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th-4Ten years ago Mattt and Tom set up in business together selling high level technical advice to the   physics departments of universities. The business operates via a company in which Matt and Tom each hold equal numbers of shares and is very successful. Both Matt and Tom make significant amounts of money from the business. Matt uses most of his share to fund his hobby, research into the abstruse aspects of nuclear physics while Tom has more conventional investments.

Tom bought a house almost as soon as the business was established and his income was secure enough to fund the mortgage which he rapidly repaid. About six years ago Penny, a long-time girlfriend of Toms moved in with him and they now have two children, Hamish and Pipa. Tom has almost $200,000 in superannuation which he believes should go to Penny if anything happens to him.

Tom has been advised by both his financial advisor and his accountant that he should have a will and that he and Matt should document an agreement to make provision for what will happen to the business if one them wants to leave, becomes unable to work or dies. Tom recognises that this is a good idea but he has not got around to it. Tom is young, healthy, successful and happy, he knows Penny is legally recognised as his de facto spouse and thinks everything he owns will go to her anyway so it’s not that important to have a will. Tom is run over by a bus. Tom dies.

Penny does not own the house. Penny has no interest in the business. Penny had a joint bank account with Tom but his share of income from the company stops going into that account after his death.

Tom is no longer contributing to the business so no more wages are paid into the bank account. The private company has never paid dividends; it reinvests in research.

Penny goes to see a lawyer and finds out the following:

  • Tom never made a binding death benefit nomination over his superannuation account so Penny must apply to the fund to release the superannuation money to her.
  • Tom’s estate cannot be distributed to anyone until letters of administration are obtained.
  • Penny can apply for letters of administration but she will not be entitled to all of Tom’s estate.
  • The only significant assets Tom held were their home and shares in the business.
  • The house is now worth a little over $1 million and there is no mortgage.
  • The business is hard to value but Penny remembers that Tom and Matt, recently obtained a bank valuation to take out a loan which put its worth at about $1million – Matt disputes this. In his view the business is worthless without him.
  • Under the legislation Penny is entitled to $100,000 and half the remainder of Tom’s estate.
  • Hamish and Pipa are entitled to the other half of  Tom ’s estate divided equallybetween them, but as they are minor children the public trustee will hold their respective shares of the estate and invest it prudentially to build up wealth for the children (less the trustee’s not insignificant fees) when each of them turns 18.

The lawyer advises Penny that Tom’s estate is worth at least $1.5 million dollars of which she is entitled to $100,000 + (1/2 x $1.4 million) = $800,000.

However, as there is no will she is not executor of Tom’s estate and does not control it. The estate passes to the public trustee which will control the estate until Penny gets letters of administration which will allow her to wind up the estate.

As there are minors with a claim on the estate, Hamish and Pippa, Penny must find a ‘surety’ before letters of administration will be granted. That means she must find someone with sufficient assets to guarantee the full value of the estate before the Court will give her authority to deal with the money.

She may also have to go to court to persuade Matt to buy Tom’s shares in the business.

The trustee of the superannuation fund has agreed to pass the superannuation balance to Penny so she does have something to live on and to pay her not insignificant legal fees. However, the Public Trustee wants to sell the house to realise the children’s $700,000 share of the estate for which it is prudentially responsible.

It looks like Penny will have to sell the house and move somewhere smaller with the children. She will also have to take them out of the fee paying school they currently attend as she has no means of finding the fees and she will have to try to find a job as she has no source of income.

Penny’s friend Amy explained to Penny, unfortunately too late, what should have been done.

Tom should have had a will. The executor of a will can obtain probate and deal with assets far more quickly and cheaply than an administrator in intestacy and there would be no need to find a surety. If the family home had been left to Penny, or held in joint names she and the children would be able to continue to live there rather than having to sell it in a depressed market and move at the behest of the Public Trustee.

A binding death benefit nomination over Tom’s superannuation would ensure that Penny got the cash rather than leaving her at the mercy of an unknown trustee’s discretion.

Tom should have agreed with Matt on what was to happen to the business if either of them died. An option agreement in place could have given Tom’s executors a right to sell the shares to Matt for an agreed amount. This could be funded by life insurance to ensure Matt had the cash.

Ideally, all Tom’s estate would have been left to a testamentary trust Penny controlled. Pippa and Hamish could have received distributions of income from that trust at adult tax rates. This means Hamish and Pippa between them could each year receive up to $36,400 tax free from the investment of the money received for Tom’s share of the business.

FinSec and their legal associate Donaldson Walsh Lawyers could have assisted Tom with all these matters and so ensured that his unexpected death did not create major financial problems for his young family.

Source: Julie Van der Velde, Senior Associate – Donaldson Walsh Lawyers

Published On: July 5th, 2013Categories: Estate Planning, FinSec Post