Legal Tip 74: Loans Death and Inheritance

Discussion in 'Wills & Estate Planning' started by Terry_w, 31st Aug, 2015.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Most people have loans secured by property, many of these loans have been used for something else other than the property they are secured by. Example is borrowing against property A to buy property B.

    They will often make specific gifts of property in their wills, but leave no instructions in regards to the loans attached to the property. To combat this state legislation basically says any loan against a property must be paid out of that property, unless a contrary intention appears in the will. See s145 Conveyancing Act 1919 (NSW) for examplehttp://www.austlii.edu.au/au/legis/nsw/consol_act/ca1919141/s145.html

    In many cases this won’t be a problem, but where the deceased planned to leave a specific gift to different people it can create a huge problem.

    Example
    Imagine Dad has a son and a daughter. Dad has 1 property worth $1,000,000 with a $500,000 loan used to buy $500,000 CBA shares in the year 2000. The CBA shares are now worth $1.5million.
    · Property worth $1million with $500,000 LOC used for share purchases
    · Shares worth $1,500,000.

    The son wants the property and the daughter wants the shares. So Dad makes a simple will leaving each what they want. But he makes a fatal mistake (pun intended) and doesn’t comment on the loan in the will. He dies the next day after signing his will.

    The son will inherit the property with the loan having to be paid out of it - $500,000 net benefit.

    The daughter will inherit $1,500,000 worth of shares.

    The son is $1mil worse off than the daughter.

    (here leaving aside the tax issues there are also going to make further differences).
     
  2. USC

    USC Active Member

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    So what is the solution Terry if he wants to leave them both an equal share but maintain it as capital?

    Ideally she sells $500K shares to pay out the property loan so they both end up with $1M worth of investments. But at any point in time these figures can be different...so is it up to the will Executor to figure this out?
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    One solution would be to build an equalisation clause into the will so that amounts can be adjusted by the executor, another way is to use super proceeds to even things out, or even insurance, but it will be difficult to make sure everything is 50/50 unless you leave your assets equally to all.
     
  4. kingster

    kingster Member

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    Hi Terry,

    What about a simple scenario. Dad has a only son. Dad has an investment property with a home loan. If anything happens to Dad, Dad doesn't want the IP to be sold. Can the son inherit the home loan and the IP? What is the process? Can the son apply for a home loan at the time and pay out the old loan?

    Kindly advise. Thanks.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes the son could get a loan to pay out dad's lender or just pay out the loan himself.
     
  6. Bonz

    Bonz Well-Known Member

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    I understand from your example that it is the intent of the father to leave both kids the same amount of the estate. If that is the case the simplest solution is to make no specific gift/s and leave the estate to the kids as tenants in common in equal shares. If the son wants the house and daughter the shares they can come to an agreement between them about the division of the estate and crystallise the same in a deed of family arrangement.
     
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  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes that's possible I was just pointing out what could go wrong under certain set ups.
     
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  8. ChrisP73

    ChrisP73 Well-Known Member

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    @Terry_w

    If the son borrows to pay out the dad's lender (either by gettting himself a new loan using the IP as security for a mortgage, or by borrowing from an existing loan against other security) then the son's loan is tax deductable? Or, does it depend on the characterisation of the original loan? i.e. is it like a sale (in which case the deductability or otherwise of the dad's original loan is irrelevant) or a refinance?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If the will says something like I leave my property to Chris. And the property is worth $100,000 but there is a $60,000 loan secured on it, that means Chris is only going to get $60,000 (depeding on the wording) because the loan is secured by the property. that means Chris would borrow $60,000 to pay the bank out so he gets more property. If the property is income producing the loan should be deductible - the interest of it.

    Note that this could be the case even where the loan was used by the deceased to buy shares - or even a main residence.

    Tax Tip 65: Deductibility of Interest for paying out a loan of a deceased estate Tax Tip 65: Deductibility of Interest for paying out a loan of a deceased estate

    See this one too
    Legal Tip 74: Loans Death and Inheritance Legal Tip 74: Loans Death and Inheritance
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  11. craigc

    craigc Well-Known Member

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    Hi Terry, maybe a maths check again $100k - $60k = ???
     
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  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    $40k!
     
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  13. Kirsti327

    Kirsti327 Well-Known Member

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    Watch out for Stamp Duty if you use a deed of family arrangement! in NSW at least, if the property title is not transferred in accordance with the will or by court order then stamp duty is payable at normal rates on the portion (eg half share) that is transferred differently to the will.
     
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