Tuesday, June 11, 2019

Super death benefits and conflicts of interest: Guilt is a useless emotion**

As mentioned in last week’s post, arguably, the highest profile decision in relation to the obligation of a legal personal representative (LPR) to avoid creating a conflict of interest is the decision in MacIntosh.

The decision in Brine v Carter [2015] SASC 205 provides another example of the key issues that need to be considered by LPRs, who are also potential beneficiaries of a superannuation death benefit. As usual, a link to the decision is here.

In summary, the factual scenario was as follows:

1) The deceased appointed his de facto partner and three children from an earlier relationship as his LPR.

2) The de facto made an application for the superannuation death benefits to be paid to her directly, as opposed to the estate.

3) If the superannuation proceeds had been paid to the estate, the three children would have been entitled.

4) For a period of time prior to the death benefit being paid, the de facto partner withheld details of the superannuation death benefit from the three children.

5) Importantly however, by the time the super fund trustee exercised its discretion, the three children were aware of all relevant information concerning the death benefits and had themselves made an application for the death benefits to be paid to the estate.

6) It was held that this was a critical point, that is, the other LPRs had effectively consented to the de facto making her individual claim by themselves making a claim on behalf of the estate in full knowledge of all relevant circumstances.

While the decision of the superannuation fund to pay the entitlements to the de facto ultimately was upheld, a number of key principles were explained by the court, including:

1) Where an LPR seeks payment of a death benefit to themselves personally (i.e. not to the estate), they will be in a position of conflict, unless the will expressly permits the conduct.

2) Where there is no express provision waiving conflict, an LPR should renounce their position before taking any active steps to seek personal payment of the death benefit.

3) Alternatively, the LPR can seek the consent of all other LPRs (if any).

4) In seeking the consent of the other LPRs, there is no obligation to also receive consent from each beneficiary under the will.

5) Complications will likely arise where there is a sole LPR. In that instance, if they choose not to renounce their role, there would be an obligation to receive the informed consent of each potential beneficiary.

Ultimately, the decision is yet another reminder of the importance of a holistic approach to every estate plan.

** For the trainspotters, the title today is riffed from New Order’s song of the same name, from 2005.

Tuesday, June 4, 2019

The View** on workarounds to avoid the McIntosh decision

As mentioned last week, the McIntosh case was concerning given that the son’s apparent objective of providing for his mother was not achieved.

While there are obviously a number of issues in relation to this case, three critical steps that could have been taken are as follows:

1) To the extent that they were available, binding nominations could have been made to the mother personally (in this regard, non-binding nominations had in fact been made nominating the mother solely).

2) With the aid of hindsight, the mother should not have applied to administer the deceased estate. This would have relieved her of any duty to act in the best interests of the estate and therefore she could have proceeded to make the application for superannuation benefits to be paid to her personally without her actions being challenged.

3) The son should have made a will at least appointing his mother as executor (this would have potentially meant that she did not have any conflict of interest as the son would have been deemed to have been aware of the potential when making the nomination). Ideally, the will would have also nominated the mother as the sole beneficiary of the estate – thereby meaning that even if the funds were not paid to her directly, she should have ultimately received them in any event.

Next week’s post will consider another case which further informs the key issues in this regard.

** For the trainspotters, the title today is riffed from The Church’s song of the same name, from 1985 (and no, View was not named after this song …).

Tuesday, May 28, 2019

Superannuation nominations – here we go again**

Several previous posts have considered various aspects of superannuation nominations and the payment of death benefits

1) Double entrenching binding nominations

2) Receipt of superannuation death benefits

3) Superannuation and binding death benefit nominations (BDBN)

4) Superannuation death benefits

5) Death benefit nominations – read the deed

The decision of McIntosh vs. McIntosh [2014] QSC99 provides another reminder of the types of issues that advisers must be aware of.

As usual, if you would like a copy of the case please contact me.

The background to the case was that a son who had lived with his mother for most of his life (including at the time of his death) died without any other immediate family other than his father and without a valid will.

Although his mother and father had been estranged since he was a young child, pursuant to the intestacy rules, they were entitled to share the estate equally.

The mother sought approval from the court to administer the son’s estate, and as part of her application, confirmed her intention to collect all relevant assets and then divide them equally between herself and her former husband.

In relation to the superannuation entitlements, the mother applied in her own capacity (i.e. not on behalf of the estate) to have those entitlements (which represented the vast majority of the son’s wealth) paid to her directly on the basis of the interdependency between herself and her late son.

All superannuation entitlements were paid to the mother directly (reflecting the direction given by the son in non binding nominations) and the father successfully challenged this outcome on the basis that his former wife had a duty as the administrator of the son’s estate to actively do everything within her power to ensure the superannuation benefits were paid to the legal personal representative, and then in turn, be divided equally between the father and the mother.

Next week’s post will consider what steps, with the aid of hindsight, might have helped ensure the outcome that appeared to be the son’s objective.

** For the trainspotters, the title today is riffed from Whitesnake’s song of the same name, from 1982.

Tuesday, May 21, 2019

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 – see the following posts for more comments in this regard –

Extensions to vesting dates – some lessons from Re Arthur Brady Family Trust; Re Trekmore Trading Trust

Fairytale of Canberra - The Tax Office plays Secret Santa as the long awaited guidance on trust vesting gets released

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 most people are aware, 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.

Tuesday, May 14, 2019

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.

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

Tuesday, May 7, 2019

Is death (not) the end**; or can a will be varied after death?

One of the significant distinctions between a family trust and a testamentary trust is that the ability to vary a testamentary trust is generally very limited after the testamentary trust comes into effect.

Obviously while the testamentary trust is incorporated into a will, where the will maker has yet to die, then this document may be varied at any time.

In contrast, once the will maker has died, the general position is that it cannot be amended without court consent.

One potential exception to this general position is that if the will allows variations to be made and if the variation relates only to administrative type issues (as opposed to the substantive provisions in the will), then there may in fact be the ability to vary the document.

** For the trainspotters, the title today is riffed from Bob Dylan’s song of the same name, arguably made famous by Nick Cave and the Bad Seeds, listen hear (sic):

Tuesday, April 30, 2019

Unit trusts and excluding trustee Liability**

When establishing a unit trust structure, it is important to ensure the deed is properly crafted to expressly limit liability of the unitholders for debts of the trust.

As is well known, in a corporate structure, shareholders are not liable for the debts of the company.

Similarly, there is generally no right of indemnity for a trustee of a discretionary trust from the beneficiaries of the trust as they are not absolutely entitled to the trust assets.

In relation to unit trusts however there is a general principle that unless specifically excluded by the trust deed, the trustee will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders.

Failing to exclude this right of indemnity against the unitholders can therefore significantly undermine the asset protection advantages offered by structuring the investment through a unit trust.

The position in relation to unit trusts was confirmed in the decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355. As usual, if you would like a copy of the case please contact me.

In this case a liquidator of a trustee company of a unit trust was able to force the unitholders to make good the deficiency of trust liabilities over its assets. The unitholders would have not been liable however if the trust deed had contained the relevant exclusion.

Including this type of exclusion expressly in a unit trust deed has been a relatively standard practice by most deed providers since this decision, for firms that do specialise in the area.

Where the exclusion does not exist in a current deed it is normally possible to implement the provisions by a deed of variation, so long as there are no potential issues on foot.

** For the trainspotters, the title today is riffed from Lorde’s song of the same name from 2017 listen hear (sic):