24/07/2013

Not considering debts owed on your property, not providing for dependants and not considering a trust for estate planning are some mistakes made in Wills by the rich and famous.

Entertainer Sammy Davis Junior reportedly left his estate to his wife and was generous in giving gifts to his friends. But when he died in 1990, he also left behind debts and a massive tax bill.  

The legacy of Sammy’s estate serves as an example that tax is due and payable prior to distribution of an estate, and also that a beneficiary inheriting property could also be unintentionally liable for debts owing on that property.

For example, leaving one child the family home and another the holiday home may on the face of it be an equal distribution. Unfortunately, the holiday home would likely be liable for capital gains tax, so the second child would also ‘inherit’ the tax bill, thus making the distribution unequal.

This also applies to mortgages on property. Unless the Will specifies that debts are to be paid out before the distribution of your assets, beneficiaries who inherit a mortgaged property also inherit the debt.

Wealthy US businesswoman Leona Helmsley left $12 million in trust for the care of her dog, Trouble, but nothing for two of her grandchildren. A subsequent claim on the estate resulted in Trouble’s trust fund being reduced to $2 million and a settlement of the rest of the trust to her two grandchildren.

Leaving someone out of a Will or leaving them only a small amount does not necessarily preclude that person from making a claim on an estate.

The division of Helmsley’s estate is indicative of what an Australian Court could also do if a dependant was not adequately provided for in an estate. Amongst other matters, the Court takes into account the size of the estate, the degree of dependence of the applicant and the moral obligations of the deceased to the applicant when deciding a claim.

It is therefore important to document and communicate the reasons for decisions in allocating your property in the Will to at least provide the Court with some guidance of your intentions.

Marilyn Monroe died in 1962 at the young age of 36, leaving amongst other things, her personal effects and clothing such as the gown she wore to President Kennedy’s birthday, to her acting coach, Lee Strasberg, who lived another twenty years after Marilyn and left his estate to his third wife.

While the eventual value in the branding and licencing of her personal effects was unlikely to be known to Marilyn at the time of her death, in hindsight she may have been better served to place her assets in a testamentary trust. That way she could have provided for Strasberg during his life as a beneficiary of the trust, and also have some say as to who would be the trustee and subsequent beneficiaries of her estate.

The above examples highlight that estate planning is not just for the old or the wealthy. Overlooking things such as the impacts of debts on your property, the value of your ‘stuff’ in the belief that loved ones will be able to agree on how to divide your assets and intentionally leaving people out of a Will are common mistakes of estate planning.

For more information on this article, please call Sandra Mencinskyj at Townsends Business & Corporate Lawyers on (02) 8296 6222.