Andrew made me promise, Sheila tells you, that we would always treat the children equally. Yes, you reply, poor old Andrew, how long since he died? Ten long years, Sheila replies, and oh my goodness! How things have changed since then!
Do you know, she goes on, that Michael married that woman we never got on with and has moved to the UK just to get away from us? And James, our youngest, has worked so hard in the business Andrew bought into in the late 1980s and is not even a shareholder! Then there’s Jane and her marriage is very shaky.

Goodness, you say, what a mix. And of course you have a big share portfolio don’t you? And your house is worth a fair bit I guess. And then there’s that investment property you have that Michael once said he’d like to have if he ever moved back to Sydney.

Yes, says Sheila, it’s all so difficult, I don’t know what to do. Don’t worry you say. We can fix it.

Firstly, so far as Jane is concerned, you suggest a capital protected testamentary trust controlled by Jane to help if her marriage does in fact fail. Sheila is happy with this and doesn’t think Jane would have a problem with it.

Secondly, you suggest Sheila in her will give Michael an option to buy the investment property. He could then choose between buying it for effectively two thirds of the value or letting it go equally between the three under the will.

Thirdly, in the family company there are two issued shares as initially Andrew and Sheila had one each and Andrew left his share to Sheila in his will. You suggest a condition in the will requiring the executors to issue a third share to Jane’s testamentary trust with the other two going to the other offspring, James and Michael.

Sheila gives you the go-ahead and tells you how grateful she is for your help.

A few months later you hear that Sheila has passed on, and soon afterwards the three kids make an appointment to go through the will. They also appreciate the equal and considered treatment.

The stings

The problems start when you consult Sophie, the family accountant for many years. She says, with feeling, I so wish you had spoken to me about this before the will was signed. Worriedly you ask why.

Firstly, Sophie says, that share portfolio. Michael is obviously a UK resident for tax purposes. This means the gift to him of one third of the share portfolio will trigger CGT event K3 which happens when certain assets – including listed shares – pass to a foreign resident (section 104-215 ITAA 1997).

What you should have done is give him different assets of the same value – for example cash or even that investment property which as real estate is not subject to CGT event K3 (section 855-15 ITAA 1997).

Secondly, Sophie says grimly, that share you required to be issued to Jane’s testamentary trust. The cost base of the share will be nil (section 112-20(3)) so that if she sells it within a year 100% of the value will be added to her assessable income.

After 12 months she gets to the general discount of 50% – but still 50% of the full price.

What you should have done is organised for the two shares to be split into six and given two to each child. That way each of them would have the advantage of whatever the cost base of the shares when Sheila died.

And thirdly, Sophie says with increasing heat, if Michael exercises that option to buy Sheila’s investment property, there will be a heap of CGT to pay because when the house is transferred it won’t be a CGT free transfer under a will, it will be just the same as if it was sold at market value to anyone else. (Section 128-20 (2) ITAA 1997 withdrawn ruling IT 2664 and Reference 1012614140562 in the ATO’s Register of Private Binding Rulings.)

What you should have done is find out from Michael before Sheila made her will what he wanted to do. If the house was simply given to him in the will it would have passed to him CGT free.

In despair you say: my goodness – I have stuffed up – is there no hope? Sophie says well, you did do one good thing, that testamentary trust for Jane. Not only does it give protection in the event of divorce but it is very tax effective. That’ll help a bit with your other stuff ups, at least for Jane.

As you sadly walk away from Sophie’s office you reflect on the difficulties you face and the importance of involving all relevant professionals when making any wills other than the most simple.

This article is general information only and should not be relied on without obtaining further specific information.

By Jim Main