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Estate Planning

Obtaining probate of a Will is effectively getting the Supreme Court to validate the Will as the last true Will of the deceased – and can often be charged in accordance with sliding scales that increase with estate value (particularly in NSW).

Many lawyers, being mindful of this, come up with ways to minimise the size of their client’s estate to reduce these fees. However, whilst being well meaning, the effort might be an exercise in being “penny wise but pound foolish”.

How to save on probate fees - but pay much more in tax and risk of loss of inheritances instead!

There are a number of strategies that are used to minimise the size of a deceased person’s estate in order to avoid or reduce probate fees, in terms of both legal fees and court processing fees. In some cases, applying for probate can be avoided altogether!

But beware of being “penny wise and pound foolish”!

However, in many instances following these strategies is being “penny wise and pound foolish”. For example:

Holding assets as joint tenants


•    Holding assets (especially real property) as joint tenants - not just the family home or principal place of residence (which is very common), but also any investment properties such as residential rental houses and commercial real estate. This means that when one of the joint owners dies, the other surviving owner automatically takes ownership of the deceased person’s share, thereby by-passing the deceased person’s estate.

However, whilst this may avoid such assets being subject to probate for the Will of the first person to die, it will not avoid the combined estates of the couple being subject to probate for the Will of the spouse on their death – in which case there is only a deferral of costs. Plus, assuming the assets have increased in value over the period, the fees for obtaining probate may end up being significantly higher.

Transferring assets before death

•    Transferring assets during the owner’s lifetime to one or more persons being the intended beneficiary/ies of the assets after the owner’s death. Depending on the type of assets and the relevant State or Territory, such transfers may incur costs such as capital gains tax, stamp duty, and legal transaction fees. This strategy may include transferring part of an asset rather than the whole asset, e.g. transferring a half share in a piece of real estate to another person so as to hold the asset as joint tenants with them.

However, transferring assets during the owner’s lifetime to one or more persons being the intended beneficiary/ies of the assets after the owner’s death may still incur costs such as capital gains tax, stamp duty, and legal transaction fees. Plus, what happens if later down the track the owner realises that they should not have transferred the assets because:

(a)    The owner has had a falling out with the transferee/s and no longer wants them to be the beneficiary of the assets. Of course, it’s too late now to change your mind, and even if the transferees were agreeable there may be costs such as capital gains tax, stamp duty, and legal fees that would be incurred if the assets were transferred back to the original owner, or to another person. By contrast, a Will can be changed at any time before death without any costs of transfer, and will be effective to transfer any assets still in the name of the Will-maker at the date of their death; or

(b)    The owner realises that they have given away too many assets so that they do not have enough to live on for themselves in retirement – can they now rely on the goodwill of the recipient beneficiary to utilise their “early inheritance” for the good of their benefactor? Or have they already spent their early inheritance? In any event, the former owner may discover to their regret (and possibly embarrassment) that they are no longer financially independent.

Death benefit nominations for life and super

•    Nominating a beneficiary on a life insurance policy other than the deceased person’s estate so that on death the policy benefit is paid directly to the nominated beneficiary and by-passes the deceased person’s estate.
However, paying insurance death benefits to beneficiaries nominated in relation to a life insurance policy directly rather than via testamentary discretionary trusts under the policy owner’s Will, may result in the loss of significant and ongoing annual tax benefits in relation to the taxation of trust income – particularly if those beneficiaries have children of their own.

•    Nominating the payment of a superannuation death benefit directly to one or more persons who are eligible recipients for superannuation law purposes, rather than via the deceased member’s estate, so that on death the superannuation death benefit is paid directly to the nominated recipients and by-passes the deceased person’s estate.

Where the beneficiaries nominated in relation to a superannuation death benefit are not tax dependants (such as adult children who are working and no longer living at home), paying the death benefit to them directly rather than via testamentary discretionary trusts under the member’s Will may result in the loss of significant and ongoing annual tax benefits in relation to the taxation of trust income – particularly if those beneficiaries have children of their own.

And what about asset protection?

Plus, and perhaps most importantly depending on the circumstances, distributing a large inheritance (especially from the cash proceeds of insurance or superannuation) directly to a beneficiary rather than via a testamentary discretionary trust under the deceased person’s Will may give rise to other unintended or adverse consequences, such as:

(a)    A relatively young and inexperienced beneficiary (e.g. an adult child between the ages of 18 and 25 years) receiving an inheritance worth hundreds of thousands of dollars, or even millions of dollars, with no oversight or guidance regarding how they will manage it;

(b)    No asset protection for the beneficiary’s inheritance, so that they may lose all or a significant proportion of their inheritance by reason of a business failure, personal bankruptcy or a relationship breakdown – this could affect both a surviving spouse and the surviving children of the deceased person.

It’s REALLY worth it to think ahead!

So when it comes to estate planning, it’s best not to think too short term about things, particularly on an issue such as saving on probate costs – you really need to think ahead in terms of the greater benefits for the family of establishing flexible, tax effective and asset protective structures within the deceased person’s Will that can potentially save much, much more in terms of monetary savings and providing peace of mind for your family in the long run.

Where does the adviser fit into the picture?

Ironically, it is a client’s financial advisers and accountants who are much more likely to realise this than the probate lawyer engaged by the client’s surviving beneficiaries – which is all the more reason why financial advisers and accountants are almost duty bound to take an active and ongoing interest in their client’s estate planning and (eventually) the administration of their deceased estate to ensure to that the estate plan is correctly implemented and the benefits fully realised for the client’s family.


Obtaining probate of a Will is effectively getting the Supreme Court to validate the Will as the last true Will of the deceased – and can often be charged in accordance with sliding scales that increase with estate value (particularly in NSW).

Many lawyers, being mindful of this, come up with ways to minimise the size of their client’s estate to reduce these fees. However, whilst being well meaning, the effort might be an exercise in being “penny wise but pound foolish”.

How to save on probate fees - but pay much more in tax and risk of loss of inheritances instead!

There are a number of strategies that are used to minimise the size of a deceased person’s estate in order to avoid or reduce probate fees, in terms of both legal fees and court processing fees. In some cases, applying for probate can be avoided altogether!

But beware of being “penny wise and pound foolish”!

However, in many instances following these strategies is being “penny wise and pound foolish”. For example:

Holding assets as joint tenants


•    Holding assets (especially real property) as joint tenants - not just the family home or principal place of residence (which is very common), but also any investment properties such as residential rental houses and commercial real estate. This means that when one of the joint owners dies, the other surviving owner automatically takes ownership of the deceased person’s share, thereby by-passing the deceased person’s estate.

However, whilst this may avoid such assets being subject to probate for the Will of the first person to die, it will not avoid the combined estates of the couple being subject to probate for the Will of the spouse on their death – in which case there is only a deferral of costs. Plus, assuming the assets have increased in value over the period, the fees for obtaining probate may end up being significantly higher.

Transferring assets before death

•    Transferring assets during the owner’s lifetime to one or more persons being the intended beneficiary/ies of the assets after the owner’s death. Depending on the type of assets and the relevant State or Territory, such transfers may incur costs such as capital gains tax, stamp duty, and legal transaction fees. This strategy may include transferring part of an asset rather than the whole asset, e.g. transferring a half share in a piece of real estate to another person so as to hold the asset as joint tenants with them.

However, transferring assets during the owner’s lifetime to one or more persons being the intended beneficiary/ies of the assets after the owner’s death may still incur costs such as capital gains tax, stamp duty, and legal transaction fees. Plus, what happens if later down the track the owner realises that they should not have transferred the assets because:

(a)    The owner has had a falling out with the transferee/s and no longer wants them to be the beneficiary of the assets. Of course, it’s too late now to change your mind, and even if the transferees were agreeable there may be costs such as capital gains tax, stamp duty, and legal fees that would be incurred if the assets were transferred back to the original owner, or to another person. By contrast, a Will can be changed at any time before death without any costs of transfer, and will be effective to transfer any assets still in the name of the Will-maker at the date of their death; or

(b)    The owner realises that they have given away too many assets so that they do not have enough to live on for themselves in retirement – can they now rely on the goodwill of the recipient beneficiary to utilise their “early inheritance” for the good of their benefactor? Or have they already spent their early inheritance? In any event, the former owner may discover to their regret (and possibly embarrassment) that they are no longer financially independent.

Death benefit nominations for life and super

•    Nominating a beneficiary on a life insurance policy other than the deceased person’s estate so that on death the policy benefit is paid directly to the nominated beneficiary and by-passes the deceased person’s estate.
However, paying insurance death benefits to beneficiaries nominated in relation to a life insurance policy directly rather than via testamentary discretionary trusts under the policy owner’s Will, may result in the loss of significant and ongoing annual tax benefits in relation to the taxation of trust income – particularly if those beneficiaries have children of their own.

•    Nominating the payment of a superannuation death benefit directly to one or more persons who are eligible recipients for superannuation law purposes, rather than via the deceased member’s estate, so that on death the superannuation death benefit is paid directly to the nominated recipients and by-passes the deceased person’s estate.

Where the beneficiaries nominated in relation to a superannuation death benefit are not tax dependants (such as adult children who are working and no longer living at home), paying the death benefit to them directly rather than via testamentary discretionary trusts under the member’s Will may result in the loss of significant and ongoing annual tax benefits in relation to the taxation of trust income – particularly if those beneficiaries have children of their own.

And what about asset protection?

Plus, and perhaps most importantly depending on the circumstances, distributing a large inheritance (especially from the cash proceeds of insurance or superannuation) directly to a beneficiary rather than via a testamentary discretionary trust under the deceased person’s Will may give rise to other unintended or adverse consequences, such as:

(a)    A relatively young and inexperienced beneficiary (e.g. an adult child between the ages of 18 and 25 years) receiving an inheritance worth hundreds of thousands of dollars, or even millions of dollars, with no oversight or guidance regarding how they will manage it;

(b)    No asset protection for the beneficiary’s inheritance, so that they may lose all or a significant proportion of their inheritance by reason of a business failure, personal bankruptcy or a relationship breakdown – this could affect both a surviving spouse and the surviving children of the deceased person.

It’s REALLY worth it to think ahead!

So when it comes to estate planning, it’s best not to think too short term about things, particularly on an issue such as saving on probate costs – you really need to think ahead in terms of the greater benefits for the family of establishing flexible, tax effective and asset protective structures within the deceased person’s Will that can potentially save much, much more in terms of monetary savings and providing peace of mind for your family in the long run.

Where does the adviser fit into the picture?

Ironically, it is a client’s financial advisers and accountants who are much more likely to realise this than the probate lawyer engaged by the client’s surviving beneficiaries – which is all the more reason why financial advisers and accountants are almost duty bound to take an active and ongoing interest in their client’s estate planning and (eventually) the administration of their deceased estate to ensure to that the estate plan is correctly implemented and the benefits fully realised for the client’s family.

Source:
Brian Hor
Special Counsel – Estate Planning & Superannuation

brian@townsendslaw.com.au

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