To be honest I started writing this blog about a few disasters that I have seen recently where accountants and financial planners have referred clients to estate planning lawyers only to be let down in terms of delivery times, exorbitant costs and end product.  Two of these cases were in the final throes of two-year-old litigation where a child challenged a deceased parent’s will and so far had racked up more than $200,000 in legal fees each. And one of the wills they were challenging cost the client more than $12,000 and had all the trimmings and guarantees.  I swear it seems like a closed loop – lawyers do the estate plans and claim they are bullet proof only to have them challenged and litigated tying up a family’s wealth for years and eroding the final pool of money – plus creating animosity and breaking up families.

It makes me really angry particularly when I have a deep look at the facts and circumstances, and it would have been so easy to build a moat around the deceased’s assets and finances plus ensure the money and assets went where they were supposed to.  Then I heard a podcast that the current business and economic climate is about “New ways of doing Old things” and that turned my attention to lawyers and estate planning and how things have not changed for centuries – seriously centuries!

Old Things: A Will made in 1778

So let’s look at a case study and see what can really be done with the tools and resources we have at our hands as we approach 2020 – not 1779.

A Client Case Study

John Smith is a 60-year-old doctor with his own practice and also a locum at two local hospitals.  John wants to retire in the next 3 years to go cruising the world with his wife Sally – a 58-year-old charity worker and home maker who hates finance, money and all that stuff.  John and Sally have three investment properties worth a total $2.2M in a discretionary trust where he is the sole appointor and sole director of the corporate trustee, a SMSF with $1.4M in his lump sum account and $1M in Sally’s account with John and Sally as trustees and he lives in a $2M mansion owned jointly with no debt.  In fact, he has only $300,000 of debt on all his properties and is paying a bucket load of tax.

John and Sally have three children – Max aged 35 who is a successful stock broker and according to John “a chip off the block”, Sarah who is a 32-year-old doctor working in country NSW and Jody who is currently in rehab for substance abuse with her boyfriend of five years.

John did a Will with his family solicitor in 2010 giving all his estate to Sally and a BDBN directing the Trustee of the Fund to transfer all of his superannuation to his estate.  If Sally was not alive then his three children were to divide the estate equally.  The Executor of the estate was his old golfing buddy Fred who was recently diagnosed with early onset dementia.  Sally holds John’s enduring power of attorney while he holds Sally’s EPOA.

What would you do and where would you start?

The Issues

The size of this estate, problems with the Executor, a lack of financial and business nous of John’s spouse, potential challenges from Jody and perhaps the other children, poor understanding of SMSFs v Wills and well I could go on, but this is another one of those potential two-year, $200,000 litigation cases.  The only winners???

My Solution

This is what I would do:

  1. Establish a new EPOA for John to replace the current EPOA with his attorney being eldest son Max and, in the event, that Max is not alive or incapacitated – Sally and Sarah with Sally having the binding vote in the event of a tied vote. The EPOA would be for health, finances and note specifically that it is for superannuation replacement trustee purposes.  At the same time, Sally’s EPOA would have John as the attorney with Max as the successor attorney in the event that John dies or is incapacitated.  Both EPOA’s would commence once the EPOA is executed not incapacity as lawyers normally draft.
  2. Add Max as the successor appointor to the Discretionary Trust if something happens to John. If Max is not alive or is incapacitated, then Sally and Sarah become the second successor appointors.  Put Max in as director of the corporate trustee of the discretionary trust and retire Sally.  Note:  The discretionary trust does not form part of John’s estate and with our newly built succession planning for the trust we have created a moat around this structure.  Safety – Certainty – Security
  3. Set up a Leading Member SMSF corporate trustee with only John as director (he is holding Sally’s EPOA, so she does not need to be a director even though a member) plus bring in Max as a member and director. Change the SMSF trustee and upgrade the SMSF to a Leading Member SMSF with John as the Leading Member, followed by Max on John’s death, incapacity or retirement followed then Sally and Sarah.  Leading members have the power to appoint and remove members, hire and fire trustees and hold veto power on trustee decisions.
  4. Retire John immediately by resigning from one of his locum positions. This is deemed retirement under SISA even though he remains working.  John to set up a reversionary pension that goes to Sally on this death and then on her death or if she is not alive when John dies, is payable to the three children equally but as a lump sum commutation into a SMSF Death Benefits Trust where John is the appointor followed by Sarah.  John and Sarah would be directors of the corporate trustee of the Trust which is created by the Trustee of the SMSF not the Executor of the estate and is thus not open to challenge.  A similar course of action would be put in place for Sally.  Safety – Certainty – Security
  5. John and Sally would keep on contributing into super with John and Sally taking pension payments. The exact amount to be salary sacrificed from the discretionary trust for John and Sally to be most tax efficient would need to be calculated.  Any pension amount over the minimum pension would be treated as a commutation payment and have a corresponding debit to John’s TBAR.
  6. A SMSF Will to be created for John for his building accumulation account with super benefits to go to his children equally and in the case of Jody into a SMSF Death Benefits Trust with John as appointor and trustee to provide some Family Law protection and not limited to solely Jody as beneficiary but all of John’s lineage. Safety – Certainty – Security
  7. Create a new Will and TT but this is where things get funny. I have done such a good job securing the discretionary trust and the SMSF from legal challenge and with the family home in joint names what assets will be left in John’s legal estate now that SMSFs are being dealt with by the SMSF trustee not the Executor.  No matter, there may be proceeds from the family home if Sally passes away.  So have John as the Executor of the estate, with Sally and Sarah as successor executors.  Any estate assets, which we are limiting as this is where any challenge will lie, are to go to Sally in a Testamentary Trust with Max the appointor and trustee.  Unlike the SMSF and discretionary trust moats I can’t guarantee that any estate assets will not be challenged but I have done the right thing by keeping as much as I can from the estate which fits in with our asset protection strategies for a doctor (which most estate planning lawyers do not understand).

The Four Takeaways

  1. You can do this: Whether you are an accountant or financial planner, this is the time to take control of your client’s Moat. They are your client and you know their structures, assets and family.
  2. Automate the Process: For those of you that came to my SMSF Strategies and Estate Planning Day in October would have seen me build the moat around a different set of client circumstances.  The key is the above security strategy works for a whole range of clients and can built quickly, efficiently and compliantly with the LightYear Docs strategy automation.  To see me build all of the above in less than 30 minutes from scratch come to our LightYear Docs training session at 10am AEDST on Thursday 21 November: The Estate Planning Moat Automation
  3. Spend the time Learning: If you would like to get a copy of the video of my twenty strategy day, which is in five parts and travels through all of these strategies and much more you can access a copy for only $99 here:
  4. Work out your pricing: I just received a call from one of our licensees asking what they should charge for a SMSF Will and I said $1,200 to $2,000 depending on the size and complexity of the member’s SMSF interests and $2,500 for John and Sally above – SMSF Will only. On the Thursday training I will be going through my pricing for each of the steps above and for the whole Moat!