Chapter 02 – Wills

A will is a legal document signed by a testator or testatrix, or a will maker, which controls the disposition of property owned by that person on his or her death. Most people regard the will as being the dominant estate planning document. This is true for most people. But for some people this is not the case: if sensible asset protection strategies have been followed then relatively few assets may be owned personally and the bulk of the assets may be in controlled trusts and super funds.

Only assets owned personally are controlled by a will. Assets owned by super funds and family trusts are not owned personally and are not controlled by a will. These have to be considered separately in any estate planning exercise.

Testamentary capacity

Only a person with “testamentary capacity” can make a valid will. A will purported to be made by a person without testamentary capacity will not be valid. Testamentary capacity will exist if the will maker is over age 18, understands the nature of the document being signed and is of full mental capacity. Obviously, testamentary capacity is not usually an issue for professional working clients but, as the population ages the question of mental capacity is becoming more and more of a concern. Solicitors are expecting more and more challenges to wills on the basis that the will maker did not have testamentary capacity at the time the will was made.

If capacity is a concern it is a good idea for those involved in making the will to take steps to be able to prove full mental capacity at the time the will is made. This could include, for example, an assessment by a geriatrician or some other expert as to the will maker’s mental capacity and understanding of the will as a legal document.

Formal requirements to create a valid will

A will must be in writing and must be properly signed and witnessed to be valid. Normally two independent witnesses must see the will maker sign the will and must then sign each page of the will as witnesses. The witnesses should be independent and not be related to the will maker because a person who witnesses a will cannot be the beneficiary of the will. As a result, relatives are definitely ‘out.’ The witnesses must understand the general nature of the will but they do not need to read the will – their role is to attest that the willmaker signed the will. Usually witnesses do not read the will.

What happens if a will is not valid?

If a will is for any reason invalid, the most recent preceding valid will made by the will maker will govern the will maker’s estate.

If there is no such will then the estate will be governed by the rules for intestacy. These rules typically provide that the estate goes to the spouse and children and other close relatives in accordance with a set formula. Sometimes a will validly disposes of part of the will maker’s estate, but not some other part. This is called a partial intestacy and in this case the set formula applies to that part of the estate that has not been properly disposed of under the will.

Further, a possible invalidity may create bargaining power for a person interested in challenging the will: the executor will be interested in settling with the challenger rather than having the whole will found to be invalid.

Obviously none of these results are what the testator wanted. So it’s very important to make sure the will is valid and all the details are properly attended to.

What happens to the old will?

Executing a new will automatically revokes the old will. Some wills contain a clause like “I revoke all earlier wills” or even specify the earlier will to make the position clear. But technically this is not necessary since revocation is automatic.

It is a good idea to either destroy all copies of any earlier wills or to mark them in a way that clearly indicates that a new will has been executed and this will is revoked and is no longer necessary.

Some basic rules for executing a will

The testator or will maker should read the will carefully and be 100% satisfied that it reflects his or her wishes. The testator’s should sign and date each page of the will in the presence of at least two adult witnesses (i.e. over age 18 and otherwise of legal capacity). The witnesses should not be family members or anyone else who may benefit under the will (this would invalidate the will) and do not have to read the will but must understand that it is a will. The witnesses should sign each page of the will and print their names, addresses and occupations on the last page of the will.

Everyone should sign using their normal or usual signature. It is a good idea for the testator and each witness to sign using the same pen.

Any last minute alterations should be referred back to the solicitor who prepared the will, and fresh drafts prepared. But if for any reason this is not possible the testator and each witness should place their initials in the margin next to each alteration.

The will should not be stapled or pinned, or marked in any way.

Multiple copies should be signed and each copy should be kept separately in a safe place where they can be accessed quickly in the event of death. De Groots wills and estate lawyers have written an interesting article called “Protecting Important Documents When a Crisis Hits” and this article can be accessed here: Protecting Important Documents When A Crisis Hits.

Simple “standard husband/wife wills” (beneficiaries have fixed interests)

One of the most common wills for the average “nuclear” family is one where each partner gives their estate to their spouse or, if their spouse does not survive them, then to their children equally.

For clients with minimal assets and relatively simple affairs a simple will is a perfectly sensible way to proceed, as it is simple and easy to understand. Assuming that the couple each appoint the other (if alive) as their executor, then the only real questions are:

  1. Who is to be executor and trustee i.e. the “reserve trustee” if the spouse does not survive?
  2. Who is to be guardian, i.e. the person with the day to day care of any children under 18, if the spouse does not survive?
  3. Who is to benefit if no spouse or children survive?

Reserve trustee

The “reserve” executor should be a trusted relative or friend, or even better, two or more unrelated and trusted friends or relatives. We often suggest the testator’s siblings and the testator’s spouse’s siblings (i.e. “unrelated relatives”) be the reserve executor.

If the children are young then the “reserve” trustee should be someone with a financial background as the person may be in charge of a trust fund for the children until they reach 18.

The same person should not be the reserve trustee and guardian of children under 18. There is a conflict of interest between the two roles: it’s all too easy for the person who legally owns the money and who is responsible for the day to day care of the children to “confuse” things, with the result that the trust monies disappear and are not available for the children.

Separating the trustee function and the guardian function minimises the possibility of the trust monies being used and maximises the probability of the trust monies being there for the children when the trust vests. At the very least there should be two reserve trustees, and they should be unrelated and unlikely to collude against the children.

Who should be the guardian?

We usually suggest the testator’s siblings and the testator’s spouse’s siblings be the guardian. This is a simple approach that leaves the children in the care of their uncles and aunts, and indirectly their grandparents, if there is a double premature parental death.

This approach normally works, and has some inherent wisdom: uncles and aunts are a natural choice, and nominating all of them leaves the decision as to who should care for the children to those who are best placed to make the decision at that time based on the conditions that then exist. Nominating a particular uncle or auntie can be problematic if, at the time the will is enacted, that uncle or auntie is in prison or living out of the country. 

Bear in mind that a double premature parental death is a very low probability event. And bear in mind that 85% of deaths occur with notice, in the sense that the person knows they have an incurable disease and will die within a certain period. This notice period allows an opportunity to re-consider the will and to nominate a more appropriate guardian if the situation calls for it. This means the odds of what we are talking about, i.e. now a double premature parental death, without notice, i.e. by accident, is an even less likely event.

For the vast majority of cases nominating the testator’s siblings and the testator’s spouse’s siblings as the guardian of any infant children (i.e. under age 18) is the most sensible strategy.

Exceptions can arise. For example, the uncles and aunts may all live overseas, or one of the uncles and aunts may be “inappropriate” in that they may have a mental illness, a drug addiction or some other condition which means children should not be in their care. But normally this approach works.

Who should benefit if no spouse or child survives?

This boils down to who should be the “default” beneficiary. This is a particularly low probability event too. We normally suggest “next of kin” or maybe parents, or in the case of a married couple each set of parents in equal proportions. Each case is different. But a common sense approach is needed because it is a very low probability event.

Advisers should urge clients to put a workable will in place even if they are not certain who the default beneficiary should be: it’s better to have a perfectly good will than to not have a perfect will. The will can always be changed at a later date if a more perfect option presents itself.

What does a will look like?

Financial planners should read and become familiar with the major clauses and the general construction of a will, so they can answer client questions and explain the wills competently.

The body of the will sets out:

  1. who the trustee or executor is. The trustee or executor is the person responsible for the administration of the estate. The full name, address and relationship of the executor(s) and possibly an alternative executor should be set out in the will. It is quite common, even recommended, that the executor engage a solicitor to handle these responsibilities, except in the simplest of cases. However it is often not wise to nominate a solicitor or other professional person such as a trustee company to be the executor, as this person can charge their normal professional fees and commissions for all work done in this capacity. This therefore tends to be an expensive option, and one which is sadly often abused. For obvious reasons it is a good idea for the executor to be younger than the will maker if the will maker is older than, say, 50, and in any event the executor should be likely to outlive the will maker;
  2. how the assets will be dealt with after the will maker’s death, that is, who gets what, how and when. The names and amounts or percentages of the estate going to each beneficiary should be set out clearly, as should the conditions attached to any bequests. This will frequently include the creation of a testamentary trust, and this is discussed in more detail below; and
  3. any special directions such as, for clients with young children, who should be the guardian of the children, i.e. who should have day to day responsibility for the children after the death of the will maker (and the death of any other parent). The guardian has an important role to play and careful thought is needed as to who should take on this role. The will maker’s siblings and spouse’s siblings are often the people most likely to have a maternal/paternal-like love for the child and to understand the will maker’s world view. They are the people best placed to make decisions for the child. The statistical probability of the premature death of both parents is low, so labouring to decide who else should do the job is probably a big waste of time. It is not a good idea for the executor and the guardian to be the same person(s): this is because of the potential conflict of interest, and if there is an actual conflict of interest, there is not much the children can do about it until they are age 18, and even then it will be a long shot.

What assets are controlled by a will?

Assets owned as joint tenants are not controlled by a will and on the death of one joint tenant immediately pass to the surviving joint tenants. The most common example is the family home. This is typically owned by mum and dad as joint tenants and if dad dies his share automatically passes to mum irrespective of what his will says.

Assets owned as tenants in common are controlled by a will.

It is critical to establish what assets are co-owned and how they are co-owned. You can get surprising results, and often apparently wealthy clients emerge as having virtually no estates on death.

Obviously this means effective estate planning goes beyond mere wills and requires the planner to consider all controlled assets.

Only assets owned personally are subject to a will. This means assets in a family trust are not covered by the will. This is so even if the will maker controls the family trust. Assets inside family trusts are discussed below.

Assets inside a super fund are not subject to a will. Assets inside super funds are also discussed below.

Who should be the executor?

The Equity Trustees outline the key issues to consider when choosing an executor. Their answer to this question is provided below. This information was extracted from their website on 27 November 2013. 

The choice of executor is critical to ensure that obligations, legalities and family issues are handled professionally after your death.

Survival – An executor should be someone who is likely to survive you and be willing and able to handle your affairs after your death. Appointing a person of similar age without an appropriate substitute is often not practical. Appointing Equity Trustees guarantees that you will have an executor to survive you.

Experience – Your executor needs to have experience (or access to advisers with experience) in all of the matters listed in Duties of an executor. Equity Trustees has many years of experience in estate planning and management and can help to ensure the smooth and speedy administration of your estate.

Security – It is important to ensure that your executor is able to manage all aspects of your affairs with safety. If a private executor fails to maintain the value of your estate, or fails to transfer it to your beneficiaries, it may be difficult to recoup any loss from his or her personal assets.

When you engage a Trustee Company, such as Equity Trustees, you have far greater assurance that your assets will be properly handled. Trustee Companies have professional indemnity insurance and the resources to meet a claim if assets are lost.

Impartiality – Your executor has a duty to carry out the terms of the will and should not be subjected to pressures from various individuals or groups after your death. Your executor should not be swayed by prejudices and should always ensure that everyone is treated fairly in accordance with the terms of your will.

Discretion – Confidentiality, tact and discretion are three very important attributes of an executor. Often those you leave behind are in an emotionally vulnerable state and it helps if your executor has the necessary experience to deal with any issues in a supportive fashion.

Where there is discretion to distribute income or assets provided in the will, your executor should also be able to balance the interests of the various beneficiaries.

Peace of mind – Knowing that your estate will be administered professionally, with a desire to maintain family unity and harmony.

What happens if the client dies without a will?

If a client dies without a valid will they are said to have died intestate. Each state has statute law controlling the division of assets, and essentially the assets are divided between family members and dependants under a statutory formula.

The government does not get anything unless there are no living next of kin, however remote. This is a very low probability event. It basically never happens: everyone is related to someone, however remote the relationship may be. The urban myth that the government gets everything is just that, a myth, without any substance at all.

In NSW, for example, the relevant Act is the Wills, Probate and Administration Act and its rules for the distribution of assets can be summarised as follows:

  • to your surviving spouse (including a de facto spouse) and children. If there are no children, the spouses inherits 100%;
  • if there are surviving children and a spouse, the first $150,000 goes to the spouse, with the remainder shared equally by the children and the spouse;
  • if there are children but no surviving spouse, the estate is shared equally between the children. If a child has already died but left children of their own (i.e. grandchildren) the grandchildren get their parent’s share;
  • if there are no living spouse, child or grandchildren, any living next of kin. If necessary, a search will be made to identify any living next of kin, including parents, siblings, half-siblings, grandparents, uncles and aunts and half-blood aunts and uncles; and
  • finally, if there are no living next of kin, the estate goes to the Government.

There are many obvious problems connected to dying without a will. First, the probate process is slower, more complex and more costly, which means the client’s family inherits less wealth. Second, and more importantly, it’s quite unlikely that the statutory formula will be what the client actually desires. For example, most married clients would want all of their estate to pass to their spouse, not just the first $150,000, and a share of the remainder. And finally there can be real problems where a married couple without children die together: the estate of each of them in effect passes to the next of kin of the spouse who died second (typically assumed to be the younger spouse when two people die in the same event). This is hardly fair or sensible. But it is what happens under the formula.

So, help your clients to make a will!

The Dover Group