Tuesday, February 12, 2019

Ensuring loans are loans and people are people

Following last week’s post, the case of Berghan & Anor v Berghan [2017] QCA 236 is a stark reminder. As usual, if you would like a copy of the decision please contact me.

Broadly, the factual matrix was as follows:

1) A son had borrowed (either directly or via related entities) a six-digit sum from his parents over an extended period.

2) The total amount lent was by way of instalments on a number of separate occasions.

3) On every occasion, there was a confirmation from the parents that they intended the amount to be a loan.

4) In saying this however, no formal agreement was ever entered into.

5) There was also an extended delay between the point in time at which the loans were made and when the parents ultimately sought recovery of the loans.

In the initial court decision, it was held that despite the reference to the loans, the conduct of the parents was more analogous to a gift, and on this basis, there was no obligation at law (ignoring any moral argument) that the son had to repay the amounts.

While on appeal, the parents were successful in having the court confirm that the amounts were actually loans repayable on demand, the fact that there was a protracted legal case to achieve this outcome is a stark reminder to ensure that comprehensive legal agreements are implemented.

The court focused on the factual matrix to determine whether the transactions had objectively demonstrated that the payments were made by way of an oral loan agreement and were not gifts. Once it was determined that the advances were loans, it was confirmed that at law, in the absence of anything to the contrary, such loans are deeded to be at call and repayable on demand.

Finally, independent legal advice should be obtained by each party to ensure that the prospects of, particularly the borrower, arguing that the arrangements were in fact a gift is unsustainable.

** for the trainspotters the title of the post today is riffed from 1984 and Depeche Mode’s ‘People are People

Tuesday, February 5, 2019

Ensuring a loan is a loan (or alone with you**) – part 1

Arguably, in relation to any form of loan arrangement, it is fundamentally important that there are documents confirming the exact terms that apply.

Purely from an asset protection perspective, ignoring wider issues such as the commercial arrangements, estate planning and tax, the importance of documenting loan arrangements in writing cannot be underemphasised.

Similarly, it is critical to consider:

1) Regular repayments, even if only nominal, to ensure that the terms of the agreement remain on foot and acknowledged by the parties. In this regard, as profiled elsewhere in these posts, government legislation can automatically cause loans to become unrecoverable and statute barred.

2) Possibly implementing security arrangements in relation to the loan, for example, by way of mortgage or registering an interest under the PPSR.

3) Ensuring that each party to the loan receives independent legal advice. Particularly in relation to arrangements between family members, the failure to ensure each party receives independent legal advice can cause a loan to become unrecoverable on the basis that a court decides that the loan was in fact a gift.

The requirement for independent advice is arguably the most important aspect in family situations, such as parents lending funds to a child and their spouse.

If the child and spouse have a relationship breakdown it is likely that the funds advanced will be argued to be a gift by the estranged spouse, even if a loan agreement has been signed.

If the amount is treated as a gift it will be an asset of the relationship (not the parents as lenders) and thus unrecoverable by the parents.

** for the trainspotters the title of the post today is riffed from the early 1980’s and The Sunnyboys ‘Alone With You’, see them perform live!

Tuesday, January 29, 2019

Trust creation – the 4 key elements

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a 'vidcast'.

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

On the basis that a picture tells a thousand words, we find the best way to explain a trust is via diagrams. Generally, we use triangles to represent a trust, rectangles for companies to keep things simple.

If pictures, symbols and diagrams are used then when you explore some of the technical issues with trusts it invariably makes it a lot easier. This is particularly the case when you then get into the detail of a trust document that run to dozens of pages.

If we, therefore, explore the creation of a trust arguably there are really only ultimately 4 key principles that need to be in place in order for there to be a trust relationship.

Many readers would probably argue very quickly, “Hang on, there’s a whole range of additional things that need to be satisfied.” On many levels that feedback is fair. However arguably the response is that, “Any other idea that you can come up with would be, I would argue, falls under one of the 4 headings.”

The first one is that you need to have legal ownership. Invariably, that’s the trustee. Invariably with a discretionary trust, that trustee will be a company. Its sole role is having the legal ownership of the underlying asset.

Where is that underlying asset? It's held within the trust, which is point two.

Without an asset, there is no trust relationship. It might again sound abundantly simple but it is a really key point.

Point three is that there are some rules. Invariably those rules will be set out in a trust deed, or a trust instrument. Generally this will be a written document.

Finally, the fourth point, is that there must be at least one beneficiary to receive entitlements, whether they be income distributions on the way through the life of the trust or capital distributions either interim or on the final vesting of the trust.

Within those 4 parameters, there are essentially no restrictions in terms of what can or can’t be done in relation to a trust structure.

Tuesday, December 11, 2018

Blame it on the Sunshine – why I refuse to listen to Bing Crosby**: Final Post for 2018 and Season's Greetings

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2019.

Similarly, the social media contributions by both the View and Matthew will also largely take a hiatus until the New Year as from today.

Thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to posts.

Additional thanks also to those who have purchased the ‘Inside Stories – Reference Guide (the consolidated book of posts) ’.

The 2018 edition of this book, containing all posts over the last year, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2019.

Very best wishes for Christmas and the New Year period.

** for the trainspotters, ‘Blame it on the Boogie’ (riffed for the title of today’s post is the Jackson 5 hit from 1978.

PS: And why I won’t listen to Bing Crosby … after 9 Christmas seasons in a row at Myer, there were many years when Bing’s Christmas album was the only music played all day, every day, for weeks on end. And one Christmas some genius in management thought it smart to play ‘White Christmas’ on repeat all day everyday for the last week of trading … (I won’t be watching).

Tuesday, December 4, 2018

If 6 was 9 – Trust Naming Conventions – Part IX **

Continuing on from the last post and the type of trust deeds that can be created, this week’s post summarises another five types of trusts:

Special Disability Trust – this type of trust is regulated by government legislation and allows relatives of a family member who has a disability to establish a trust that has concessional income tax treatment, and also allows for any family home owned by the trust to still gain access to the main residence capital gains tax exemption. There are a number of particular rules in relation to how this form of trust must be established and operated.

Employee Benefit Trust – this type of trust is often set up by business owners as a way to provide discretionary bonus entitlements to key staff. The structure was very popular for a number of years, however active Tax Office compliance has meant that the range of circumstances where this type of structure will be useful is now relatively limited.

Business Succession Trust – from a business succession perspective, it is often important to help manage the exit of an ultimate owner by obtaining insurance cover for events such as death, trauma and total and permanent disablement. While there can be a number of complex issues that arise, one way to structure the ownership of the insurance policies is via a special purpose trust, often referred to as a 'business succession trust'.

Blind Trust – a blind trust is one where the trustee is the only party disclosed as being involved in the trust and the standard phrase 'as trustee for [name of trust]' is not disclosed. In a semi-blind trust, the existence of the arrangement is maintained on trust records. With completely blind trusts, there is no documentation in existence supporting the evidence of the trust and everything about the trust relationship is regulated verbally.

Sub Trust – particularly in relation to a discretionary trust that make distributions to beneficiaries, with those distributions remaining unpaid for extended periods, the trust instrument will often automatically create a 'sub trust' that permits the beneficiary to any time call for the payment of the unpaid distributions.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘If 6 was 9’ is a song by Jimi Hendrix from 1969.

Tuesday, November 27, 2018

NSW implications for all changes of trustee

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.

As usual, an edited transcript of the presentation is below:

There is a specific provision of the New South Wales Duties Act which requires that, in order to qualify for the stamp duty exemption where a change of trustee is occurring, the new trustee needs to be excluded as a beneficiary of the trust.

This means the trust deed needs to contain an express provision excluding any new trustee from being a beneficiary.

Advisers practicing in New South Wales are usually acutely aware of that limitation being in most of their trust deeds and of the resulting need to look at who may have been a previous trustee to see whether any beneficiaries are excluded.

The issue comes up quite commonly because several of the popular online trust deed providers use trust deeds from Sydney law firms, meaning that even though the trust deed might be ordered online by an accountant in Western Australia or a lawyer in South Australia, if the deed provider is based in New South Wales, the deed they’re providing probably contains this exclusion without the adviser being aware of it.

There are two reasons we need to know whether the deed contains the exclusion.

Firstly, if we are changing the trustee and we appoint a new trustee who is a beneficiary of the trust, then that change of trustee may be invalid or it may trigger unintended tax or stamp duty consequences.

Secondly, we may have individuals who were previously a trustee of the trust and who at face value appear to be a beneficiaries, but who were actually excluded as a result of the clause.

For instance, if Mum and Dad were individual trustees but they subsequently retired and appointed a corporate trustee, even though they may be named as beneficiaries of the trust, the exclusion clause may have made them ineligible to receive income or capital distributions.

An exclusion like this can have an impact from a family law perspective and also from a tax perspective, if we have been purporting to make trust distributions to individuals thinking they were beneficiaries, not being aware of this exclusion hidden within the trust deed.

Tuesday, November 20, 2018

Maintaining trust records

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.

As usual, an edited transcript of the presentation is below:

It’s surprising how often we are provided with an original trust deed for a trust that’s been around for 10 or 15 years and are asked to give advice on the terms of the trust, only to have it turn out later that there were subsequent deeds of variation or resolutions which amended the terms of the trust, which everyone had lost or forgotten about.

As a practical tip, clients who are establishing a trust should have some form of trust register or trust folder in which they store copies of all of the trust deeds, trust variations, trust resolutions and any other documents which may impact on understanding what rights and responsibilities attach to that trust.

We also need to understand that beneficiaries can make unilateral decisions, such as deciding to renounce an interest as a beneficiary of a trust.

If an individual who is a beneficiary issues a disclaimer or a renunciation, which says that notwithstanding the terms of the trust deed they have chosen not to be a beneficiary of the trust anymore, that will impact on their standing from a family law perspective, bankruptcy perspective and a tax perspective.