How To Protect Your Loved Ones From Financial Ruin

​Generally a will is made along the following lines; "Everything I own is to go to my partner "B" and should they die before me or at the same time as me then everything is to go to our children "C". The partner then writes a similar will in favour of the first person "A".

Now consider the following scenario... "A" dies and leaves everything to "B". "B" remarries "X" - "X" has their own children.  When "B" dies everything they own then goes to "X" . Upon "Xs" death  everything then goes to THEIR children not to "C"! "C" may contest the will however it has been clearly demonstrated in court that "C" has little chance of winning!

One alternative would have been to put "B" into a "life tenancy" which means that while "B" is alive they can live in the residence, then when they die the proceeds of the sale of the residence  are distributed to "C". However, suppose "B" decides the house is too big for them as they get older  and want to move to a smaller house, "C" has every right to take the proceeds of the sale and use the money themselves.

One way to alleviate the "remarrying" and "life tenancy" problems is to have both parents make a "deed  of mutual wills as a contract". In this case both parents enter into a legal contract  with each other that basically says "I'll give it all to you "B" on the condition that when you pass away everything goes to "C" . This gives the right for everything to end up in "Cs" hands.  "B" can live a normal life but can't sell assets and buy luxuries above their "normal living standard" - "C" can take out a court injunction to stop any excessive living because they have an interest in the contract.  Even if "B"  marries "X" all the assets passed on at "As" death have to go to "C". "X" and their children cannot get any of these assets.

Another popular, but little known strategy, is for the deceased to leave their assets in a "testamentary trust" upon their death. In this case "A" leaves the assets in the testamentary trust with "B" and "C"  as the beneficiaries. "B" is nominated as  the trustee of the trust and upon their death it is predetermined that "C" becomes the trustee (ie "C" then controls the assets). So then "B" and  then "C" have the  control of the trust. 

The major advantages of this structure are;

  1. Under a trust will,  minors (ie children under 18 years of age) are taxed as adults. In normal tax law when a child is under 18 and receives a "passive income" from a trust, dividends, rent, interest or the like, they are allowed to earn the first $416 per annum tax free and then any amount over this is taxed at 60%.  However under a testamentary trust, they are taxed at normal adult rates. ie the first $20,542  tax free and the remainder  at normal adult tax rates.  This is a major tax planning strategy for those with young children.
  2. The protection of pensions for (non spouse) beneficiaries.
  3. Entitlement to income can be varied each year at the discretion of the trustee (in this case "B").
  4. Capital gains tax exemptions on the death of "A".
  5. The protection of the beneficiaries against creditors and bankruptcy.
  6. The control of assets against spendthrift beneficiaries.

As you can see there are major advantages in having your will set up correctly. I have only given a brief overview to the potential dangers and benefits in this area. 

Remember the worst thing you can do is die "intestate" (ie without a will). In this case the laws order that your partner gets the residence, plus one-third of the estate. The other two-thirds are  divided up between the children.  

This can cause major financial hardship for the surviving partner, particularly if they are elderly. They have only one-third of the original estate to invest and live on because the children have the other two-thirds. They may be forced to sell the home and move to a more modest residence, just to have enough to live on.

If you would like to discuss how a Testamentary Trust could benefit you, please contact Tolevsky Partners and make a time to speak with us.