ESTATE PLANNING. WHAT ARE THE OPTIONS? Pearls of wisdom from Atticus Legal, Estate Planning lawyers Hamilton & Property Lawyers Hamilton
What is estate planning?
Estate planning aims to achieve an efficient distribution of your assets amongst those you wish to provide for, both during your lifetime and following your death. This article outlines the sorts of steps that you can take for estate planning purposes.
Estate Planning Toolkit
Actually there are more tools in the estate planning shed than you might think, including:
- Family trusts;
- Relationship property ‘contracting out’ agreements (to spread assets &/or income);
- Converting asset ownership to tenancy in common;
- Ordinary v Life interest wills;
- Life insurance;
- Enduring powers of attorney.
A family trust can be a very flexible tool for estate planning purposes. It is often an important part of an estate plan. If you are in business a family trust can be very effective in protecting your major assets from creditors, although family trusts can serve other purposes as well. And trusts are not the only means of obtaining some protection from creditors – see below. For more information on family trusts, see the Atticus Legal article ‘Family Trusts’ on our website at https://atticuslegal.co.nz/family-trust/
Family trusts are by no means the only estate planning tool available. Depending on your particular circumstances and your desired outcomes, an estate planning program may include, in addition to or instead of a family trust, one or more of the following.
Relationship Property Contracting-Out Agreement – Spreading assets &/or income
A relationship property agreement under the Property (Relationships) Act 1976, can be used to re-distribute between spouses or de factos “relationship property” and/or “separate property”. This might be done in order to equalise asset holdings, for the purposes of splitting of income earning assets (e.g. for income tax advantage in the case of a spouse in a lower tax rate bracket), for creditor protection or for other reasons.
The division of relationship property ownership under a contracting out agreement can also result in benefits in terms of protection from the creditors of one spouse/partner. An example of this follows.
Say one of the couple carries on a business in his/her own name or in the name of a wholly owned company and say the sole director has given personal guarantees to the landlord and trade suppliers. That person will have a liability risk to trade creditors and the landlord, as all business-owners do to some extent. Say the family home is owned jointly by the couple and all of these assets (business assets or shares as the case may be and the home) are relationship property. A contracting-out agreement could be entered into to ‘divide’ ownership of these assets between the couple (and classifying the divided assets as their respective separate property) so that the spouse/partner ‘at risk’ from business liability owns the business assets or shares and the other spouse/partner, who is not at risk from creditors, owns the home.
The business assets, unless held in a separate trust, will be at risk from creditors anyway. But the home, now owned by the not-at-risk spouse/partner, is effectively protected from the creditors of the spouse/partner. This division of assets would need to result in equalised asset holding valsues in order to be effective for the purpose. And such ‘restructuring’ would need to occur while you are solvent and well before any claims by business creditors are brought or threatened. It’s not for everyone, but this can be an alternative, for creditor protection purposes, to a family trust. Note this option still leaves the business assets exposed to creditors. Also, dividing family assets/relationship property in this way and converting them to ‘separate property’ can back-fire if the couple later separate at a time when the business assets may have reduced from creditor claims against a failing business. The business-owning spouse/patner can not ‘take back’ their interest in the family home, other than by agreement.
Gift duty has now been abolished so it is no longer a cost to be avoided in respect of re-distribution and transfer of assets. However, gifting remains relevant in regard to income and asset testing for various government benefits – eg. rest home subsidy.
Tenancy in Common Asset Ownership
Another estate planning method often used is to convert existing joint asset ownership (e.g. a family home or a beach house) from “joint tenancy” to a “tenancy in common”.
Many couples own their major assets (eg. their home, investments, deposit accounts, etc) jointly. This means that when one of them dies full ownership of those jointly-held assets automatically passes to the surviving co-owner.
By contrast, tenancy in common is a type of dual or multiple ownership where the interest of a co-owner in the asset does not automatically pass on death to the surviving co-owner(s). Instead, the interest of the deceased co-owner passes pursuant to his/her will or, in the absence of a will, pursuant to an intestacy under the Administration Act 1969 which sets out a statutory order of inheritance where there is no will.
Converting ownership of major assets from joint ownership to tenancy in common can effectively result in an asset re-distribution without the existing co-owners having to transfer away their interest in the property – eg. instead of transferring ownership to the trustees of a trust. This restructuring of asset ownership is usually coupled with the putting in place of new wills or the review of existing wills, usually a “life interest will” (see below).
Wills – Ordinary Wills v ‘Life interest’ Wills – Especially for second marriages
An estate planning exercise commonly involves putting in place wills or reviewing existing wills. Many people have wills leaving everything to their spouse/partner and then their kids or instead leaving everything to their family trust. That is probably the norm. However, a ‘life interest will’ is an alternative which is often used in the context of a second marriage/relationship, especially where kids from previous relationships are involved.
A life interest will usually provides for a surviving spouse/partner to have a life interest in the deceased’s estate, the major assets being co-owned on a tenancy in common basis. The surviving spouse/partner gets the benefit of the unrestricted use of, say, the family home and income from estate investments until their death. At that point the estate of the first deceased passes to his/her children and the estate of the second deceased passes to his/her children.
Note that the life interest wills only work where the main family assets are held by the couple as tenants in common (often in equal shares). If the family assets were held jointly (see above) the survivor would take full ownership and the ‘life interest’ under the will could not operate. The end result would be that the (first) deceased’s kids miss out! You therefore need to take good advice on this to avoid unintended consequences.
As a side-effect, in the context of tenancy in common and life interest wills, when one spouse/partner dies the survivor’s asset-holdings are not ‘added to’ for government asset-testing purposes such as for rest home subsidy applications. That is, a life interest in the deceased’s estate as compared to outright inheritance of that estate, does not form part of the surviving spouse’s asset-holdings for asset-testing purposes, at least under the government rules as they currently stand.
Alternatively, a will can instead be used to place further assets into an existing family trust established during your lifetime. For example, instead of your spouse/partner and kids directly inheriting under your will, your will could provide that your existing family trust is to receive (all or part of) your estate when you die. Some people perceive a benefit here in reducing the risk of potential future relationship property claims being brought against what would otherwise be the inheritances of their spouse/partner and/or their kids.
You should also consider the appropriateness of putting in place life insurances or reviewing existing life insurance policies. As a first step in a very basic estate plan there can be advantages in taking out life insurance on one’s own life and naming your spouse/partner as the beneficiary of the policy. Or, in the case of an existing life policy where you are the ‘beneficiary’ of your own policy, assigning the benefit of that policy to your spouse/partner. Why? If your spouse/partner ‘owns’ your life policy (and vice versa) then upon your death your surviving spouse/partner can promptly access funds for support of the family by claiming on the policy, rather than having to wait for probate of your estate.
Note that assignment of a life policy requires a specific transfer document to be signed, witnessed and sent to the insurance company.
You need to be aware that the above would fall outside any mutual life interest wills arrangement. A pay-out under a claim by a surviving spouse/partner on your life policy will go directly to your spouse/partner. This is often a sensible arrangement especially where you have children with your spouse/partner. Alternatively, if you have a family trust you could assign your life policy to the trustees of the trust. When you die the trustees will claim on that policy and the proceeds would fall into the family trust, rather than automatically going to your surviving spouse/partner.
Enduring Powers of Attorney
The creation or review of estate planning should also include the putting in place of Enduring Powers of Attorney (EPOAs). Under an EPOA you can give a power of attorney to another person which is not cancelled in the event of your mental incapacity. This is a simple method of giving power to another person to act on your behalf in the event you become incapable of handling your own affairs. We recommend EPOAs to all clients when they are putting in place wills.
If you don’t put in place EPOAs and you lose mental capacity (eg. though head injury, stroke or dementia) then your spouse/partner or other family members will need to apply to Court for appointment as a “property manager” and/or “welfare guardian” to look after your affairs. Applying to Court can be a costly exercise which can easily and relatively cheaply be avoided by having EPOAs. Note that EPOAs only operate up until the time of your death. At that point your will (and your executors) then come into play.
WANT TO KNOW MORE? Just ask Atticus Legal, Supremo Estate Planning Lawyers Hamilton & Property Lawyers Hamilton
CALL ANDREW SMITH, the owner of Atticus Legal, for expert professional advice on any of the matters referred to in this information sheet.
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Disclaimer: The information contained in this information sheet is, of necessity, of a general nature only. It should not be relied upon without appropriate legal advice specific to your particular circumstances.
This information sheet is copyright © Atticus Legal, August 2016.