Cancellation of Certificates of Title

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Cessation day 11th October 2021

The Registrar General of NSW has declared that 11 October 2021 is the day on which all certificates of title (CTs) will be abolished, known as ‘cessation day’.

By order under section 33AAA of the Real Property Act 1900, from cessation day all current CTs will have no legal effect and the Registrar General will no longer issue CTs for any reason.

The Torrens Title Register remains and has always been the single source of truth as to a person’s ownership or interest in land.

This means that from 11 October 2021 paper dealings will no longer be accepted for lodgment and only electronic dealings will be accepted.

New changes to the land titles system in NSW will be introduced that will transition NSW away from paper-based processes.

The Real Property Amendment (Certificates of Title) Act 2021 makes several changes to legislation, importantly allowing for the cancellation of certificates of title (CTs) and progressing NSW to 100% electronic lodgment of land transactions.

There are two significant changes from 11 October 2021:

  • the cancellation of CTs and the control of the right to deal (CoRD) framework; and
  • all land dealings must be lodged electronically. This is referred to as ‘100% eConveyancing’.

As Russell Kelly & Associates are accredited by PEXA, please contact us for all your conveyancing matters

Pexa Agent

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What we will do as your agent

  • We set up the electronic settlement workspace in PEXA
  • We provide you usage of our trust account
  • We can attend to stamping of the contract.
  • Once the transfer and settlement adjustment documents are ready in PEXA they will be sent for approval to you.
  • All original documents will be sent back to your office.

Please contact our office for further enquiries

Casual or Temporary Staff?

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Every employer who engages casual staff needs to understand the significance of the Full federal Court decision in Workpac v Rossato.

Many staff who are currently employed as casuals are really permanent which means they are entitled to annual leave and sick leave. Moreover, the fact that employers have paid casual leave loadings does not matter one jot.

Please contact our office if you require advice on this important issue.

Land Tax Concession Applications Now Open

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Landlords providing rent relief for eligible tenants in financial distress due to COVID-19 can now apply for land tax concessions online.

Minister for Finance and Small Business Damien Tudehope said the land tax concessions were part of a wide range of support measures designed to help those in need and to support jobs and business.

“Eligible landlords will be able to apply for a land tax concession of up to 25 per cent of their 2020 land tax liability on relevant properties so long as they pass on the full savings in the form of a rent reduction to their tenants,” Mr Tudehope said.

“The land tax concession is expected to be divided approximately 50-50 with around $220 million going to the commercial sector and a further $220 million expected to benefit the residential sector.”

Once approved, a concession will be applied to any unpaid 2020 land tax notices, and refunds will be issued for payments already made this year. Those refunds are expected to take up to five days to process once determined.

Landlords can find out more about eligibility and apply for a tax concession online and are encouraged to complete their applications before 31 October 2020.

Electronic contracts

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There are a number of ways an electronic contract can be executed:
• Clicking a checkbox to acknowledge agreement.
• Typing yes or I agree in a form online.
• Signing a document with a stylus or your finger.
• Using a facility such as DocuSign to electronically sign a document.

These contracts are considered legally binding, provided they meet the usual requirements under a contract relating to:
• Offer,
• Acceptance, and
• Consideration.

The Electronic Transactions Act 2000 (NSW) stipulates that an agreement can be in writing if it is given by electronic communication. (Paperless)

There are provisions within the act to stipulate that if a person consents to a method of electronic signature and intends that signature to be their consent to the contract then it will be as binding as a written signature on paper.

Quite a few organisations have adopted electronic contracts even banks have adopted electronic contracts for loan agreements.

Contracts for the sale of land can be electronic too.

Electronic contracts for conveyancing can increase the speed and efficiency of a transaction.

During these unprecedented times, many Real Estate Agents will be utilizing electronic contracts. The vendor or purchaser can access the electronic contract through a secure client portal. This document can then be signed electronically and available to the solicitor immediately.

If you require any further information please do not hesitate to contact our office.

Life in the time of COVID-19

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What is the process for Wills, Enduring Powers of Attorney and Appointments of Enduring Guardian

On the 24th March, 2020, The COVID-19 Legislation Amendment (Emergency Measures) Bill 2020 [NSW] was passed

At present the person signing the document and the witness must be physically present and sign at the same time, which is not practical in the time of COVID-19 but at Russell Kelly & Associates we have the facilities to accommodate this requirement.

The Law Society of NSW is working with the Government to enact regulation(s) in accordance with the regulation-making power as soon as possible. We will monitor the situation and update this blog. Pending introduction of these regulations, the current requirements and ‘good practice’ for revocation and execution of Wills, Enduring Powers of Attorney and Appointment of Enduring Guardian documents are as follows.

Wills

  • To be valid, a Will should be in writing and signed by the Will-maker and two independent witnesses.
  • The witnesses should be over 18 years of age and should not be the same person as the Executor(s), or any named or potential beneficiaries contemplated by the Will.
  • The will-maker should sign the document first, following by the two witnesses.  
  • All parties should use the same pen.
  • The witnesses should write down their names, addresses and occupations.
  • The Will should be dated.

In light of the COVID-19 situation, it may not be possible or practical to locate two independent witnesses, which begs the need for the contemplated regulations.

Pending the introduction of these new regulations, if you realize that you need to update your Will for one reason or another, we do have the facilities to accommodate witnessing of documents

A Will that is not executed in accordance with the prescribed legislation, is commonly referred to as ‘an informal Will’. The Court may admit an informal Will to Probate provided that:

  • It is ‘a document’;
  • The document sets out the author’s wishes or intentions for what he/she wants to happen in the event of his/her demise; and,
  • The Court is satisfied that the Will-maker intended the document to operate as his/her Will.

It is always recommended that you have your Will professionally prepared. Writing one out yourself is a risky exercise which may result in misinterpretation of your wishes, prolonged litigation and extra costs to your estate.

Enduring Power of Attorney

An Enduring Power of Attorney should be signed by the principal (you) and witnessed by a prescribed witness. Your appointed attorney(s) do not require to have their signature(s) witnessed.

A “prescribed witness” means:

  • a registrar of the Local Court, or
  • an Australian legal practitioner, or
  • a conveyancer, or an employee of the NSW Trustee and Guardian, who has successfully completed a prescribed course of study; or,
  • a foreign legal practitioner.

If you need to urgently revoke a Power of Attorney document you have in place, it is crucial that you tell your appointed attorney(s) that you have revoked the document, preferably in writing (for example, by email or post), please contact our office for any help required.

Appointment of Enduring Guardian

An Appointment of Enduring Guardian document should be signed by you and witnessed by a prescribed witness. Your appointed guardian(s) will also need to have their signatures witnessed by a prescribed witness.

Similarly, a revocation of an existing Appointment of Enduring Guardian should be in writing and witnessed by a prescribed witness. A copy of the written revocation must be provided to the guardian(s) it removes.

We will continue to monitor further announcements and issue an update when the new regulations are introduced. In the meantime, if you need to update your Will, Enduring Power of Attorney or your Appointment of Enduring Guardian documents, please contact our office

Retail Leases

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From 1st July 2017, there have been some significant changes to the Retail Leases Act in place.

You can find a brief summary of the significant changes below:

  • No minimum term
    – The 5 year minimum has been removed.
    – This provides flexibility in determining the length of retail leases.
    – This also reduces the red tape for Landlords and Tenants.
    – Section 16 (3) Certificate (Solicitor Certificate for Retail Leases of less than 5 years) has been removed.
     
  • Disclosure of outgoings
    The Tenant is no longer liable for outgoings which are not fully disclosed in the Lessor’s Disclosure Statement.

    If the estimate in the Lessor’s Disclosure Statement is less than the actual amount then the Tenant is only required to pay the estimated amount.

    Close attention should be paid to the Lessor’s Disclosure Statement.
     
  • Mandatory Registration
    Registration of Retail Leases of 3 years or more is now mandatory.

    The Retail Lease must be registered within 3 months after Retail Lease signed by Tenant is returned to the Landlord.

    This 3 month period can be extended due to mortgagee delay.

    If the Retail Lease is not registered and the mortgagee takes possession of the property and did not consent to the Retail Lease, then the mortgagee does not have to recognise the Retail Lease. The Tenant is such as instance would be unprotected.

    Registration is for the Tenant’s protection.
     
  • Return of Tenant’s Bank Guarantee
    Following termination of the Retail Lease, the Tenants Bank Guarantee is to be returned within 2 months after the Tenant has complied with all obligations under the Retail Lease.
     
  • No Mortgagee consent fees
    It is now expressly stated that a Landlord cannot charge Mortgagee consent fees.
     
  • Copy of Retail Lease
    The Tenant is to be provided with a copy of the Retail Lease within 3 months after it is returned to the Landlord.
     
  • Failure to provide Disclosure Statement
    If the Landlord fails to serve the Disclosure Statement within 7 days before the Retail Lease is entered into or if the Disclosure Statement is materially false, misleading or incomplete, then in addition to the Tenant being able to terminate the Retail Lease within the first 6 months, they also have a right to claim compensation including in connection with the fit out of the retail shop.
     
  • Lessors Disclosure Statement can be amended by Agreement or by NCAT
    The Lessor’s Disclosure Statement can be amended both before and after the Retail Lease is entered into by agreement or by NCAT.
     
  • New Schedule 1A
    This new schedule to the Retail Leases Act specifically excludes certain usages. These uses are not Retail uses under the Retail Leases Act:

    – ATMs
    – Vending Machines
    – Public Telephones
    – Children’s Rides
    – Signage Display
    – Internet Booths
    – Private Post-Boxes
    – Storage of goods for use in retail shops
    – Car Parking
    – Communication Towers
    – Digital Display Screens
    – Public Tables and Seating
    – Self-Storage Units and Storage Lockers
     
  • Act does apply to Agreement for Lease
    Accordingly, a Lessor’s Disclosure Statement needs to be served 7 days before Agreement to Retail Lease issued.
     
  • The Retail Leases Permanent Retail Markets
    Act now applies to permanent retail markets. Provided such a store also satisfies the definition of a retail shop.
     
  • Applies to proposed Lessees and Lessors
    A Landlord cannot charge legal fees under Heads of Agreement for a Retail Lease if the Tenant does not proceed.
     
  • Specialist Retail Valuers
    This process run by Office of the NSW Small Business Commissioner and not NCAT.
     
  • Retail Lease Assignment
    Streamline the process – easier and clearer process for assignment of Retail Leases.
     
  • Online Sales
    Are excluded from turnover data.

    Turnover data must be in relation to the “bricks and mortar” shop only.
     
  • NCAT
    Financial jurisdiction increased from $400,000.00 to $750,000.00.

    NCAT may amend Retail Lease or Disclosure Statement.

    NCAT may make order for compensation.
     
  • Demolition
    Demolition of a building and also a part of the building now included.
     
  • Rental Bond
    Online rental bond scheme to apply.
     

According to the Office of NSW Small Business Commissioner such changes were adopted to:
 

  • Better level the playing field between Landlords and Tenants.
     
  • Improve the sharing of information between Landlords and Tenants for example in relation to rent increases, assignment and demolition.
     
  • Refresh and update the legislation to coincide with the rapid change the Retail Industry has faced.

For more information please contact our Office

When do I need a Witness

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Do you need a signature from a witness in order for a contract to be valid.

Most documents and contracts do not require a witness for them to be valid.  But wills and documents that need to be registered with NSWLRS (Land Registry Office) have legal requirements in relation to witnessing.

Who can be a witness to a document?

The person you choose to witness a document should have no financial or other interest in the document that is being signed. An independent adult (over 18 years old) witness who does not benefit from the document is the best solution.

Ideally a witness will observe the relevant party or parties signing the document and then the witness will sign the document as proof that they witnessed the parties signing. The witness is generally not required to know or understand the contents of the document.

It is also important that documents such as wills have clearly regulated requirements regarding the number of witnesses and the nature of the relationship between the parties and the witness. Most States in Australia will not allow witnesses that are mentioned in your will, either as beneficiary or executors. The witnesses must be of legal age (18) and they must be mentally capable of managing their property and making their own decisions.

Contact our office to get a clarification on witness protocol.

Introducing 2-year time limit on validity of Survey Certificates – Effective 1 September 2018

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New legislation to ensure plans of survey contain current information

Legislation imposing a time limit on the validity of a Survey Certificate accompanying a plan of survey will commence on 1 September 2018.  The legislation will form part of the remake of the Conveyancing (General) Regulation 2018 (the Regulation).

The legislation will apply to a plan of survey (as defined by the Regulation) lodged on or after 1 September 2018. It will not apply to compiled plans or strata plans.

The cadastre is dynamic and regularly changing. A plan may no longer be current if there is a delay between completion and lodgment.  By ensuring a plan remains current, the legislation will result in fewer requisitions being issued by NSW LRS and will help to maintain the integrity of the cadastre. The new requirements will formalise and enhance the existing practice of requiring plans to be updated to include current information.

Time Limits – staged introduction

A plan of survey cannot be lodged with the Registrar General more than 2 years after the date of completion of the survey shown on the Survey Certificate unless it is accompanied by a Certificate of Currency attested to by the surveyor in the approved form.

The legislation will provide for a staged introduction to allow lodging parties to transition to the new requirements as follows:

  • For plans lodged on or after 1 September 2018 until 31 August 2019, the requirement will apply where the survey was completed more than 5 years prior to lodgment.
  • For plans lodged on or after 1 September 2019 until 31 August 2020, the requirement will apply where the survey was completed more than 3 years prior to lodgment.
  • For plans lodged on or after 1 September 2020, the requirement will apply where the survey was completed more than 2 years prior to lodgment.
Certificate of Currency

The approved form will be published on the NSW LRS website www.nswlrs.com.au on 1 September 2018. To assist lodging parties prepare for the new requirements, please find a copy of the approved form here. A surveyor must attest to each of the matters in order that the plan can be accepted for lodgment.

To fulfil these requirements, the surveyor will need to review the plan before lodgment to determine whether the plan needs to be updated and to make sure any consents from certifying authorities or other people are obtained.

The Certificate of Currency is an additional Certificate to be attested to by a surveyor.  The Survey Certificate accompanying the plan of survey does not require any further endorsement or alteration.

Lodging parties must ensure they comply with the new provision when lodging a plan of survey.

Stronger laws for off the plan purchasers

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NSW home buyers purchasing residential properties off the plan will benefit from stronger protections under new laws set to be introduced to Parliament in the second half of the year.

Minister for Finance, Services and Property Victor Dominello joined Member for Oatley Mark Coure in Penshurst today to announce the proposed changes to the Conveyancing Act that affect disclosures, cooling off periods, holding of deposits and sunset clauses.

“Purchasing a property is one of the most significant financial investments an individual or couple will make in their lifetime. These reforms are a big win for buyers and will provide them with greater confidence and certainty,” Mr Dominello said.

“Buying off-the-plan has become increasingly popular. But there are risks involved and buyers can’t just rely on lavish display centres and glossy brochures.”

Mr Coure said: “The St George region is experiencing a housing boom and the new laws will help families make more informed decisions to ensure they get what they paid for.”

The reforms include:

    • Buyers being provided with a copy of the proposed plan, proposed by-laws and a schedule of finishes before contracts are signed;
    • Vendors providing a copy of the final plan (and notice of changes) at least 21 days before the buyer can be compelled to settle;
    • Allowing buyers to terminate the contract or claim compensation if they are materially impacted by changes made from what was disclosed;
    • Widening existing legislation to clarify that the Supreme Court can award damages where the vendor terminates under a sunset clause; and
    • Extending the cooling off period to 10 business days with any deposit to be held in a controlled account.

The number of off-the-plan sales has increased from just over 2,000 in 2006/07 to nearly 30,000 in the last financial year. They now account for about 12 per cent of all residential property sales in NSW. The reforms follow a public consultation.

For more information visit www.registrargeneral.nsw.gov.au.

Difference between Strata Title and Community Title

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What’s the difference between strata and community title?

Strata Title:

Town houses, units and some types of commercial property generally fall under these categories.

Each unit and common property comes from one large parcel incorporating property and land.

Each unit or allotment is given its own title as well as the common property (shared between all members of the group).

The difference is in the way in which the land boundaries are defined.

A Strata Title unit’s boundaries are defined by reference to parts of the building, not by the land. There must be an area of common property, for which everyone is responsible.

Community Title:

Similar to that of a Strata Title holding, Community Titles are defined by lot boundaries and surveyed measurements unlimited in height and depth, as well as reference to parts of the building.

Community Title Corporations are also appointed and comprise registered owners of the lots in the community scheme.

The Corporation is responsible for the administration of the group’s by-laws and for maintaining the common property and any fixtures on the property.

Apartment complexes generally fall into this category.

GST Payments changes from 1st July 2018

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GST payments changes from 1st July 2018

From 1 July 2018, purchasers of new residential premises or potential residential land are required to withhold an amount of the contract price and pay this directly to us as part of the settlement process. The amount of GST will not change.

This does not affect the sales of existing residential properties or the sales of new or existing commercial properties.

For property transactions, purchasers will need to:

  • split the amount of GST from the total purchase price
  • pay the GST component directly to us by a disbursement at settlement
  • pay the GST exclusive purchase price to the property developer (vendor).
  • Property developers will need to give written notification to the purchasers when they need to withhold. The liability for the GST remains with the property developer, and there are no changes to how property developers lodge their business activity statements.

https://www.ato.gov.au/Business/Large-business/In-detail/Business-bulletins/Articles/GST-property-settlement-changes/

What is a Testamentary Trust

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“Testamentary” is a legal term that means the issue relates to the making of a will. A “trust” is where one person holds the legal title of property for the benefit of another person (not themselves). A “trustee” is the person who take the ownership in “trust” for another person (known as the “beneficiary”). Under the trust the trustee owes a legal financial duty to the beneficiary.

A testamentary trust is established under a will to appoint a trustee to use property for the benefit of the beneficiary in the way that the will specifies. Many people, especially those of wealth, create trusts to protect assets or to minimise tax. In the same way a trust can be set up under a will. These trusts can last for many decades following the date of death.

Why a trust?

A trust is a legal device that separates the ownership and control of an asset, which beggars the question, why is this useful in the first place?

Rather than an asset passing into the personal name of a beneficiary (as it does in a traditional will), under a testamentary trust the asset passes to a trustee who holds it in trust for the beneficiary. The trustee then decides how (or if) the beneficiary will receive income and capital from the trust. From an estate planning perspective, testamentary trusts offer almost endless flexibility for accountants and financial planners.

What it can achieve

Let’s take the example of a couple with a child who has an intellectual disability. They naturally worry what will happen to the child after their death. One of the ways to deal with the child’s financial security is to set up a testamentary trust. In this way the testator (the person making the will) can direct how the assets will be used after their death.

Another example might be where a parent is concerned about the marital situation of a child, and wants to ensure that only their child and not the child’s spouse inherits their wealth, or that the inheritance does not become subject to a claim under the Family Law Act.

The advantages include:

  • maintaining social security entitlements;
  • ensuring that assets pass to children even if a surviving spouse remarries or the child divorces;
  • capital gains tax and income tax advantages;
  • providing for children with an intellectual disability or mental illness; and
  • protecting assets where a beneficiary becomes bankrupt.

Discretion of trustees

Under the trust the trustee can either be given specific instructions on how the money will be spent, or they can be given a discretion.

Often it is better to allow for a discretion because:

  • it is the most flexible type of the trust;
  • it may provide the best chance of the beneficiaries’ actual future needs being met;
  • it may best allow for the best interests of the beneficiary to be met.

Choosing a trustee

This is a significant decision and should not be made without serious thought. The person you choose will have a lot of responsibility, and should have some financial management skills (or access to those skills).

You can choose:

  • an individual.
  • Private trustee companies
  • Private trustee companies are regulated by law.

The advantages of using these companies are:

  • they are professional;
  • they are independent;
  • they are companies and therefore, unlike an individual trustee, can continue to act as trustee into the future.

The disadvantages are:

  • the trustee will not have a personal relationship with the beneficiary;
  • the company will charge.

It is possible to appoint an individual as a co-trustee with the company.

Individual Trustee

The main advantages of an individual trustee are:

  • you can appoint someone with a personal relationship with the beneficiary (in a discretionary testamentary trust it can be the beneficiary);
  • it may be cheaper.

The main disadvantages are:

  • the individual may not have sufficient expertise;
  • there can be a conflict of interest

Will & Estate Planning – Top Ten Questions

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1. Should I make a will?

Everyone should have a will. A will is the only way you can tell others how you want your assets to be distributed after your death. It is the only way you can provide for people who may depend on you financially, e.g. children.

2. Can I leave a child out of my will?
You have to be very careful about doing this. Children may be able to challenge your will if you don’t make adequate provision for them. And it’s no good including a term in the will that anyone who challenges the will loses their inheritance. This would not be valid.

3. Does it matter if I am very sick when I make the will?
As long as you have the mental capacity, it’s OK. But it’s a good idea to get a statutory declaration from a competent doctor to prove that you understood what you were doing when you signed the will.

In some States a court can make a will for you in certain circumstances, if you don’t have sufficient “mental capacity”.

Can I make a testamentary trust with a DIY kit?
No. You must see a lawyer. Consider the issues in the fact sheets carefully and ten make an appointment, armed with your research.

4. Can anyone be a witness?
No. The witness should not inherit anything under the will, or be your spouse/de facto. It is also best that the witness not be anyone who is married to a person who inherits under the will. It is sometimes possible to have a will declared valid if it does not conform to the technicalities, but it is far better to do it properly in the first place.

5. What happens to debts?
Unfortunately for those who survive you, any debts that you have while you are alive remain as debts.

6. What if I don’t have a will?
If you die without making a valid will, you leave what is known as an “intestacy”. This means you have not validly disposed of some or all of your assets.

Many people believe the Government takes their assets if they die without a will. This isn’t completely true. It could only happen if you have no living next of kin. However, if you die without a will, your assets will be distributed according to a legal formula. This might mean that your assets do not end up with the person you would have chosen. It also means that you have no control over who distributes your assets.

7. Who arranges the funeral?
Funerals could be arranged by anyone, but they will be paid for (or reimbursed) by the executor – the person who has the legal responsibility for this task. Nevertheless, it is far better to have dealt with the issue beforehand – if there are instructions in the will, but it is not read till after your funeral, you may not get what you intended for your funeral.

8. Do I need a lawyer?
It’s always better to get a lawyer to make your will. Lawyers are covered by indemnity insurance, which means that beneficiaries can take action against your lawyer’s insurer if they miss out on an inheritance because of an error.

9. Will the guardian we appoint for our children be appointed after we die?
Not necessarily, the Courts have the final say, but if you follow the guidelines we suggest and make an appropriate choice, then your choice will be persuasive.

10. Can I leave a particular piece of jewellery to someone?

Yes, but be sure it can be identified by the executor (you may want to take a photo) and the description should be incorporated into the will.

Retirement villages – What are the pitfalls

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QUESTION

There was a scary segment on ABC’s 7.30 program recently about retirement villages. It told of a woman who bought a strata title unit about eight years ago, and died two years ago. Because she owned the unit outright, the only way for the family to get the money is to sell the unit but there are 19 for sale in a complex of 35 units and NO BUYERS. The poor family are stuck with paying all the costs of the unit until they find a buyer. What is the solution?

ANSWER

It’s a bit of a Catch 22. The group that run the units claim that it is essential for them to charge these fees because, if they did not charge them to vacant units, they would be forced to reduce services, or increase fees to all the old people who are living in the other units.

As Rachel Lane and I point out in our book Aged Care Who Cares, there is no easy choice. If you opt for a lease or licence arrangement, you accept the buyback price that is written into the contract when you purchase the unit in the first place. If you opt for strata title, you or your estate is stuck with trying to sell it.

It’s a warning to anyone moving into a retirement village to really take advice on the implications of the contract you sign. Unfortunately, I have seen these contracts and they’re nearly as thick as a phone book.

I don’t know any area which is as complex as aged care. This is why taking advice is essential
Read more: http://www.theage.com.au/money/ask-an-expert/blogs/ask-an-expert/retirement-villages-20140524-38ttd.html#ixzz35cDA4E4b

Family trusts: are your assets protected

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A family trust can form an important part of planning in your will. This can include thinking about protecting the assets you leave behind and also helping your loved ones deal with the financial consequences of inheriting your estate. So, what is a testamentary trust and how are they used?

What is a testamentary trust?

According to the Australian Tax Office (ATO) definition, a testamentary trust is a trust which is established according to a person’s instructions in their will. That is, the trust does not exist until the person who has made the provision in their will passes away.

At this time under the terms of the will, the beneficiaries could be given the option to inherit their assets within a testamentary trust, rather than inheriting them directly.

Establishing a testamentary trust effectively allows you to “ensure that a trust over your assets is created on the day of your death, which means that rather than your assets being distributed directly to your beneficiaries, they are held for their benefit by a trusted individual or organization”.

There are a number of different kinds of testamentary trusts, although in estate planning, commonly a testamentary trust is discretionary, which means the trustee has discretion as to which of the beneficiaries named share in the capital or income of the trust fund.

Why would you leave instructions in your will to set one up?

A discretionary testamentary trust is not for everyone. However, there are some benefits conferred by the structure that make it a good option in some cases.

The benefits most commonly cited are:

  • tax effectiveness; and
  • protection of the bequeathed assets

Tax effectiveness

Say a couple has two children and either the husband or wife passes away. Under a standard will, the one spouse would leave all of their estate to the other spouse and vice versa. Usually if both spouses pass away then they will provide for the estate to be divided equally among their children.

In the above scenario, where only one of the spouses passes away, then the surviving spouse would inherit all of the estate’s assets.

The surviving spouse will then have to pay tax on any income and capital gains earned from those assets at his or her marginal tax rate, meaning that person’s tax bill could rise significantly and any unearned income distributed to children under the age of 18 would be subject to a penalty tax rate.

Where there are young children or grandchildren under the age of 18, however, then inheriting assets within a testamentary trust can be more tax effective for the family.

This is because Division 6AA of Part III of the Income Tax Assessment Act says that if a child under the age of 18 receives income from a trust established in a will then the adult tax free threshold of $18,200 (for 2012/13 and 2014/15) and marginal rates of tax will apply to the child.

What this means

If the spouse who passed away in our example left an estate of $1m invested and it returned 10%, or $100,000, during the 2014/15 tax year and if the surviving spouse already earned a taxable income of $75,000 that year, then ignoring the Medicare levy, the surviving spouse would have to pay tax on an income of $175,000. This equates to a tax bill of $52,697.

If, however, the will included the provision that the whole of the estate was to be left to the surviving spouse as trustee of a discretionary testamentary trust, with the beneficiaries of the trust being the surviving spouse and the couple’s two children, then the income would be split. If the income was split equally then it would look like the below (rounded to the nearest dollar):

Beneficiary Taxable income Tax liability
Surviving spouse $75,000 + $33,333 $28,030
Child 1 $33,333 $2,430
Child 2 $33,333 $2,430

This is because each child is entitled to the $18,200 tax free threshold, with the amount over this taxed at 19 cents in the dollar. In addition to this, they would qualify for the low income tax offset of $445.

So, this equates to a family tax bill of $32,890 – a saving of $19,807.

Jonathan Philpot, specialist wealth management adviser at HLB Mann Judd, says that the other big tax advantage is where there is a large amount of unrealized gains with the inheritance – say a large share portfolio.

“This is because the estate is one tax payer so the marginal tax rate for one person applies, whereas if those shares are transferred into a testamentary trust and then all the shares are sold it may be possible to distribute the capital gains, say, between three people, which would reduce the capital gains tax.”

Protection of assets

The other reason commonly cited for establishing a testamentary trust within a will is protection of assets; that is, the desire to ensure that assets remain within the family for the benefit of direct family members.

Philpot says that in his experience, while the benefits of flexibility in terms of distributions covered above is attractive, often more important to his clients is added asset protection in the event of things like future marital breakdowns.

“It’s more about protecting your wealth so it only goes to your lineal descendants and there is no worry about half of your assets going to a child’s ex-spouse, which tends to be what people prefer,” Philpot says.

Protection against a child’s bankruptcy can also be a motivating factor in establishing a testamentary trust as assets are owned by the trust rather than becoming the direct property of the child.

Another instance where a testamentary trust may be used is to provide for a child with a disability, allowing for the assets to be used for the benefit of that child who may not have the capacity to handle financial matters following their parents’ death.

What to watch for

Philpot cites a number of things to consider before establishing a testamentary trust. One consideration is the need to understand at what level of assets it becomes worthwhile to establish a testamentary trust. Generally, testamentary trusts provide the greatest benefit for larger estates with multiple children, Philpot says.

Another is working out who will act as trustee of the trust – of which there can be more than one. For example, a trust may be established where one trustee is independent, such as a lawyer, accountant or other arms-length professional, and one trustee is the primary beneficiary of the trust.

The reason those making a will may want to consider appointing an independent trustee is to ensure all beneficiaries’ best interests are looked after and that distributions are not influenced by things like family politics. For this reason, it can provide an extra degree of protection over assets.

Philpot says that it’s important when considering the structure to speak with an expert – such as a specialist estate planning lawyer.

read more https://www.mywealth.commbank.com.au/strategies/testamentary-trusts–what-are-they-and-when-can-they-be-used–infocus201406

Achieving a Property Settlement

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Achieving a property settlement can be a long and painful process. Early provision of honest and accurate information and having realistic expectations can greatly reduce the pain.

Divorce and separation is not easy. With this in mind, I turn your attention towards the property settlement.

A property settlement involves the division of marital assets between separating partners. This can be a highly emotional process and as such both sides may become vindictive. If this happens, the process is all the more painful and drawn out for all concerned.

Despite the obvious difficulty, an amicable approach is always favourable – especially where children are involved.

If an amicable settlement cannot be reached, you will need to involve the courts. The courts will require, among other things, the following:

  • A detailed list of all marital assets, liabilities, income and superannuation, with agreed values or appropriate valuation evidence included in support;
  • Details of the assets, liabilities, income and superannuation that each partner brought to the relationship;
  • The contributions each partner made to the accrual or preservation of assets etc. during the relationship;
  • The length of the relationship;
  • Details of care provided to any children of the relationship;
  • Details of any personal behaviour that might affect settlement, e.g. gambling or drug addiction;
  • Age and health of each partner.

If this information is provided to your solicitors in advance, they may be able to mediate an agreement without recourse to court in the first instance.

If you have any questions regarding family law or require assistance with a property dispute, feel free to contact our office.