor. You might not have an executor for a number of reasons, for example:
• The executor has died
• You have lost contact with them and they cannot be located
• You omitted to appoint one
Who would you like to benefit from your estate?
Anyone you like can benefit from your estate and there have been instances when an entire estate has been given to charity without any provision for family members. It is important to review the terms of your will as beneficiaries may have died, become significantly wealthy in their own right or even drifted out of your life.
Are there any specific bequests you would like to make?
You are also able to make specific bequests under your will. This is common with family heirlooms or where you have particular items that would suit a particular person. For example, if you have a grand piano and a grandson who plays the piano, it makes sense that the family member who plays the piano receives it under the terms of your will.
Would you like to establish a testamentary trust for your beneficiaries?
A testamentary trust is simply a trust created under the terms of a will. A testamentary trust can be a discretionary trust, where the trustee, usually the executor, determines when and who should receive the benefits under the trust, or a unit trust which provides for fixed entitlements or percentages to be paid to specified beneficiaries at some stage in the future.
It is important to note that there are currently no restrictions on who may benefit from a discretionary testamentary trust. For example the trust may provide benefits for immediate or extended family, siblings, children, grandchildren, nephews and nieces or mistresses. The main advantage of a discretionary testamentary trust is that distributions, i.e. income, which are paid to beneficiaries under eighteen years of age are taxed at normal adult tax rates, rather than the traditional penalty tax rates that are usually applied to the income of minors.
A testamentary trust allows for monies or assets to be invested or retained within the trust until the happening of a certain event. For example, you may not want your children to receive their share of your estate until they attain twenty-five years of age. If this is the case, you may look at setting up a testamentary trust, which provides that their share of the estate can be invested by the executor or other suitably qualified professional until the beneficiary attains that age. Upon attaining twenty-five years of age, the beneficiary would receive their share of the estate and the trust would cease.
How would you like your body disposed of?
Many people have a preference to be cremated, buried or have your body donated to medical science. This can be set out in the will.
Who will look after your children?
You are able to express your preference as to who will be appointed guardian to look after your children. It is important to note that, as wills are only meant to deal with property matters i.e. your assets, these directions are not binding on the executor but can be used to demonstrate your intention. If this issue is taken to court, your wishes as to what is to happen to your children will be taken into account.
Frequently Asked Questions
How often should I change or update my will?
It is important that your will be reviewed every two to three years as your circumstances change and your will needs to reflect these changes. For example, you may have additional family members, beneficiaries may have died or attained eighteen years of age, or your asset base may have changed. There have been many examples of people bequeathing assets which they have sold before they died, so there is no asset to give. In these circumstances, the gift fails as it no longer exists. When you review your will, it is generally recommended that you have a new will drafted to avoid any potential issues in the future.
It is possible to amend or alter a will by doing this in a separate document called a codicil. For a codicil to be valid, it must meet the formal requirements of making a will. It is often easier and less confusing to simply draft a new will.
Does marriage or divorce affect the validity of a will?
If you get divorced or married, any previous will which you have made will be revoked. You will need to have a new will drafted in these circumstances. It is possible to make a will in contemplation of marriage and divorce. This will is valid. To satisfy this exception there must be a clause to this effect in the will itself.
Can a will be contested?
A will can be contested in the courts on a number of grounds, including:
• The testator was not of sound mind
• The testator was unduly influenced or pressured by a third party when drafting the will
• The will does not meet the formal requirements of a valid will
The main reason for challenging a will is on the grounds that the testator has failed to make adequate provision for the proper maintenance and support of a dependant. A dependant may include a spouse, a child, a stepchild, your parents or any other person who is financially dependent on the deceased. This type of claim is called a Testators Family Maintenance Claim.
What constitutes adequate provision depends on the nature of the relationship, the size of the estate, and the consideration of other dependants to whom you have a responsibility. Many people are under the mistaken impression that, as long as someone receives a small bequest under your will, they cannot challenge the will. A will can still be challenged in these circumstances.
How is superannuation treated on death, is it distributed in accordance with a will?
It is important to note that benefits paid from a superannuation fund do not form part of an estate. The benefits are distributed in accordance with the binding nomination that the deceased completed with the superannuation fund prior to their death.
There may be tax payable on superannuation death benefits and this will depend on whether the beneficiary is a financial dependant or not. This is a fairly complicated area when you are looking at the tax treatment to a beneficiary and we recommend that you seek professional advice in this area.
Should I take out funeral insurance?
In recent years there have been a number of advertisements recommending that you consider taking out funeral insurance. Funeral insurance is an insurance policy that will pay for your funeral when you die. The advertisements are generally misleading in that they often break the premium down to a daily figure, which on the surface seems insignificant. However, when you multiply this daily or weekly cost to get a yearly figure and then multiply this by your life expectancy, the figure starts to add up. It also does not take into account that the older you get the more expensive the premiums become. When you do the sums, a funeral could be costing you up to $60,000 in premiums.
This is significantly higher than the average funeral in Australia, which costs approximately $6,000-10,000 depending on your requirements. The more bells and whistles you have, the greater the cost. For example, a Blackwood coffin costs more than a standard pine coffin.
Rather than taking out a funeral insurance policy, a better option is to contact a funeral home and pre-pay your funeral. With pre-paid funerals you often get a discount on the total cost, with the cost of the funeral effectively "locked in." Whilst this is not a pleasant thought, it is inevitable for us all.
What happens to my online identity when I die?
One of the unusual aspects of the world in which we live is that whilst you can die in the traditional sense of the word, your on line identity continues indefinitely. This can be quite confronting to family and friends that this aspect of a deceased person's life cannot simply be switched off. This is an issue which lawyers have struggled to resolve and to be frank it is very difficult to erase an online identity. For example a facebook profile will continue indefinitely unless it is shut down and you will be remembered of birthdays etc on an ongoing basis. A number of families have converted a deceased's facebook page into an ongoing memorial for family and friends to remain connected.
There have been a number of websites that have been set up attempting to overcome these issues including:
• www.legacylocker.com was set up to act as an online executor and provides a digital safety box for storing all of your online passwords, and passes on the relevant details to your online beneficiaries
• www.deathswitch.com is an online service that emails various people advising of your death with a pre-prepared email for example to former mistresses, ex workmates etc. This service is activated if you fail to respond to their regular email updates
• www.virtual-eternity.com is a website that allows you to create an online cartoon based on a photograph of yourself together with your own voice. This site allows you to write the script, and develop your own story
This is a new area and expect further developments in this area as death remains the only certainty in life.
Common estate planning mistakes
Despite the best intentions and planning of the deceased, inevitably mistakes occur when trying to administer an estate. The majority of these are caused by the failure of administrators to seek professional advice and trying to do it themselves.
The most common mistakes are:
• Failing to have a will in the first place
• Failing to keep your will up to date. For example, if you get divorced or married any will which you previously drafted is automatically revoked by law. If you do not have another will drafted you will die intestate, i.e. without a will
• Failing to express your intentions clearly, which causes confusion as to what your actual intentions were
• Failing to specify that debts are to be repaid before any distribution is made. This can cause problems; for example where a father left one child a life insurance policy of $200,000 and his other child his apartment, which is also worth $200,000 but is subject to a mortgage of $50,000. These gifts are not equal, which was what was originally intended
• Failing to take tax into account when making provision for beneficiaries. Some assets are subject to capital gains tax; such as investment properties, Australian shares, etc, whilst others, such as the family home, are not. Tax can make a huge difference to the net amount which a beneficiary receives once the estate has been finalised
• Having an informal will, as this is likely to create confusion, delay and additional costs. Many people now draft what is known as a Memorandum of Wishes, which gives the executor guidance in how to administer the estate but has no legal status
• Failing to nominate guardians if you have dependent children or even a pet
• Giving assets that are not owned by you. Many assets that we accumulate during our lives are held in entities other than our personal names and as a general rule if an asset is not in your name you cannot give this away in your will. There are many examples of this inclusion of assets held in a family trust, company, joint tenancy or business situation
• Understanding that superannuation is treated as a separate asset for estate planning purposes
• Using beneficiaries as witnesses in the will, which can invalidate the will
• Appointing a beneficiary as executor where it may lead to a potential conflict of interest situation
• Not providing the executor with sufficient guidance or authority to administer the estate
• Failing to advise anyone where your will is actually located. If your next of kin cannot locate your will, you may as well have not bothered writing it in the first place
• Failing to make provisions in your will for the distribution of the residue of your estate. This may occur, for example, where you make a number of specific bequests in dollar terms but fail to advise how the balance of the estate is to be distributed. Where this occurs, the residue of the estate will be distributed in accordance with the state intestacy laws; i.e. as if you did not have a will for that part of the estate
Useful websites
This website provides a rather sobering calculation as to how long will you live for.
This website allows you to provide a final cartoon message after your death.
This website advises people on the internet that you have died.
This website provides a secure online storage facility for all of your internet passwords