'The Vibe' and ruling from the grave: nothing breaks (like a heart)**

The legal doctrine of The Vibe was originally argued in the movie The Castle.

Arguably however it essentially captures the concept of courts making decisions driven by 'public policy' or what they believe to be 'in the public interest'.

One aspect of estate planning and asset protection that brings these concepts into sharp focus is a willmaker imposing conditions on provisions under their will about the personal relationships of a beneficiary.

One of the leading cases in this area dates from the mid 1800s and confirms that a trust (such as a life interest) for a surviving spouse can be structured to end automatically if the surviving spouse ceases to be 'single ... and living a chaste life' (see - Lloyd v Lloyd (1852) 2 Sim (NS) 255).

Similarly in Ramsay v Trustee Executors and Agency Co Ltd (1949) 77 CLR 321, a will gifted proceeds in trust “... to pay the income ... to my son ... for such period ... as he shall remain married to his present wife ... and on the termination of such period in trust for my ... son absolutely provided however that should my ... son predecease his said wife during such period ... my estate shall go to my ... nephew ... and my sister ... in equal shares.”

The court confirmed that:

1. This provision contained nothing which offended against public policy as having, or tending to have, an adverse effect on the son’s marriage and it was wholly valid.
2. The will was drafted to secure an income to the son during the marriage, and to prevent his wife obtaining any interest, either directly under the will, or indirectly through her husband’s will, in the corpus assets and there is nothing illegal in such an intention—it is simply a case of a willmaker choosing their beneficiaries.
3. By way of an analogy, it would be contrary to all experience to say that a remainderman of a life interest under a will, under which a person is entitled to property on the death of the life tenant, is exposed to a temptation to hasten the death of the life tenant.
4. Most people in a civilised community respect the sanctity of marriage as well as of life, and would not be induced by pecuniary gain to destroy one or the other. It is not reasonable to suppose that the terms of the will here create any practical conflict between the son’s duty as a husband and his interest as a beneficiary – future illegal or immoral activity (that is deliberately ending the marriage) is not to be presumed.

More recently decisions have upheld partial restraints on marriage, such as preventing marriage to a person with particular characteristics (including race and religion). For example, in Seidler v Schallhofer [1982] 2 NSWLR 80, there was an agreement which contemplated the continuation of a de facto relationship for a specified period but then required that the parties either marry or end the relationship. It was held that the agreement simply formalised the financial aspects of the relationship and was appropriate given current public policy notions.

More recently again is the decision of Ellaway v Lawson & Anor [2006] QSC 170. This case involved a will where the entitlements of one daughter were conditional on her divorce from her then current husband, or his death (assumedly due to natural causes), whichever occurred first.

Arguably applying The Vibe it was held the reason for the approach was the mother's desire to protect the daughter's finances - and not a wish to see the daughter get divorced or the son in law die. On this basis the provisions in the will were held to be valid.

Similarly, the decision in Jones v Krawczyk [2011] NSWSC 139 also involved a will where a daughter was prohibited from being a potential beneficiary of a testamentary trust so long as she was married to, or living with, her husband (his death was not specifically mentioned). The decision based on public policy, was that the restriction was valid as a being motivated by a desire to protect the daughter, rather than trying to force the daughter to get a divorce.

In contrast however, there remain situations where the courts will strike down agreements that will offend the public interest, perhaps the highest profile example being the claim bought by a form of 'defacto spouse' against married businessman Richard Pratt (see Ashton v Pratt (No 2) [2012] NSWSC 3).

In this case, Ashton sought to enforce a contract for 'mistress services' in return for Pratt establishing a trust for her and her children with $5 million and an ongoing income stream.

In rejecting the claim the court held that the extent of the relationship was simply for ‘meretricious sexual services’. The court's view was that such arrangements were contrary to public policy and thus illegal and unenforceable.

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 Mark Ronson (featuring Miley Cyrus) song ‘Nothing breaks like a heart’.

View here:

Is it the end of the trust as we know it?**

A critical aspect of every trust is the period for which a trust can last – often referred to as the perpetuity period or the vesting day of the trust.

As a rule of thumb, any review of a trust deed that we perform always starts with checking the exact vesting date. We have had countless situations where this review has in fact led to the discovery that the trust itself has ended (in one instance, almost 7 years earlier).

Generally, so long as steps are taken before a trust vests, it should be possible to extend the life of a trust to the maximum period allowed at law (ie the perpetuity period), which in most cases is 80 years – noting that Queensland upped the rules in that state back in 2023 to 125 years.

In some cases, it may also be possible to extend the life of the trust so that it complies with the laws of South Australia – as has long (no pun intended …) been the case, there is effectively an unlimited perpetuity period available via South Australian law.

** For the trainspotters, the title today is riffed from REM’s song of the same name, from 1987, listen here:

Sunny Afternoons - Counter-intuitive Tax Planning **

We had an adviser recently wanting to explore having a client make distributions from a family trust directly to a superannuation fund.

Historically (during the mid-1990s), this was a strategy that many were using until the government closed the loophole.

The way in which the loophole was closed was to treat all such income as 'special income' of the super fund or, as it was then renamed, 'non-arm’s length income'. This type of income is taxed at a flat rate to the fund of 45%.

Interestingly, what the adviser had realised however was that many trust distributions are now effectively taxed at 47% if they go to beneficiaries on the top marginal rate, given the increase in the Medicare levy.

Trust distributions to a superannuation fund may therefore be (marginally) tax effective initially and also a good way to ensure that superannuation savings are increased at a far greater rate than would otherwise be available if relying on the contributions within contribution caps – and subject to overlaying issues such as the $3M cap.

** For the trainspotters, ‘Sunny Afternoon’ is one of the first tax referencing rock songs by the Kinks from 1966, see:

Einstein’s prenup: … and holidays in Malibu**(?)

Previous View posts have looked at various cases where a binding financial agreement (BFA) has been held to be ineffective.

BFAs can be entered into at the start of a relationship (that is, a traditional ‘prenup’), at any time during the relationship (‘midnup’) or once the relationship has ended (‘postnup’).

While we see BFAs add value as prenups and postnups, perhaps understandingly we see few midnups successfully assist. Indeed we are aware of many situations where one spouse raising the idea of a midnup has been a catalyst for the ending of the relationship.

One of the highest profile examples of this is given by Albert Einstein.

According to biographer Walter Isaacson, as Einstein and his wife Mileva’s relationship deteriorated, they decided to try and stay together for the sake of their children.

Part of Einstein's approach involved him setting out a list of 'conditions' his wife needed to accept in writing (ie a form of early 20th century ‘midnup’), as follows:

A. You will make sure:

1. that my clothes and laundry are kept in good order;
2. that I will receive my three meals regularly in my room;
3. that my bedroom and study are kept neat, and especially that my desk is left for my use only.

B. You will renounce all personal relations with me insofar as they are not completely necessary for social reasons.

Specifically, you will forego:

1. my sitting at home with you;
2. my going out or travelling with you.

C. You will obey the following points in your relations with me:

1. you will not expect any intimacy from me, nor will you reproach me in any way;
2. you will stop talking to me if I request it;
3. you will leave my bedroom or study immediately without protest if I request it.

D. You will undertake not to belittle me in front of our children, either through words or behaviour.

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 Hole song ‘Malibu’.

View here:

Oops! … I did it again**: amending existing agreements

An issue that often arises is the desire to amend an existing agreement, with effect from a particular date – regularly that date will be on and from the day the original agreement was entered into.

It is generally accepted that, as between the parties, an agreement can be effective and binding on whatever basis is desired. This does not mean however that an agreement can be changed such that it is binding retrospectively on third parties, such as revenue authorities.

Arguably the leading case in this area is Davis v Commissioner of Taxation; Sirise Pty Ltd v Commissioner of Taxation 2000 ATC 4201. As usual, if you would like a copy of the case please contact me.

In this case the parties purported to have an agreement entered into that caused adverse tax consequences amended some time later, with effect from the date of the original document.

In rejecting the effectiveness of the amended agreement in binding the Tax Office it was confirmed that a rectification by a court or by deed between the parties is the only approach that binds third parties. Such an approach however is only available where the parties are under a mutual mistake that the document they signed recorded the terms of their bargain, when in fact it did not.

Rectification does not operate to ‘alter the past’, rather it simply recognises what had in fact always been the case, namely that the true agreement between the parties was not correctly recorded in the document that was mistakenly signed.

Critically, rectification requires that there must have been a mutual mistake. In other words, ‘a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had’.

A mistake or misunderstanding, for example, as to the revenue consequences of an agreement is not a mutual mistake allowing rectification.

** For the trainspotters, the title today is riffed from Britney Spears song of the same name from 2000 see hear (sic):

How does it feel** - when a deed of rectification causes a resettlement?

Recently we revisited a Tax Office private ruling in relation to a decision by the trustee of a discretionary trust to rectify a trust deed so it correctly reflected the intentions of the settlor at the time of establishing the trust some years earlier.

The exact ruling is Authorisation Number 37630. As usual if you would like a copy please contact me.

Critically, the ruling is based on the assumption that a court would in fact approve the rectification – a rectification requires a court to make an order to correct a trust instrument that, due to mistake, does not reflect the true intention of the parties.

The specific issue of concern was whether the rectification would create a new trust, or in other words, a resettlement, to be triggered.

The private ruling remains a very useful reminder of the usefulness of rectifications, even though it is from 2004 and therefore predates the substantial changes in approach about resettlements in 2012 of the Tax Office (see the other View posts on this issue).

The ruling confirms that where a trust deed fails to accurately express the true agreement between the parties, equity will allow rectification of the document.

In particular, it was confirmed that:

‘The object of rectification is not to make a new contract for the parties or to alter the terms of an agreement, nor to rescind the existing contract it does not create new rights but to rectify the erroneous expression of agreements in documents' (see GE Dal Pont, DRC Chalmers - Equity and trusts in Australia and New Zealand).

Importantly, a rectification also has retrospective effect.

That is, a rectification is 'to be read as if it had been originally drawn in its rectified form' (see Craddock Bros v. Hunt [1923] 2 Ch 136.

As there is no change in the intended beneficial interest of the beneficiaries there are also no changes to the terms and conditions of the trust. Therefore, a rectification does not result in the creation of a new trust.

** For the trainspotters, ‘how does it feel’ is a line from the New Order song from 1983 ‘Blue Monday’ listen hear (sic):

Have you got time to rectify?**

Previous View posts have looked at various aspects of deeds of variation, and in particular, the critical need to 'read the deed' before implementing any variation.

Where a purported deed of variation later proves to be ineffective due to a failure to follow the provisions of the trust deed, one approach that can provide a solution is a deed of rectification and clarification.

Generally, this approach will be a valid way to address previous inconsistencies, without the need for court approval.

Critically however, any attempt to rectify or clarify historical issues with a trust deed cannot do something that is beyond what was originally contemplated by the parties involved.

One example in this regard that we reviewed recently, involved a situation where a trustee was incorrectly inserted under a deed of variation as a beneficiary, in direct conflict with another provision of the trust instrument.

On discovery of the conflict some years after the deed of variation, it was clear that the only way to rectify the error would be to change the trustee with retrospective effect to a new entity. The deed of rectification approach was unavailable as the deed could not ignore the clear intention of the parties, which at the time was that the trustee should remain in its role and a rectification workaround would have ignored that fact.

** For the trainspotters, ‘time to rectify’ is a line from the Beatles song from 1965’s Rubber Soul ‘Think for Yourself’ listen hear (sic):