FNSPRT502 Advise clients in estate planning

Ian and X – Estate Planning Case Study

Meg and Ian Smith married in 1975 when Ian was aged 30. Meg was born into a wealthy family
and as such never worried about money. Ian, on the other hand, was born into a hard-working
blue-collar family and left school at an early age to begin employment with his father as a
carpenter.
Ian’s parents had never owned a property and Ian made it his goal in life to purchase a house
for he and his family to live in.
Meg, in marrying Ian, went against her parents’ wishes who thought she should marry
someone who would be able to financially care for her, as such Meg lost contact with her
parents.
Later in 1975 Meg and Ian purchased a large 3-bedroom home on an ample block size of
800m2 at Ingle Farm in the northern suburbs of Adelaide for $45,000 using predominantly
funds Ian had saved over his years of working, and a loan from the Commonwealth Bank of
Australia. The home was purchased as joint tenants.
To cap off a big year for the Smiths, late in 1975 their only child was born Xanthia, who became
known as X.
After such a big year for the Smiths, trouble was brewing.
Meg’ parents convinced Meg that Ian could never financially cater for both her and X and that
she should leave Ian and return to their mansion in leafy Burnside. Meg agreed and in 1980
she left the family home and took a young X with her.
A year later the divorce was finalised and the property settlement included a transfer of the
Ingle Farm house to Ian, after all he had worked very hard for many years to purchase the
house, there was no way he was going to lose it in the divorce.
The Sun would smile upon Ian again soon after when he bumped into his High School
sweetheart Dana who soon after moved into the Ingle Farm property.
In 1982 Ian and Dana married and, as had been Ian’s trait, by the end of that year had twins
with Dana, they were named Yvonne, who became known as Y and Zoe, who affectionately
became known as Z.
Ian had learnt a thing or two as a result of his divorce and despite finding the love of his life,
so in 1985 went to see a lawyer to draft a Will for he and Dana. Ian was hesitant to transfer
the home to anyone and prepared a Will which gave everything to Dana upon his death or, if
she had failed to survive him, to his children Y and Z.
The lawyer in 1985 did not ask Ian if he had any other children than Y and Z, after all he had
not seen X for 5 years and thought that drafting a Will giving his estate to Y and Z if his partner
had died would be enough.

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Life was great. Y and Z grew up to be intelligent and strong young women and in 2000, aged
18, they both enrolled in Law at University. Just when things were going great for Ian tragedy
struck again and Dana was killed that year in a car accident.
Ian saw a lawyer later that year and despite being told there was no estate to administer, the
lawyer asked Ian about his current Will and after further questioning informed the lawyer
about X.
Ian was told that under his current Will X might mount an Inheritance Claim against his estate
(and the house) if he died. This upset Ian as he had saved, improved, and turned his house
into his life’s achievement, a legacy he could pass to Y and Z with pride. Ian asked what he
could do to gift the house to Y and Z, defeat an inheritance claim by X, and be confident he
would have a place to live for the rest of his life.
In December 2000 Ian, now aged 55, executed a transfer of the house and created a legal life
interest** to himself, and the remainder interest to both Y and Z for no value. The Valuer
General’s value of the house on transfer was $245,000.

** One particular use of testamentary trusts is to create a life interest or right of occupancy.
It can be used to create a fixed or flexible life interest.

Life Interest
Life interest is a form of testamentary trust where a person (usually a surviving partner) is
granted a lifetime of fixed income and benefits, and use and enjoyment of all or part of the
assets (e.g.: principal place of residence) of the deceased estate. This is useful if you wish to
ensure that the capital assets are preserved after the lifetime beneficiary dies.
The executor or trustee is usually given the express power to pay any taxable capital gain that
might be assessed against the lifetime beneficiary with funds from the estate.
By creating a life interest, you are able to allow the life tenant to enjoy the asset (it can be the
whole of an estate or just a home) for their lifetime and upon death the asset or fund is given
over to someone else (for example your respective children).
The person who holds the life interest is called the life tenant and the life tenant has the right
to possession and enjoyment of the asset and its income until their death or until they
abandon the interest.
A whole range of conditions can be applied to a life interest but the interest always ends on
death and sometimes if the life tenant finds another partner. You can even provide that it
ends at the expiry of a specific period of time – for example, after 10 years.
Once the life interest ends the gift/asset reverts to the ultimate beneficiaries – usually
children.
If a life tenancy is created in respect of land the life tenant has the right to occupy the
land/home during the life tenancy and depending upon what conditions are imposed in the

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Will, can lease the property, improve the property and sell and replace with another property
(for example if a down size was required due to age or infirmity).
Where the owners of the property are joint tenants it is necessary to sever the joint tenancy
to a tenancy in common so that each owner can gift the other a life interest in their ‘share’ of
the property ultimately preserving the actual gift of property for children or other
beneficiaries.
This can be important in a blended family that has mixed assets or where the asset mix of the
families is not equal.
A life interest in property granted to a spouse will enable him or her to have the use of the
property during his or her life time. The person granting the interest can then have certainty
that his or her child (or children) will benefit upon the spouse’s death.
A life interest is one way to give the benefit of an asset while preserving it for the ultimate
beneficiaries. It is a very useful tool where blended families are involved.
The life tenant is generally responsible for maintaining the asset during their life tenancy
though it is not uncommon for an Estate to pay the costs of insurance, rates, taxes and
maintenance.

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