You Can’t Gift What You Don’t Own: Wills and Estate Planning for the business-minded
By Kristoff Lajoie
4 February 2020
A well-drafted Will is the best gift you can leave for your friends and family.
Its contents may not necessarily be beneficial to its maker (the testator), but it is of great importance to those who are named in it. Conversely, a poorly drafted Will – or having no Will at all – can cause uncertainty and even breakdowns of once-close families.
In particular, patriarchs and matriarchs who leave uncomplicated Wills to deal with complicated estates are susceptible to challenges by bitter spouses, children or extra-marital companions who feel short-changed. Estates involving companies, businesses, trusts and properties warrant sufficiently complex Wills, lest all assets be liquidated and divested to bitter siblings.
The first step in contemplating the distribution of an estate is identifying who actually owns the property. Property can only be gifted under a Will that is legally determined to belong to the estate – that is, property that belonged to the testator. This will exclude:
- Real estate that is jointly owned by joint proprietors, in which case the surviving proprietor(s) automatically will receive the deceased’s share;
- Real estate, businesses, vehicles, shares or other assets owned by a company, in which case such property will remain the property of the company; and
- Real estate, businesses etc that are owned by a trust, in which case such property remains held by the trust, even if the deceased is the trustee personally (but this may depend on the wording of the trust deed).
If real estate gifted under a Will is encumbered by a mortgage or caveat, then the beneficiary receiving the real estate receives the property with the encumbrance. This means that the beneficiary must be able to either pay-off or refinance the debt if they wish to keep the property. Otherwise the beneficiary may have to sell the property in which case they will be entitled to keep the proceeds – after any mortgage debt, as well as any CGT or other liability has been paid out. If the testator intends on gifting specific properties to specific beneficiaries, they should consider this.
As above, property under the name of a company or a trust does not form part of the testator’s estate, even if they are the sole director of the company or the personal trustee of the trust. However, for a trust, the trust deed may contain provisions concerning its divestment upon death of the trustee. If property is under the ownership of a company, the Will should specify who is to receive the testator’s shares in the company (if they have any), and who is to be appointed as director in the testator’s place (if the company constitution allows). Alternately, the testator, during their lifetime, may consider transferring property from a trust or company to themselves personally, in which case the testator may deal with it how they wish. However, such a transfer may attract stamp duty and other costs and, for a company, may be subject to board and shareholder approval.
The best way to organise an estate – including assets being held by companies or trusts controlled by the testator – will largely depend on the owners’ intentions for those assets. Are they for short-term income generation, or for long-term capital growth? Are they to fund retirement, or to be left to children?
If you think that any of the above may be relevant to you, it is important that you consult with a lawyer to ensure that you not only have a well-drafted Will, but also that you plan your estate properly to ensure a secure and properly planned future.