Wills, Trusts and Power of Attorney

The pitfalls of making a will can be many. But dying without one can have many unintended consequences.

Dying is no laughing matter - especially if you do it without a will. As today's complicated family arrangements proliferate, it is becoming more important to ensure you have a legal will that clearly stipulates how your estate will be divided.

And it is not just a question of having a legal will. Lawyers stress that a will should be just one element in an all-embracing financial package to guarantee - as much as anything can be - that your estate is distributed according to your wishes.

A consultant with law firm SJQ Legal, Wendy Quay, says it is "absolutely imperative" that a person making a will understands what they own and how they own those assets.

She says wills can exclude certain assets. And three of the largest - the family home, superannuation and trusts - often fall outside the will.

"A house jointly owned by a husband and wife will be excluded from the will of the first one to die as ownership automatically transfers to the partner," Ms Quay says.

"With this asset it's a simple case of the last person standing that determines whose will is relevant.

"Superannuation assets - the retirement benefit and death and disability benefit - are often excluded from a will. Yet they are often the biggest asset on death and in most cases their distribution is at the discretion of the trustee of the superannuation fund."

Ms Quay says that where the will maker's super fund allows them to make a "binding" nomination, they can choose their beneficiaries - but this is fraught with problems. Things can get complicated if circumstances suddenly change.

Assets in a trust are also excluded from a will.

Ms Quay's colleague Allan Swan says the fact that some assets are excluded from the will should prompt lawyers drawing them up to cooperate more closely with their clients' financial advisers and accountants.

Assessing your assets is the first step. Then you need to determine likely beneficiaries of the will, as well as their circumstances.

Ms Quay says lawyers must be alert to special circumstances such as:

• Blended families and the difficulties they can present.
• Children in difficult relationships - for example, those involved in divorce proceedings.
• Beneficiaries in a "risk" occupation, such as a company director who could be sued.
• Vulnerable beneficiaries, including those with intellectual disabilities or problems such as a gambling or drinking addiction.
• Children under 18. Wills involving minors can have tax implications.

The third step is working out whether the will you want to make is legally enforceable and dealing with the possibility that it might be challenged. The tax ramifications of any estate planning are also crucial.

In 1998, the Wills Act in Victoria was amended to extend the number of people who could make a legal claim. Before the change, only spouses and children, including adopted children but not stepchildren, could make a claim, says McNab, McNab & Starke partner Ken Starke. Now anyone who can show that the deceased had a moral duty to support them can make a claim.

The change has resulted in more wills being challenged, especially as family structures and responsibilities are becoming increasingly complicated.

McKean & Park partner Geoff Park says claims against wills are generally made for three reasons:

The person making the will lacked the mental capacity to do so. This could include when a person is suffering dementia, taking legally prescribed drugs, under the influence of other drugs or intellectually disabled. If a will is declared invalid on these grounds, the previous will becomes the valid will. If there was no previous will, the person dies intestate (without a will).
Somebody, such as a beneficiary, unduly influenced the person making the will. If the will becomes invalid, then any prior will has legal standing. Mr Park says undue influence can be difficult to prove.

The deceased did not provide for someone for whom they had a duty of care. The court can order that provision be made out of an estate to maintain and support a person for whom the deceased had responsibility. Two conditions are essential for a successful claim: the deceased had a moral duty towards the claimant; and the claimant has genuine need. Mr Park says claims without both are unlikely to succeed.
It is essential to have an up-to-date will.

Ms Quay believes a will should be reviewed at least every three to five years.

"Events happen in our lives - such as getting married, divorced, having children, changed financial circumstances - that all have potential consequences for your estate," she says. "Indeed,

I think it's not a bad thing to look at your will every year when you do your tax return just to make sure it is still achieving what you want."

The law does offer certain protection: if you get married, any previous will is revoked unless it is made explicitly anticipating that marriage. The components of a will that benefit a former spouse are null and void after divorce. However, complications arise in a situation where a couple is separated and the will has not been changed.

Many people still die intestate, including millionaires.

"You get situations where the patriarch, who has fallen out with one of his five children, dies without a will," Ms Quay says. "He simply didn't want to address the issue. The tragedy is he sets the scene for a bitter family brawl."

If you die intestate your assets are distributed according to government dictate. In Victoria, your assets will be distributed under a formula in the Administration and Probate Act.

Under this formula, if the deceased has a partner and children, the surviving partner receives all personal belongings and the first $100,000 in assets, plus a third of any amount above that. The remaining amount goes to the children.

Another key reason for reviewing your will is to ensure it is tax-effective.

Mr Starke says high-net-worth individuals, particularly those with extended families, should take the opportunity to get sophisticated tax-planning advice when drafting their wills.

"There are very substantial tax concessions available for trust holdings and income earned via trusts for the benefit of minor children," he says. "There is the opportunity to create in wills tax-effective trusts for the benefit of the next two generations."

Mr Starke advises his clients against using will kits because these do not deal with the tax implications.

"It's an extraordinary thing that a large financial planning organisation advertises a $5 will kit to its clientele, most of whom could be expected to be high-net-worth individuals," he says. "But you won't get advice (about trusts) in a $5 kit.

"While the kit might save you a couple of hundred dollars, a will drawn after considering all the financial issues might save the family tens of thousands of dollars over many years. It's the old adage: you get what you pay for."

Ms Quay agrees. "(Will kits) can cause problems when people do not fill them out properly," she says. "I've had examples where people have dealt with their favourite guitar and stamp collection in their will but left out all their other assets. It just sets the stage for a fight between the possible beneficiaries."

Will-making pitfalls: What to avoid

For individuals:

• Failing to appoint any or appropriate executors.
• Failing to execute the will in accordance with the Wills Act. (This includes failing to sign the will in the presence of two witnesses who also sign in the presence of each other.)
• Failing to plan for the entire estate, resulting in partial intestacy.
• Failing to anticipate a situation where beneficiaries might die first.
• Failing to plan for superannuation or insurance benefits.

For lawyers:

• Failing to identify whether property is jointly owned or owned as tenants in common.
• Failing to identify assets owned by family structures instead of the deceased. Trust assets cannot be dealt with in a will.
• Failing to consider the possibility of super benefits and whether they will be paid into the estate or to beneficiaries.
• Failing to anticipate possible challenges to the distribution of assets in the will.
• Failing to ensure protection for disadvantaged beneficiaries, such as the physically or intellectually disabled.

Source: McNab, McNab & Starke

The will of the law

The Wills Act was amended in 1998 to widen the number of people who could make a claim on an estate under the Administration of Probate Act.
While this has led to more wills being contested, the following example, provided by legal firm McNab, McNab & Starke, shows why the amendment has made the system more equitable.

In the late 1980s, a man in his early 60s suddenly lost his partner of 30 years to cancer. They had never married, but because they owned their house in joint names he got the property because of "survivorship".

When the woman became ill she had resigned from work and drew down her $200,000 superannuation payout (her retirement nest egg) and put it in a rollover fund. This decision was to have dire consequences: it put the money outside the discretion of the super trustee, who could have paid it to her partner.

Because their relationship was de facto and the woman had not made a will, her partner had no rights to the $200,000 under the then intestacy law. The same law also required an investigation to determine whether the woman had any surviving relatives.

The woman was an illegitimate child and because of the social mores of the day was sent to an orphanage in another state. She finally settled in Victoria and never met any of her relatives. When inquiries were made about any surviving relatives after her death, it was discovered that she had an aunt in her late 70s living in Tasmania.

Legally, the $200,000 was the aunt's money - and she claimed it, arguing that the money should remain in the family. McNab, McNab & Starke partner Ken Starke says: "This was an appalling result."

After negotiations and threats of legal action, which Mr Starke concedes would not have succeeded, the woman's partner got $100,000.

Today, the partner would have been able make a claim and, while there would be legal costs and he might have had to make a monetary concession to competing claimants to settle the issue, the law would assist him.

Of course, if the woman had made a will in favour of her partner there would have been no problem.

The big picture

A man in his late 40s dies, leaving behind a 19-year-old son and granddaughter, both addicted to heroin.
Aware that any money left to his son will be at risk, the father places $120,000 into a protective trust so that the money will not be spent on drugs. However, he neglects to address his $600,000 superannuation payout.

When he dies, the trustees of the fund, ignorant of the son's drug dependency, promptly pays it to his son. It is believed the son's drug dealer drove him to the fund's administrative offices to pick up the cheque for $600,000.

SLQ Legal partner Allan Swan, who tells this anecdote when he speaks about wills and probate, says this is a prime example of the maker of a will ignoring the bigger picture.

What is a Power of Attorney?

A Power of Attorney gives someone the authority to do things on your behalf when you are unable - "They stand in your shoes."

For example, the person you appoint (your attorney) can sell and buy another home on your behalf.

With a Power of Attorney you don't need to keep running off to a government department to get permission to do something.

Why is it ENDURING?

The Power of Attorney is enduring because it continues to operate even if you are of unsound mind.

Choosing an attorney

The only legal requirement in choosing an attorney is that the person is over a certain age specified in the applicable State legislation (e.g. 18 in Victoria) and is mentally competent.

Often an attorney will be a relative, close friend or an independent person such as a lawyer, accountant or an employee of a trustee company.

The choice is yours. But there are a few points you should keep in mind.
You must be able to trust the attorney. Choose someone who knows you and what you want. Think of the attorney as someone who stands in your shoes.

Make sure that the attorney does not have a conflict of interest that would make it impossible to act in your best interests.

"Horses for courses" - choose the person who can do the job. The person you appoint to make financial decisions may not be the same person you would want to make decisions about your health care.

Make sure that the person you choose understands your wishes, e.g. is there any sort of medical treatment you would not want? Some people write down their wishes. This can be useful if there is conflict later.

If the State legislation allows, you can choose more than one attorney. There are pros. and cons. if you do this. Two attorneys might disagree about the decision to be made.

Alternatively, two attorneys can be handy if one is likely to be away a lot or you don't completely trust one to make decisions alone.

A word of caution ...

You must remember that you are giving your attorney a lot of power - the power to make decisions that are legally binding.

Powers of attorney can be useful. But use them carefully! Remember, only choose a person you trust to be your attorney ... and if you are unhappy with your attorney then you should cancel the power of attorney and appoint someone else.

How do I use it?

Once you've signed a power of attorney, put it in a safe place and give a copy to your attorney. To make a copy just photocopy it and write:

"This is a true and complete copy of the original" on the photocopy. Sign it and date it.

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