Far too many Wills exist which, when "detonated", will create huge problems for farming families. This article aims to reduce these potential disasters.
When making a Will it is important to recognise that certain assets cannot be distributed via your Will. For example, when you open a bank account or buy shares with another person and either person can sign for withdrawals or disposals then joint tenancy applies. That is, on the death of one person the asset will automatically pass to the survivor.
Two or more owners can hold farming land as tenants in common or as joint tenants.
Assets held as tenants in common can be dealt with through the Will, whereas assets held by joint proprietors or as joint tenants will not be part of the deceased's estate.
Therefore a Will challenge will have no impact when held by joint tenancy, at least until the death of the surviving tenant.
On the other hand, farming land held by a farming parent and a married son as joint tenants could be a disaster for the daughter in law. The Will maker needs to make provisions in his or her Will on the basis of becoming the surviving joint tenant.
Where assets are held by a trust, then whoever controls the trust will decide as to what happens to the trust assets. The control of a trust is typically a combination of the trustee (or shareholder in the trustee company) and the appointor (or principal) of the trust. In some cases, the guardian may even have ultimate control.
It is critical that any sole shareholdings in the trustee company are dealt with specifically in the Will. The succession of the appointor should not be included in the Will, simply because the Will can be challenged by a disappointed beneficiary. Hence the succession of the appointor should be spelt out in the original trust deed or by a subsequent deed.
Trusts can also be a problem where Will makers (and their advisors) fail to take account of the beneficiary loans to and from a trust. A loan to a trust is an asset of the Will maker and conversely, a loan from a trust is a debt or liability of the Will maker.
Loans to a trust generally represent undrawn profits or capital contributed to the trust and often amount to hundreds of thousands of dollars. The risk arises where these loans are ignored and far greater amounts pass to non-farming children than the Will maker intended. An immediate obligation by the farming child to pay these amounts to siblings could come as a complete shock!
For many farmers, a significant proportion of their farming and non-farming assets are held by their self-managed superannuation fund. In some cases, the self-managed superannuation fund also owns life assurance policies and therefore would receive any proceeds.
Your Will cannot directly control what happens to your superannuation on death.
Instead, the surviving trustees of the superannuation fund will have the initial power to decide who receives your superannuation when you die.
To provide certainty as to where and to whom the lump sum superannuation benefit be paid, the member may make a binding death benefit nomination.
This binding nomination could stipulate that the superannuation benefit be paid to the estate and then dealt with by the Will. Alternatively, the binding nomination could nominate a certain person or persons to receive the superannuation benefits directly. Again, avoiding a Will challenge may be the reason to bypass the estate.
Where the interest in the superannuation fund is supporting a pension, then the Will maker needs to consider whether the pension should revert to a surviving spouse or dependent child. Any directions in this relation to the reversion of pensions are not part of the Will. It is a very complex area and expert advice should be obtained.
There can also be major variations in the amount of tax payable by the recipient of superannuation benefits. This can depend on whether a tax dependent or non-dependent is the beneficiary. Further, the taxable portion of the fund will influence the amount of tax payable.
Therefore advising in regard to, and making a Will, without a complete understanding of superannuation tax laws is fraught with danger.
The next trap for farm Will makers is where there are minimal off-farm assets and a portion of farming land is left to non-farming children.
Almost in every case, the non-farming child or their spouse will want to convert their inheritance into cash immediately. This may not be an ideal time for the farming child, which could mean that land being lost from the family and leaving a non-viable unit.
A far better idea is to leave all the farming land to the farming child with an obligation to pay a specified amount to the siblings. The Will should also spell out the payment terms to siblings on a fair and commercial basis. I cannot ever recall working with a farmer who believed he owned too much land!
Next time we will examine the significant benefits that can accrue to non-farming children by using Will trusts.
Bill Beard is a director of RSM and can be contacted on 03 5330 5800 or [email protected].
Important: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur rapidly. We therefore recommend that our formal advice be sought before acting.