Step (child) on** ... and the list of people entitled under an estate

 

Last week's post considered some of the key issues, from a will drafting perspective, about whether a step child is entitled under a deceased estate.

The case of the Superannuation Complaints Tribunal in D19-20\023 provides a useful explanation of the wider position at law in relation to step children, including from a superannuation perspective.

In summary the decision confirms:

1. There is some support for the position for general law purposes, and in particular family provision (or testator family maintenance applications) that someone does not cease to be a ‘step-child’ of a person when their natural parent pre-deceases the person, if the marital relationship between their natural parent and the person was in place at the date of the natural parent’s death (see Scott-Mackenzie v Bail [2017] VSCA 108).
2. That is, the relationship of step-parent and step-child is one of affinity and does not cease merely because of the death of the natural parent. In other words 'once a step-child of the deceased, always a step-child of the deceased (providing the relationship of the deceased with the natural parent was not earlier dissolved otherwise than by death)'.
3. In contrast, there are also cases that conclude the relationship of ‘step-child’ ceases automatically on the death of the natural parent (see Re Burt (1988) 1 Qd R 23, Re Moreton (1996) 2 Qd R 174, Basterfield v Gay (1994) 3 Tas R 293 and Connors v Tasmanian Trustee Limited (1996) 6 Tas R 267).
4. For superannuation purposes, historically the Tax Office is on record as holding that a child only remains a stepchild while the relevant parents are a couple, for example see ATO ID 2011/77 where it was decided that a person ceases to be a 'stepchild' for the purposes of being a 'dependant' of the member under regulation 6.22 of the superannuation regulations, when the legal marriage of their natural parent to the member ends.
5. There is however support for the broader concept of ‘step-child’ - that is a relationship of affinity between the step-parent and step-child that can continue beyond the death of the natural parent.
6. In the factual matrix here, the Tribunal was satisfied that the step-daughter and the deceased member continued to have a sufficiently close relationship after the earlier death of the spouse of the member (who was the natural parent of the step-daughter).
7. As a result the natural daughter of the spouse of the member remained the step-child of the deceased member and in turn fell within the definition of ‘child’ at the date of the deceased member’s death. Therefore she was a ‘dependant’ for the purposes of both the trust deed of the fund and the superannuation legislation.

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** For the trainspotters, the title of today's post is riffed from the Happy Mondays song ‘Step On’.

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A drafting lesson: waiting for you in the shadows**

Recently we were reviewed a clause in a trust deed that confirmed the beneficiaries were ‘any and all of the children, grandchildren or great grandchildren of the mother and the father.

The drafting approach is a common one, and can lead to 2 starkly different interpretations, namely either all of the children, grandchildren and great grandchildren of:

1. the relationship between the father and the mother; or
2. each of the father and the mother (i.e. including children from other relationships).

Generally the position adopted by the courts is that where a phrase is capable of more than one correct grammatical interpretation the construction that conforms with current usage should prevail, while also having regard to the circumstances surrounding the establishment of the trust.

One of the leading cases is Boranga v Flintoff (1997) 19 WAR 1.

The case confirms that the primary task of courts is to discern the intention of the settlor from the words of the relevant trust deed, with reference to the position as at time the deed was entered into.

In this case the following facts were considered to be relevant in determining whether step-children would be included as beneficiaries under the phrase 'the children of A and B’:

1. the ages of the stepchildren at the time the trust was established and whether the step- children were dependants of A or B at the time;
2. whether the step-children had any special needs, e.g. a disability;
3. the existence and ages of any children from the relationship of A and B at the settlement date;
4. the ages of A and B at the settlement date and whether it was likely there would be any further children from the relationship of A and B; and
5. the pattern of trust distributions and whether the step-children received distributions from the trust.

Having factored in each of the above issues, it was held that the phrase 'the children and remoter issue of the said A and the said B’ included children of either A or B – in other words stepchildren were included.

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** For the trainspotters, the title of today's post is riffed from the Thurston Moore song ‘Smoke of dreams’.

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SMSFs and non-geared unit trusts: bulletproof**

While there are some, narrow exceptions, generally an SMSF is only able to invest in an ungeared unit trust and subject to strict requirements set out in the Superannuation (Supervision) Regulations (namely regulation 13.22C).

The provisions of regulation 13.22C are detailed and prescriptive and if there is any intention to access the concession regard should be had to the exact requirements.

One issue that often arises for SMSFs that do have a partial ownership interest in a trust that otherwise complies with regulation 13.22C is whether the SMSF can acquire additional units in the structure from a related party.

Generally such an acquisition by an SMSF is prohibited under the in-house asset rules, however there is an exemption from those rules in relation investments in trusts that comply with regulation 13.22C.

Furthermore there is an exemption from the prohibition that also applies against SMSFs acquiring assets from related parties for ownership interests in trusts that comply with regulation 13.22C.

The exceptions operate to specifically permit the acquisition of shares in companies or units in unit trusts, so long as all provisions of regulation 13.22C are satisfied at the time of the acquisition and on an ongoing basis.

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 Radiohead song ‘Bulletproof’.

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Accessing excepted trust income – avoid being a paranoid android**

Estate planning best practice dictates to ’begin with the end in mind’ and ensure a person's documentation achieves their objectives, for example, by including a testamentary trust.

This said, as previous posts have highlighted, it is possible to establish a trust following a person's death such as an estate proceeds trusts, superannuation proceeds trust or a special disability trust.

When considering the use of ‘post death testamentary trusts’ it is important to ensure income derived from gifted property to the structure does in fact create excepted trust income.

The Tax Office has provided useful guidance in this regard in Private Ruling 50621.

In the situation of this Ruling, minor children had each received gifts of money from 2 sources which were then invested on their behalf by a relative.

The 2 sources of the gifts were:

1. money left to them in a will; and
2. other gifts made to them by persons who were alive at the time the gifts were made.

The Tax Office confirmed its view that:

1. The investment earnings derived from monies that were sourced from a deceased estate (whether due to an absolute gift under a will or due to the intestacy rules) held in trust for minor beneficiaries were excepted income.
2. In contrast, the investment earnings from monies gifted to children by their living relatives were not excepted income.

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 Radiohead song ‘Paranoid android’.

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#exceptedtrustincome #estateplanning #Radiohead #bethechange #viewlegal #matthewburgess

Can you or can't you (explain)** if you can amend a power to amend

Posts over recent weeks have considered various aspects of the extent of authority created for a trustee by a general power of variation under a trust deed.

Another useful case in this area is the decision in University of Adelaide v Attorney-General (SA) [2018] SASC 82.

Relevantly, the court confirmed that:

1. Where a power of amendment has been included in a trust deed, there must be compliance with any procedural or substantive restrictions on its exercise.
2. As a general principle of construction of trust deeds, a 'trustee cannot utilise its power of amendment of the trust deed to remove restrictions on its power of amendment' (see Retail Employees Superannuation Pty Ltd v Pain [2016] SASC 121).
3. Even in the absence of express restrictions, it would seem implicit that a power of amendment cannot be exercised to amend itself (see a case featured in a number of previous posts, namely Jenkins v Ellett [2007] QSC 154).

Despite the above conclusions, the decision in the case of Re McGowan & Valentini Trusts [2021] VSC 154 (as also featured in other View posts) essentially distinguished the above summary.

This was on the basis that where there is an extremely wide power of amendment in a trust deed it should be read and interpreted according to its natural meaning, notwithstanding what might otherwise be a general principle of construction.

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 riffed from The Who and the song 'I Can't Explain'.

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Coming home** by extending trust vesting dates

As mentioned in last week’s post, the need to ‘read the deed’ is critical on a number of levels, particularly in relation to the vesting date of a trust.

A previous post also explores when a court may approve the extending of a vesting date for a trust.

The two other main pathways that may assist in this regard are:

1. using a specific power in the trust deed that allows the vesting date to be extended; and
2. using the variation power (if it is broad enough).

Whether a general power of variation will be broad enough was considered in the case of Andtrust v Andreatta [2015] NSWSC 38.

Essentially the decision confirms that where a trust deed contains a power to vary the trust, it should be assumed that the power includes the ability to extend the vesting period, subject to the perpetuity period rules.

In particular, it was held:

‘It does not seem to me to be stretching language unduly to say that a trust to distribute or hold income up until a defined date, and upon that date to distribute capital, is “varied” if that defined date is extended. Thus, as a matter of language, it seems to me that the power to vary the trusts set out in the deed should be taken to include a power to vary them by extending the time for which they are to endure.’

In other words, as explored in other View posts, any variation power should generally be construed widely and beneficially, including in relation to the ability to extend a vesting date even if there is no specific power to do so (see cases such as Kearns v Hill (1990) 21 NSWLR 107 and Nisus Pty Ltd [2022] NSWSC 369).

However, where there is not a sufficiently wide power to vary a trust in relation to the vesting date (or indeed no power to vary at all), the conservative view is that court approval is required.

This said, as explored in other View posts, variation of the terms of a trust may be able to be achieved with the unanimous consent of the beneficiaries if all are in being, sui juris and absolutely entitled (see the rule in Saunders v Vautier (1841) 4 Beav 115). In this style of situation it may also be prudent to have the settlor be a party to the variation deed, if they are alive and have capacity.

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 Fine Young Cannibals song ‘Johnny come home’.

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Embrace the ceremony** and ‘read the deed’

As highlighted in previous posts, the need to ‘read the deed’ before making any variation to a trust deed is critical – and a case that remains a leading example of the mantra is Jenkins v Ellett [2007] QSC 154.

Broadly the background in this case was as follows:

1. A principal under a trust deed had the ability to remove and appoint the trustee of the trust.
2. The principal purported to relay on a power of variation to remove himself as principal and name a replacement, which effectively changed the schedule to the trust deed that automatically appointed the principal’s legal personal representative (LPR) as his replacement on death.
3. When the LPR of the principal purported to exercise the principal powers following the death of the original principal and was challenged, the Court held that the previous attempted variation was invalid, effectively confirming the LPR’s authority to act as the principal.
4. The attempted variation was held to be invalid because the relevant power in the trust deed was crafted so that it could only be used in relation to the ‘trusts declared’, and in particular did not extend to varying the schedule to the trust deed.

Generally the decision here is cited as authority for a number of principles including:

1. If an attempt is made to made to amend fundamental provisions (such as appointor powers or indeed the amendment power itself), there must be a specific ability to do so under the trust instrument. This said, if the power to vary under a deed is wide, this can allow a trustee to change an appointor without their consent; and without destroying the substratum of the deed (see Cihan v Cihan [2022] NSWSC 538, a case explored in other View posts);
2. conversely, ancillary provisions should be able to be amended so long as there is a robust power of amendment in the trust deed;
3. this said, the trust deed may expressly prohibit certain amendments, thereby effectively ‘hard wiring’ those clauses;
4. furthermore, the exercise of a power of amendment must comply with any restrictions on the exercise of power, for example the need to obtain prior consent from a principal or appointor. The case of Re Cavill Hotels P/L [1998] 1 Qd R 396 (which has featured in previous posts) is also often quoted in this regard);
5. any power of variation should be construed widely and beneficially, such that (as one example), even if there is no specific power to amend or extend a vesting date, a wide power of variation will give this ability (see Nisus Pty Ltd [2022] NSWSC 369);
6. in situations where the purported amendment is not within the powers under the deed (or has the consequence of destroying the ‘substratum’ of the trust) it will be held to be invalid and ineffective; see for example Kearns v Hill (1990) 21 NSWLR 107.

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 New Order song ‘Ceremony’.

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