Many young couples take out considerable life insurance cover to provide funds to the estate to pay out mortgages etc. While clients with young families have enough life cover is vital that advisers ensure that it is complemented by a Will with a number of essential provisions the impact of the good work could be severely diluted.
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Specify that the children inherit via Testamentary Trusts
The Will should provide that a separate beneficiary testamentary trust is created for each surviving child.
By creating separate trusts, 2 or more children do not have to share control of a single testamentary trust, thereby reducing the potential for tension and conflict between them.
Each child will then ultimately have control of their own trust which will offer them significant benefits. These include tax minimisation later in life, as well as protection from the inheritance being accessed by the Family Court or creditors.
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Nominate a “Qualifying” age at which child beneficiaries inherit
To avoid the possibility that young beneficiaries can inherit substantial funds and assets when they turn 18, it is important the Will specify an age that the parents would feel confident beneficiaries had the maturity to manage their inheritance.
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Provide for a Maintenance Trust for children under the qualifying age
If one or more of the children were under the qualifying age at the time of the death of the surviving parent, t here is need for a clause imposing positive obligations on the executors to ensure that any infant children are properly housed and maintained until they reach the nominated qualifying age.
> Under such a clause the executors are obliged to review children’s circumstances at least every 6 months and to consider any recommendations made by the children’s guardian. The executor is required to comply with the prudent person rule set out in the Trustee Act in respect of the investment of funds for minor children.
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Nominate Guardians of Infant Children
While it is not possible to leave custody of infant children via a Will, it is good estate planning practice for a Willmaker who has young children to appoint a guardian to take care of such children should the Willmaker die prior to the children attaining their majority.
It is the guardian's responsibility to make the important ''life decisions'' on behalf of the child. The guardian must ensure that the child is adequately housed, clothed and educated. The guardianship of minor children is a responsible task and the Willmaker should think carefully about the appointment of a guardian.
There should also be a direction to executors in the Will to ensure that the children’s lifestyle is maintained
Such a provision would give wide powers to executors to allow funds to be made available for education, development and advancement to a standard applicable at the date of the death.
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Consider establishing a “Special Needs Fund” for the Children
Such a provision would only apply if one or more orphan children were left who had not attained the qualifying age.
The purpose of this clause is to establish a fund (say 20% of the estate) if necessary to help even up any inequality between the children arising from the fact that a child is younger than other siblings or is in need of extra or special help because of ill health, physical or mental handicap or other special need.
Wide powers are given to the executor as to how the fund is to be applied but the clause limits the application of the fund to the children under the qualifying age.
When all the children have reached the qualifying age set in the Will any remaining monies held in the special needs trust is distributed equally between all the surviving children.
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Ensuring equality among beneficiaries
Where the Willmaker has two or more children and the goal is to ensure absolute equality of inheritances received by the children a clause is needed requiring the executors to “even up” inequalities. These may be caused by the manner of distribution of non-estate assets.
Most commonly, the issue that causes an adjustment to be made is the death benefits to be paid from the Willmaker’s superannuation fund or funds. The Willmaker’s children may be entitled to claim, may have received, or may receive after the Willmaker’s death, unequal distributions from or by virtue of:
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Superannuation and pension death benefit payments (particularly where one of the children is a dependant and another who is not a dependant);
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Balances in the investment reserves of self managed superannuation funds – a particularly important issue when the Willmaker has been in receipt of a complying lifetime or term pension;
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Life insurance policy ownership; eg death benefits paid to a particular child nominated as policy owner or beneficiary;
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Discretionary trust allocations (it may appropriate to provide that the discretionary trust become a restricted, fixed or discretionary trust for a beneficiary unlikely to have children or grandchildren);
Having an equalisation or adjustment clause gives the executor the power to divide the Willmaker’s estate so that the right overall division of the estate and non-estate assets is, as far as is possible, achieved. The absence of such a clause from a Will may mean that a Willmaker’s wishes to divide overall “wealth” equally, or in set proportions almost certainly not eventuate.
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Dependants and Superannuation Death Benefits
The Will must provide for the situation where there are dependants for income tax purposes, eg a surviving spouse, children under 18 or any person who is financially dependent at the time of the Willmaker's death.
Superannuation death benefits paid to a spouse or dependants attract significant taxation concessions but death benefits paid to adult children will be liable to tax - referred to in the press as a "death tax".
Where parents of young children have superannuation the executor must have the authority to ensure that all or part of any superannuation death benefits received by the estate be held or distributed on terms that satisfy the requirements for tax exemption on the payment from the trustee of the superannuation fund. The terms of any superannuation death benefits distribution or testamentary trust are specified in our Will.
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Superannuation Death Benefits Trust
Where there are dependant children, the executor should have the option of placing all or part of any death benefits paid to the estate in a special superannuation death benefits testamentary trust. To prevent unnecessary tax being payable, beneficiaries of a superannuation death benefits testamentary trusts are usually confined to “tax dependants” for death benefit eligible termination payment purposes, thereby preserving the income tax exemption. A superannuation death benefits testamentary trust is essentially an alternative to the beneficiaries of the trust receiving a pension from the superannuation fund.