Prenups v Wills – winner takes all? **

Previous posts have explained the various aspects of binding financial agreements (often referred to as 'prenups').

On a number of occasions recently, we have had cause to review binding financial agreements in the context of wider estate plans, and in particular, have had to consider whether, in the event of a death of a spouse, the binding financial agreement takes priority or whether the will applies.

As is the case in many estate planning areas, the rule of thumb to remember is that the issue must always be reviewed on a case by case basis.

This said, generally, a prenup should at least expressly set out whether it is intended to apply on the death of either spouse. Ideally, the document should be crafted in any event to complement the provisions of the estate plan. In some situations the provisions can also regulate what should occur if one of the spouses seeks to challenge the provisions of their former spouse’s estate plan.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For trainspotters, ‘Winner takes it all’ is song by Abba from 1980.

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Half your age, plus seven**

Many family lawyers will relay that there appears to be a disproportionate level of relationship difficulties where there is a significant gap in the ages of the spouses - hence the above quoted rule of thumb to ensure the age gap is no more than half you age, plus seven years.

In Alderton v C of T [2015] AATA 807) the rule of thumb was breached by around 10 years (the de facto husband, Trapperton, was 42 to and the de facto wife, Alderton, was 18 when the relationship commenced).

Alderton was financially dependent on Trapperton.

For some years, a trust that Trapperton was trustee of made distributions to Alderton. Alderton had no knowledge of the existence of the trust nor that withdrawals from her debit card and online banking were in fact trust distributions.

After the relationship ended, a trust return was filed that based on the distributions caused an assessment for Alderton.

Alderton then, some years later, attempted to disclaim the income she had, unwittingly, received from the trust.

The Tax Office, and in turn the court, ignored the attempted disclaimer and Alderton remained liable to pay the tax assessed.

The fact that Alderton had no knowledge of the conduct or operations of trust was irrelevant as to her liability to pay tax on the distributions she had effectively been made presently entitled to.

As set out in earlier posts (please contact me if you would like access to these and can not easily locate them) in order for a disclaimer to be made retrospectively, it must be done so within a reasonable period of time from the beneficiary first becoming aware of the relevant interest that they wish to disclaim.

The disclaimer must also be an absolute rejection of the gift. Here, although the disclaimer was likely made 'in time', Alderton had in fact used the funds distributed to her and was therefore unable to provide an effective disclaimer.

This conclusion stood despite the court questioning the 'discreditable' conduct of the trustee in taking advantage of Alderton's naivety.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Taylor Swift song 'Seven'.

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When tomorrow comes** - A bankruptcy case study example

Following last week’s post, this week we explore one example of a factual scenario we have been asked to assist with that highlights the importance of advisers working collaboratively in this area to deliver value to clients is as follows:

1. An accountant had provided a written recommendation to a willmaker that testamentary trusts should be included in their will for asset protection purposes - this advice included a specific recommendation in relation to 1 beneficiary who had a history of financial misadventure in business activities.
2. The advice was provided to the willmaker's long-standing, although unspecialised, lawyer who dismissed the recommendation for testamentary trusts on the basis that it was an 'unnecessary complication that accountants and financial planners push as part of their product sales'.
3. At the time of the willmaker's death, the relevant son was indeed bankrupt.
4. In working to discharge their duties, the executors of the will asked us to assist in obtaining probate of the will and also confirm that they were obliged to pay the bankrupt beneficiary's entitlements to the trustee in bankruptcy. We were able to obtain probate and also confirm the duty that the executor was obligated to pay to the trustee in bankruptcy.
5. The executors also sought advice from specialist litigation lawyers as to whether the accountant or the lawyer could be potentially liable for failing to ensure that the willmaker included a testamentary trust in their will.
6. The specialist litigation advice suggested that the prospects of recovering any damages were in fact quite low for the bankrupt beneficiary.
7. The primary reason for this was that if a testamentary trust had been used, then the bankrupt beneficiary would have simply been 1 of many potential beneficiaries, and the only 'asset' that they would have received would have been the right to due administration of the testamentary trust. This right to due administration would arguably have no monetary value and therefore the damages awarded on suing the lawyer and accountant would have probably only been nominal.

The above conclusion was not ultimately tested through the court system. It would therefore seem an unnecessarily risky approach for advisers to dismiss the benefits of testamentary trusts for bankrupt beneficiaries on the basis that they may not be liable if their advice is later shown to be inappropriate.

Key points to note

The need to take active steps to protect assets and wealth, as well as concerns with the overall effectiveness of the steps taken, are not new concerns.

Arguably however, those concerns have never been taken more seriously by a greater number of people than they are currently, particularly in relation to superannuation death benefits.

The recent case law in this area is a timely reminder of the need to ensure comprehensive asset protection strategies are implemented as part of an integrated tax and estate planning exercise.

The above post is based on the article we had published originally in the Weekly Tax Bulletin.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Eurythmics song ‘When tomorrow comes'.

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Superannuation and skirting the shoals of bankruptcy **

The Federal Court's decision in Cunningham (Trustee) v Gapes (Bankrupt) [2017] FCA 787 (Federal Court, Collier J, 13 July 2017) (Cunningham) is vital guidance for all advisers in relation to the interplay between superannuation death benefits and the Bankruptcy Act 1966.

In particular, the case highlights the fact that a superannuation death benefit paid via a deceased estate to a bankrupt beneficiary is divisible amongst the creditors of the bankrupt.

At a minimum therefore, advisers should consider advising clients who have at risk potential beneficiaries to utilise a binding death benefit nomination (BDBN). The BDBN should mandate that any death benefit is paid directly from the superannuation fund to a beneficiary at risk of bankruptcy, ideally as a lump sum (given that a pension stream will be subject to the threshold income limits).

Testamentary trusts

One additional strategy that should be considered in the context of deceased estates generally, and specifically in relation to superannuation death benefits, is the use of comprehensive testamentary trusts.

As readers will be aware, 1 of the key reasons that testamentary trusts are often recommended is due to the asset protection offered by the structure generally, and in particular where a potential beneficiary is at risk of suffering an event of bankruptcy.

This approach can help protect beneficiaries, regardless of whether a BDBN is in place, or where a BDBN is implemented and mandates payment of the death benefits to the legal personal representative for distribution under the will.

Importantly, testamentary trusts also provide significant flexibility from a tax planning perspective, as compared to the benefits being paid directly to the bankrupt beneficiary. Previous posts have explored a number of the tax planning issues in relation to testamentary trusts (see for example our posts on 13 May 2014 and 27 October 2015).

Unfortunately, we have seen a number of examples recently where no testamentary trust has been incorporated under a will, with superannuation death benefits passing directly to the estate and then in turn to a bankrupt beneficiary. In other words, creating the exact same factual matrix as existed in Cunningham.

Key issues to remember

In summary, the key issues to be aware of in this type of situation are as follows:

1. Where a beneficiary is bankrupt at the time of the death of the willmaker, the bankruptcy legislation mandates that the bankrupt's entitlements are to pass to their trustee in bankruptcy.
2. If there are any assets remaining after the bankruptcy has been discharged, then the beneficiary is entitled to those assets.
3. The right to due and proper administration of the deceased estate is an asset that forms part of the bankrupt's estate, and therefore also vests in the trustee in bankruptcy.
4. If an executor of an estate seeks to avoid assets passing to a trustee in bankruptcy where a beneficiary is entitled personally under the will, the executor will themselves be personally liable.

Importantly, each of the above issues can be legitimately avoided by the appropriate structuring of a testamentary trust into a will, prior to death.

Where testamentary trusts are not included under a will, best practice dictates that the executor should obtain a formal declaration from each beneficiary, before making distributions to them under the will, whereby each beneficiary confirms that they are in fact solvent.

If a beneficiary refuses to provide the declaration, then further searches should be made by the executor to minimise the prospect that the executor might become personally liable to a trustee in bankruptcy.

As usual, if you would like copies of any of the cases mentioned in this post please contact me.

The above post is based on the article we had published originally in the Weekly Tax Bulletin.

** For trainspotters, ‘skirting the shoals of bankruptcy’ is a line from a song named ‘Accountancy Shanty’ by Monty Python from their 1983 movie ‘The Meaning of Life’.

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How soon is now ** (or ‘as soon as practicable’)?

Last week’s post considered the phrase ‘as soon as practicable’ in light of the 2017 superannuation changes.

Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) requires death benefits to be cashed ‘as soon as practicable’ following the death of a member.

Unfortunately, ‘as soon as practicable’ is not defined in the Regulations and has not been otherwise defined.

Generally in our experience the Tax Office has historically expected death benefits to be paid within 6 months of a person's death, or earlier if possible.

While perhaps not directly relevant, part of the reason for this approach is likely to be because under section 17A(4) of the Superannuation Industry (Supervision) Act 1993 (Cth), any replacement trustee (or replacement director of a corporate trustee) must resign within 6 months of the death benefits commencing to be paid. In other words, 6 months is legislated in a manner that is arguably analogous to the concept of ‘as soon as practicable’.

This said, if there are objectively reasonable circumstances preventing payment for more than 6 months, this is unlikely to cause a breach of the rules, so long as the payment occurs as soon as practicable once the relevant circumstances have been resolved.

Some examples of where a payment after 6 months may still meet the ‘as soon as practicable’ test include -

1. It may be that probate of a member's estate is seen as required before paying a death benefit, and generally probate will take longer than 6 months;
2. If there is a risk that an estate may be challenged or the potential recipients of a death benefit challenging the trustee's decision, confirming that the risk has passed will generally take longer than 6 months;
3. Similarly, if there is an actual challenge to a deceased estate this may warrant delaying paying of a death benefit;
4. If there is uncertainty about the validity of any purported binding death benefit nomination this may take longer than 6 months to resolve;
5. The nature of the assets in a fund may make distributions within 6 months impossible, for example illiquid assets such as real estate or investments in platforms that have large penalties for early withdrawal;
6. It may also be that the values of assets that are will form part of the cashing take an extended period to value;
7. Surrounding circumstances, such as poor health of a surviving fund member may also justify a payment commencing later than 6 months.

Interestingly, the 2017 superannuation reform legislation permits a reversionary beneficiary 12 months to decide if they wish to cash their benefit before it is automatically credited to their transfer balance. This allowance may (again by analogy) support the argument that a death benefits payment within 12 months will meet the ‘as soon as practicable’ test, even without other explanatory reasons.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** for the trainspotters – check out iconic 1980s new wave band The Smiths perform ‘How soon is now?’.

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To cut a long story short** In conclusion - 1 related issue

Subject to the terms of the relevant trust deed, a change to the appointor or principal provisions should have no adverse revenue consequences. Any change should, even if not expressly required by the deed, be done with the consent of the incumbent appointor. This is because of the significant ultimate powers retained by the appointor.

This conclusion about the extent of an appointor's powers however does not mean that where an appointor or principal is declared bankrupt, their power of appointment is considered 'property' which vests in and can be exercised by the trustee in bankruptcy.

Historically, there has been some confusion around this issue, given that the property of a bankrupt under the Bankruptcy Act which is available for distribution to creditors includes "the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…".

However, it has been held that the right of a bankrupt to exercise a power of appointment under a discretionary trust is not property of the bankrupt (see Re Burton; ex parte Wily v Burton (1994) 126 ALR 557).

In that case, the argument of the trustee in bankruptcy centred on the fact that Mr Burton was the appointor and a discretionary beneficiary of a family trust. He could in theory therefore appoint himself (or an entity that he controlled) as trustee.

In rejecting the argument, it was held that the powers of an appointor are fiduciary powers that must be exercised accordingly, in the interest of the beneficiaries.

In other words, the powers of an appointor must be exercised solely in furtherance of the purpose for which they were conferred.

This means that the powers of an appointor do not amount to 'property' that passes to a trustee in bankruptcy.

The powers are also not something that can be exercised by the bankrupt for their own benefit.

By analogy, the power to remove an appointor is also considered to be a fiduciary power (see Ash v Ash [2016] VSC 577).

This means that equitable relief may be imposed upon a third party who knowingly receives some benefit from the fiduciary's wrongful conduct or is knowingly involved in that wrongful conduct (see Barnes v Addy (1874) LR 9 Ch App 244).

An attorney may be able to exercise the powers of an appointor, if this is anticipated by the trust deed or attorney document (and indeed, ideally, both documents in a complementary and considered manner).

An attorney may also be able to exercise an appointor's powers where there is informed consent. Such consent must however involve more than inference from an alleged plan of the principal, particularly where that plan is vaguely defined and based on inference itself. That is, there must be clear evidence of the salient details of the transactions affecting the principal's interests being provided to them before their incapacity (again see Ash v Ash [2016] VSC 577).

Like last week, the above post is again based on an article that we originally contributed to the Weekly Tax Bulletin.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Spandau Ballet song ‘Cut a long story short’.

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Changing an appointor - just like (starting over**) - or changing a trustee; simple! (in theory ...)

A previous post explored the key revenue issues in relation to changing the trustee of a discretionary trust.

An equally important and related issue concerns a decision to change the principal or appointor role of a family trust. That is, the person, people, or company having the unilateral right to remove and appoint a trustee.

As regular readers of this blog will know, there does not necessarily need to be an appointor or principal provision under a trust deed. However, where there is one, a trust deed itself will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Where there are no provisions in relation to the succession of the appointor role, it is often necessary to try and rely on any power of variation under the deed to achieve an equivalent outcome.

Generally, from a trust law perspective, it is possible for the appointor provisions to be amended. However, any intended change must be permitted by the trust instrument, meaning the starting point must always be to 'read the deed' – a mantra regularly profiled in this blog. The decision in Mercanti v Mercanti [2016] WASCA 206 (this Court of Appeal judgment stands following the High Court's refusal to reject an appeal) being a leading example of the principle in the context of purported changes to appointorship.

The tax and stamp duty consequences of changing an appointor can be similarly complex.

Stamp duty costs on changing an appointor

In broad terms, the stamp duty consequences of changing an appointor provision can normally be managed in most Australian states.

This said, care always needs to be taken, particularly where the trust deed simply defines the appointor by reference to some other named beneficiary in the trust.

For example, it can often be the case that the appointor is defined as being the primary beneficiary of the trust and that primary beneficiary may also be a default beneficiary.

In these circumstances, depending on how the deed is crafted, there may be stamp duty consequences of implementing any change.

Tax Office views on changing an appointor

In relation to the tax consequences of changing an appointor, there are a number of private rulings published by the Tax Office which support the ability to change an appointor role, particularly if it is part of a standard family succession plan.

Arguably the 2 leading private rulings concerning the tax consequences of changing an appointor are Authorisation numbers 1011616699832 and 1011623239706. Broadly, these each confirm that there should be no tax resettlement on the change of an appointor where –

• The relevant trust deed provides the appointor with the power to nominate new appointors and also allows for the resignation of an appointor;
• The intended change complies with the trust deed (the "read the deed" mantra again highlighted);
• The proposed amendment is otherwise analogous with the changing of a trustee and is thus essentially procedural in nature; and
• The original intention of the settlor is not changed such that there will not be any change to the beneficiaries, the obligations of the trustee or the terms or nature of the trust.

Clark case

The conclusion that there should be no adverse tax consequences on changing an appointor is also supported by the decision in FCT v Clark [2011] FCAFC 5 ("Clark") and which has been profiled previously in this blog.

In particular, the Full Federal Court in Clark held that significant changes to a trust instrument would not of themselves cause a resettlement of the trust for tax purposes, so long as there is a continuum of property and membership, that can be identified at any time, even if different from time to time. That meant that, in Clark, although there had been a change of trustee, a change of control of the trust, a change in the trust assets and a change in the unitholders of the trust between 2 income years, this did not trigger a resettlement for tax purposes.

Rather, it is only where a trust has been effectively deprived of all assets and then 're-endowed', that a resettlement will occur.

While the Tax Office released a Taxation Determination (namely TD 2012/21) following Clark, it unfortunately does not provide any specific commentary around when the Tax Office will deem changes to an appointor or principal of a trust to amount to a capital gains tax event under CGT events E1 and E2 (ie a resettlement).

Rather, in broad terms, the Tax Office simply states that unless variations cause a trust to terminate, then there will be no resettlement for tax purposes.

While a number of examples are provided, which give some guidance around issues such as changes of beneficiaries and updates to address distribution of trust income, the examples ignore issues such as changing appointors and multiple changes (for example, changing beneficiaries, the trustee and the appointor as part of an estate planning exercise).

As usual, please make contact if you would like access to any of the content mentioned in this post.

The above post is based on an article that we originally contributed to the Weekly Tax Bulletin

** For the trainspotters, the title of today's post is riffed from the John Lennon song ‘Just like starting over’.

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