There are a number of issues planners need to be aware of if estate equalisation is one of their client’s key objectives.
Beware of CGT
If Capital Gains Tax (CGT) will have to be paid by a beneficiary when an asset is ultimately sold, the real value of that asset is obviously less than its market value.
Example:At the time of his death, Don owned two units in the one block. He was survived by two children. He lived in one unit and rented the other. Both units were purchased in 1980 and both have increased significantly in value.
If he were to leave one unit to child A and the other to child B and both children sold their unit within six months, then the child who received the principal residence unit (and therefore the CGT exemption) would be far better off than the other.
There are a range of possible solutions. For example, each child could be given an equal share in all assets, in this example, both units.
Alternatively, the will could require that the value of each asset be calculated taking into account uncrystallised CGT, and that other funds be used to equalise the gifts.
Major Indivisible Assets
When, on the death of the last parent, the objectives are to treat the children equally, and provide one of those children with an asset that has a value greater than that child’s equal share, a problem then arises.
This problem is common within families running a small business, especially farmers. It is not uncommon for the parents to want to pass the business to the child who has worked in it with them. Often this asset will constitute a large percentage of their estate.
Solutions could include:
* Building additional non business assets so that the problem is reduced. Life insurance is traditionally used to meet this need.
* The will could provide that the children are to be treated equally but that one child is to have the right to purchase his or her siblings’ share of the asset in question. The outcome would depend on the ability of the child to raise the necessary funds.
* Another similar approach could involve the will providing the business to the one child on the condition that they pay funds to the siblings over a period of years.
This type of problem is never easy to resolve. Often a combination of approaches will provide the best outcome.
Family Loans
Family loans can cause real problems if not clearly documented.
Example:Ted helped his youngest child with the deposit on her home when she married.
When he died he left his estate equally to his three children. No mention was made of the help he had given to the youngest.
Was it a loan or a gift? There were no documents providing any real clarity either way. The youngest ultimately received one-third of the estate. The other two were furious. They felt she should have honoured their father’s wish that they be treated equally.
The simple solution is to document any gift or loan. Financial help that is documented as a loan can always be specifically forgiven in the will.
Failure to document these arrangements can cause real problems.
Gifts to grandchildren
Grandparents often have a different perspective on their family to that of their children.
Grandparents will often view their children as one group and their grandchildren as another.
They will often wish to leave a part of their estate to be divided equally between their children and another part to be divided equally between the grandchildren.
From a grandparent’s perspective, such an approach is perfectly fair and reasonable.
The adult children may feel quite differently.
Example:Zalal had three children. Child one had remained childless. Child two had married and produced one grandchild. Child three, however, had excelled herself in Zalal’s eyes and had given her four grandchildren. Zalal left half of her considerable estate to be divided equally between the five grandchildren.
Clearly child three’s family benefited far more than the other two, especially child one.
Sometimes this type of imbalance can cause friction.
Superannuation distributions
As funds held within superannuation continue to grow as a proportion of the net wealth of most people, care is needed to ensure a fair distribution of all assets is achieved.
These days, especially with the wide introduction of binding death benefit nominations, a co-ordinated approach to asset distribution is called for.
Example:John nominated his son to receive his superannuation death benefit on his death. His son was at university and still financially dependent on him. John was aware that this would provide the best tax outcome.
In his will, however, he left his other assets equally to his two children — his son and his older daughter. The daughter ultimately received roughly one-third of the total assets with the son receiving the lesser share.
The solution to this type of problem is to ensure any superannuation nomination is co-ordinated with the provisions of the will.
The will could have given the daughter an equivalent sum to the super death benefit, with the balance of the estate to be divided between them. This would have achieved both the tax and equality objectives.
Children’s ages
If parents die when children are young, the older children invariably do better than those who follow. The older children will already have benefited from funds being spent on them.
A simple solution is for the will to provide that a specific fund be put aside to meet the education and other needs of the children up to, say, age 23. More will obviously be spent from this fund on the younger children. This approach would avoid the inequality inherent in the ‘equally to the children’ approach.
Attention to detail when planning the distribution of assets can avoid conflict between beneficiaries.
Circumstances that result from a mere oversight sometimes result in the permanent breakdown of a relationship.
Michael Schneider is a technical services manager withAMP Technical and Professional Services.
