Tuesday, June 21, 2022

Do beneficiaries need to believe in love** when concerned about trustee distributions?

Many previous posts have considered the overriding duty of trustees of trusts - and the fact that a trustee must exercise its discretion in good faith, upon real and genuine consideration and for a proper purpose.

Again with 30 June rapidly approaching, the decision in Callus v KB Investments - [2020] VCC 135 provides a useful example of the approach the courts will take in this area.

Relevantly the factual matrix involved:
  1. A family trust set up by the parents of the family (on apparently standard terms);
  2. Over time, all adult children benefited in various ways from the assets of the trust;
  3. Some years after the trust was established, a new trustee company was appointed, with one of the adult sons the sole director of the company;
  4. Around 3 years later the trust distributed one of the properties of the trust to the sole director in his personal name;
  5. On discovering the transfer some years later, a sister brought proceedings to unwind the transaction and have the trustee replaced.
In letting the transfer stand, however also removing the trustee, the court confirmed:
  1. While the trustee did not give any reasons for its decision to transfer the asset, it was not required to under the trust deed.
  2. In any event, no record was provided of the decision – and even if there had been a document disclosing the reasons produced, the trust deed provided that the trustee was not bound to disclose any document setting out any reasons for any particular exercise of the trustee’s power.
  3. The trustee was entitled to transfer the property to the son under the terms of the trust deed, which provided that the trustee may in its absolute discretion transfer any property ‘to any beneficiary for his own use and benefit in such manner as it shall think fit’ - with specific provision also confirming the trustee did not have any obligation ‘to consider competing claims of beneficiaries’.
  4. The trustee also had no obligation to tell other potential beneficiaries of the trust of the transfer.
  5. In contrast, due to the clear hostility between the son and one of his sisters (their relationship had deteriorated significantly following the transfer) the court was of the view that the trustee should be replaced, applying the rules explored in many previous posts centred on the test that 'the only guide is the welfare of the beneficiaries, and a trustee may be removed if the court is satisfied that its continuance in office would be detrimental to their interests'.
As usual, please contact me 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 Human League song 'Love Action (I believe in love)'.

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Tuesday, June 14, 2022

The Mirror (man)** test - trustee powers of investment

Previous posts have considered various aspects of a trustee's powers.

Given another 30 June is on the horizon, it is timely to remember that the scope of a trustee's powers is often limited when relying on the provisions of the state based legislation in the area - reinforcing the preference to have comprehensive powers set out under the trust deed wherever possible.

The decision in G v G (No. 2) - [2020] NSWSC 818 is a useful point of reference in this regard.

The case involved the powers of a trustee of a protected estate (where the underlying sole beneficiary had lost capacity to manage their own affairs). As there was no trust deed regulating the trust, the relevant trusts act applied.

The key question in contention was whether the trustee had the power to invest assets of the trust in a retail superannuation fund (as opposed to a self managed superannuation fund).

The reason for the proceedings being the view that a payment by a trustee (which it was argued that by analogy, included a protected estate manager) into a superannuation fund is not an 'investment' of trust property by the trustee.

This was said to be because, by the payment into the fund, the trustee divests itself of trust property, loses control of that property and puts the property beyond the protective control of the court, albeit that, as a member of the fund, but without a property interest in the fund, the beneficiary (not the trustee) obtains a right to future benefits.

Furthermore, the trustee had arranged a binding death benefit nomination in favour of the legal personal representative of the estate of the beneficiary.

The court confirmed:
  1. The trustee had the power under the relevant legislation to invest, or to authorise a private manager to invest, a protected estate into membership of a Regulated Superannuation Fund (although perhaps not a self managed superannuation fund, without deciding that issue).
  2. This was at least in part because a protected estate manager stands in the shoes of the protected person and is the substitute decision maker. A protected estate manager does not hold property for the benefit of the protected person. Rather the protected estate manager controls the property which always remains in the name of the protected person.
  3. There was however no power under the legislation for the making of a binding, or indeed any other form of nomination, for the payment of a death benefit payable by the trustee of a superannuation fund.
  4. This was despite the fact that the court acknowledged that the prevailing view in Australia is that a binding death benefit nomination is not a testamentary act either because it is merely the exercise of a contractual right or the rules of the fund pursuant to which the nomination is given to the trustee confer a discretion on the trustee as to the identity of the person, or persons, to whom the benefit is to be paid.
  5. Rather it was held that the management of an estate terminates on the death of the protected person and therefore the manager's power to make a decision about what happens to the protected person's funds after their death cannot be valid.
  6. Thus, here, the proper course of action in relation to the nomination was there to be a separate court application authorising the effective making of a gift out of the estate of a protected person, and (perhaps) also an application for a statutory will (another topic considered regularly in View posts).
As usual, please contact me 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 Human League song 'Mirror Man'.

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Tuesday, June 7, 2022

(Platinum) pension** planning

In the lead up to (another) 30 June, it is worth remembering that up until the early 2000s, there were a number of planning opportunities available in relation to maximising accessibility to pension payments.

Due to perceived abuses of the system, the government and Tax Office developed extremely comprehensive anti-avoidance provisions.

While some felt that the extent of the crack down was an over reaction, by and large, all of the historical strategies were permanently removed.

While there are some, comparatively minor, planning opportunities still available, none of these can be implemented within any narrow timeframes.

In other words, for example, there is the ability to gift assets to family members or structures such as trusts, however these transfers must take place many years before access to the pension is intended.

There are specialist advisers that continue to assist in the area.

Perhaps, counter intuitively, department and government advisers are however often the best starting point to get a full understanding of the rules as they apply in any particular set of circumstances.

** for the trainspotters, the title today is riffed from the Beck song ‘Broken Train’.

Listen hear (sic):

Tuesday, May 31, 2022

(my) spouse** and the family trust

Previous posts have looked at various aspects of what a 'spouse' is, particularly for family law purposes.

Often, however a definition of a spouse under a discretionary trust deed is crafted in a way that is materially narrower than what might otherwise be the case for either family law or tax law purposes.

In particular, if a wide definition is adopted under a trust deed, it can potentially mean that even short term de facto spouses may have some rights as a beneficiary of the trust, particularly in relation to a trustee's obligation to provide an account to beneficiaries of their administration of trust assets.

Where a narrow definition under a trust deed is adopted, there would normally still be the ability for the trustee or appointor to nominate people who do not otherwise satisfy the definition of spouse under the deed, by way of a specific process on a case by case basis.

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

** for the trainspotters, the title today is riffed from the Blues Brothers song ‘Groove me’.

View hear (sic):

Tuesday, May 24, 2022

Hey!** It’s part III of the Ioppolo decision

Las week’s post looked at the original Ioppolo decision.

This post considers the subsequent appeal decision in Ioppolo & Hursford v Conti [2015] WASCA 45.

In broad terms, the appeal decision confirmed the original case, in particular:
  1. It was confirmed that section 17A(3)(a) of the Superannuation (Industry) Supervision Act 1993 (SIS Act) does not obligate the trustee of an SMSF to appoint the legal personal representative of a member following that member’s death.
  2. In other words, section 17A(3)(a) is a ‘permissive rather than mandatory' provision.
  3. This meant that the surviving trustee was within their rights to appoint a corporate trustee (of which he was the sole director) and still comply with the SIS Act.
  4. It was further confirmed that as the appointment took place within 6 months of the member’s death, then the fund was still complying for SIS Act purposes.
  5. In also confirming that there was no lack of bona fides in the trustee’s decision, the court expressly commented that the subsequent signing by the deceased of a binding nomination (in favour of her husband) meant that it was reasonable to assume that the earlier made comments in her will (requesting that the death benefit pass to her children) had been superseded.
As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Pixies song ‘Hey’.

View hear (sic):

Tuesday, May 17, 2022

(Nothing) challenging** a trustee's decision

Previous posts have considered the key aspects of the Ioppolo decision.

One aspect of the decision, which is potentially very relevant for advisers and clients alike, relates to the plaintiff's argument that the trustee (being effectively the surviving husband) had not exercised his discretion in paying the entirety of his deceased wife's death benefit to himself in a 'bona fide' (or in good faith) manner, and therefore, should have been forced to repay the benefit to the fund.

In addressing this issue, the court specifically commented as follows:
  1. The husband had sought specialist advice in relation to his rights and obligations as the trustee;
  2. The husband deliberately waived his right to confidentiality (or privilege) in relation to this advice;
  3. The court on reviewing the advice agreed with the conclusion given, that being that the husband was able to make the payment to himself;
  4. Where a trustee is acting on advice of a specialist, it will be generally very difficult to successfully argue that the trustee lacked good faith in making a decision;
  5. Even whereas here, there was a provision of the deceased’s will that contradicted the decision ultimately made by the husband, this of itself did not automatically mean that the husband was acting without good faith, particularly when there was no other evidence to support the allegation; and
  6. Ultimately, a court will only review the way in which the discretion of a trustee is exercised in very limited circumstances.
Next week’s post will provide commentary on the outcome of an appeal of the original decision.

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

** for the trainspotters, the title today is riffed from the James song ‘Ring the bells’.

View hear (sic):

Tuesday, May 10, 2022

Sometimes** the Family Court will allow access to trust documents

The case of Schweitzer & Schweitzer [2012] FamCA 445 considers the disclosure of documents claimed by one spouse to be in the possession, or under control, of the other.

The specific facts of this case were that the husband was a director of two corporate trustees, but not the sole director. In one corporate trustee, the husband's father was the other director. In the other corporate trustee, the husband's father and mother were the other directors.

While the husband was not a shareholder of either of the trustee companies, however he was a discretionary beneficiary of both trusts.

The appointor of both trusts was the husband's father.

The wife applied to the court asking that the husband disclose the financial statements, tax returns, bank statements and the minutes of meeting relating to trust distributions by the corporate trustees.

The wife’s request was rejected on the grounds that the husband had a fiduciary obligation in relation to the holding and use of trust and corporate trustee documents.

The court also held that the documents were not under the husband’s ‘control‘ for the purpose of the Family Court rules. The decision confirms that directors of corporate trustees have no right to 'possession' or 'control', but only to 'access' trust documents and that such access must be used strictly for the trust or company purposes.

The documents might have been accessible if the wife was able to join the corporate trustees as parties to the proceedings, although this was not necessarily something the court would approve; and even if they were joined, disclosure of the documents would still be subject to the court’s discretion.

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

** for the trainspotters, ‘Sometimes’ is a song by Badfinger.

Listen hear (sic):