Tuesday, October 20, 2020

‘The Vibe’, family trusts and family law (part 2)

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Last week's post considered some of the key issues in relation to the Family Court's ability to access assets of a trust.

The decision in Harris & Dewell and Anor [2018] FamCAFC 94 provides more context to the approach of the court in this area. As usual if you would like a copy of the case please contact me.

In summary, the factual matrix was as follows:
  1. A unit trust was established about 5 years before the start of the relevant relationship.
  2. The husband and husband’s father were the sole shareholders in the corporate trustee of the unit trust (the father owning 67%, the husband 33%). Although the husband was for many years a director of the corporate trustee, he had retired from this role some years before the trial, replaced by his solicitor. The solicitor was however accustomed to acting in accordance with the husband's wishes.
  3. At trial the husband’s father was the sole unit holder of the unit trust (and the husband had never owned any units), although it was assumed that the husband would inherit the units on his father's death (the father was aged 99 at the time of the trial).
  4. It was concluded that the level of control held by the husband over the trust was clearly significant.
In holding that the trust was not an asset of the husband (although it was taken into account as a financial resource) the court confirmed as follows:
  1. Property of a trust can be treated as property of a party only where evidence establishes that the person or entity in whom the trust deed vests effective control is the ‘puppet’ or ‘creature’ of that party.
  2. Control of itself is not sufficient to deem trust assets to be the property of a party to a relationship. Instead, what is required is control over a person or entity who, by reason of the powers contained in the trust deed can obtain, or effect the obtaining of, a beneficial interest in the property of the trust.
  3. In other words, the spouse must have an actual ‘lawful right to benefit from the assets of the trust’.
  4. Here, despite the extensive control held by the husband, he did not have the ability to guarantee benefit of the assets to himself - that right at all times rested with the husband's father.
  5. In a sentence, the trust was not the husband's alter-ego nor a device used by him for his sole benefit.
Therefore, the assets of the trust were not property of the husband for the purposes of the settlement proceedings with the former wife.

** for the trainspotters closely behind Dennis Denuto and his vibe principle is the refrain ‘tell ‘em they’re dreaming’.

Tuesday, October 13, 2020

‘The Vibe’, family trusts and family law (part 1)**

View Legal Blog ‘The Vibe’, family trusts and family law (part 1)**

Previous posts have referenced the legal principle known as ‘The Vibe’, as developed by the legendary Australian movie ‘The Castle’.

In an arguably analogous decision the family law case of Romano & June [2013] FamCA 344 is relevant. As usual, if you would like a copy of the decision please let me know.

The case was complex and the judgement took over 19 months to be issued by the court following completion of the trial and ran to almost 100 pages in length.

It is important to note that the court held that the husband was not being honest about many of his arguments concerning the trust. Furthermore, several of the witnesses whose evidence the husband also relied upon (for example, close friends and colleagues) was also held not to be honest.

One, of many examples, listed in the case of the courts view of the husband is best captured in the following extract -
“I am quite satisfied that the husband’s resignation as a director of [British Virgin Island company] X1 and several other companies, after the commencement of these proceedings, was effected not for the reasons advanced by the husband and those of his witnesses who gave evidence about the matter, but so that he could not be required to obtain access to any of the records of the companies that directors lawfully have access to. That he did so resign after being put on notice by the solicitors for the wife that he should not do so gives me added cause for such satisfaction, on the balance of probabilities.”
Briefly, the factual matrix was as follows:
  1. the relationship was around 16 years in length (9 years of marriage);
  2. there were no children of the union;
  3. the husband had set up a family trust some years before meeting the wife as part of a number of entities, including (for example) a company the husband was deemed to control (despite having no legal ownership) in the British Virgin Islands, that was set up around the time the husband was advised to (and did) move to Monaco (apparently for tax planning purposes);
  4. at all relevant times the husband was one of two directors of the corporate trustee of the trust and a primary beneficiary of the trust; and
  5. the husband however was never an appointor of the trust, nor a shareholder of the corporate trustee.
In rejecting the husband's argument that he did not control the trust (and was merely a potential beneficiary of future distributions), the court confirmed:
  1. while the husband did not have legal control of the trust, he did have effective control;
  2. the husband deliberately looked to avoid being in legal control of the trust, while in reality regarding the assets of the trust as his; and
  3. given the level of control the husband exercised over the trust assets, it was appropriate to include them as assets of the marriage and available for division in the property settlement.
The key aspect of the court's reasoning is arguably best captured by the combination of its assessment of the husband's lack of honesty and the following extract from the judgement
“The question whether the property of the trust is, in reality, the property of the parties or one of them.... is a matter dependent upon the facts and circumstances of each particular case including the terms of the relevant trust deed ... [Here the] husband’s actual control would allow him to cause those assets to be appointed to himself or his wife along with his and her right to due consideration constitute property of the parties.”
** for the trainspotters Dennis Denuto and his need no introduction.

Tuesday, October 6, 2020

Trusts structuring checklist - part III**

View Legal Blog Trusts structuring checklist - part III

The last two posts have each mentioned seven key issues that should generally be considered whenever establishing or amending a discretionary trust deed.

Set out below are a further seven issues that should generally be taken into account:
  1. If there is an appointor, is the role automatically terminated on certain events (for example death, bankruptcy)?
  2. If the appointor ceases to act, do their powers pass to anyone else, and if so, who?
  3. If there is more than one appointor, must they act jointly?
  4. Is the appointor a beneficiary of the trust?
  5. Will the trust own more than one asset class?
  6. For an existing trust, has there been a pattern of income or capital distributions to at risk individuals associated with the trust?
  7. For an existing trust, have there been variations to the deed following establishment that impact on the overall control of the trust?
** for the trainspotters, a classic song from Led Zeppelin album ‘III’, namely ‘Immigrant song’.

Tuesday, September 29, 2020

Trust structuring checklist - part II

View Legal Blog Trust structuring checklist - part II

The post last week mentioned seven key issues that should generally be considered whenever establishing or amending a discretionary trust deed.

Set out below are an additional seven issues that should generally be taken into account:
  1. Does the trustee effectively/practically control the trust in an unfettered way?
  2. Does the trustee exercise its powers independently or are they controlled or subject to approval by any other person/entity?
  3. Is the trustee a beneficiary of the trust?
  4. Can a beneficiary or a class of beneficiaries control the actions of the trustee?
  5. Can beneficiaries be removed or added, and if so by whom?
  6. Is there any risk that the trustee may be seen as simply the ‘alter ego’ of some other person?
  7. Does someone (e.g. an appointor, guardian, principal) have the power to unilaterally change the trustee?
** for the trainspotters, a classic song from Prince album ‘Hits (Vol. II)’, namely ‘Raspberry Beret’.

Tuesday, September 22, 2020

Trust structuring checklist - vol I**

View Legal Blog Trust structuring checklist - vol I

Over the years we have developed a checklist of some of the key issues that should be considered whenever establishing or varying a discretionary trust.

Obviously, the relevance of each issue depends on the exact circumstances of the client and over this and the next two posts, each of the 21 issues in our non-exhaustive list will be summarised.

The various issues are not listed in any particular order of priority and the first seven items on the checklist are as follows:
  1. Who is the trustee of the trust?
  2. If the trustee ceases to act, do their powers pass to anyone else, and if so, who?
  3. Is the trustee an individual or a company?
  4. If the trustee is a company, who are the directors?
  5. Is there a default distribution of the income and capital of the trust to certain beneficiaries?
  6. Does the trust deed restrict the range of beneficiaries who can receive income or capital distributions?
  7. Does the trustee need consent/approval of any other person for distribution?
** for the trainspotters, a classic song from George Michael album ‘Listen without prejudice (Vol. 1)’, namely ‘Freedom 90’.

Tuesday, September 15, 2020

Read the deed … another one (bites the dust)**

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.

The following case study falls under the mantra ‘Read the Deed’.

Here, the factual scenario centred on a standard family trust.

However, when I say ‘standard’, I should put an asterisk. This is because we thought it was standard and the accountants that had sent the job in to us had been operating for about 10 years on the basis that it was a ‘standard’ family trust.

Under the trust deed, there was a principal (often also referred to as an appointor). In other words, there was a person who had the right to hire and fire the trustee.

As is well understood, in some trust instruments where there is a principal or an appointor, there is then under the power to vary a requirement that that principal or appointor consent to any purported variation before the trustee is permitted to proceed with the proposed variation.

Here, arguably, re-enforcing the assumption that the deed did seem to be a standard family trust, pursuant to the variation power, the principal was not required to consent to any variation.

Importantly, there was a variation that had been done about 12 years ago, which was two years before the current accountant became involved. Under the variation, there was the nomination of a bucket company. In other words, the nomination of a corporate beneficiary to help cap the tax rate at 30 cents – a standard strategy.

As part of a review and updating of the trust deed, we, in conjunction with the accountant, actually sat down and read the entire trust instrument.

What we discovered was that the second to last clause in the deed, buried with the general powers (for example, powers about the power to lend, the power to invest), was a clause that had a nebulous title of ‘Further Provision’.

The Further Provision clause was said to apply in relation to any exercise of the power to vary that resulted in the nomination of a new beneficiary.

The clause mandated that the trustee must obtain the principal’s consent before relying on the variation power.

The relevant deed of variation however did not have the principal’s consent. There was therefore 12 years of distributions to the bucket company, and every single one of those was void for the failure to comply with the trust instrument.

The only real solution, with the aid of hindsight, is to ensure in the future, always - read the deed, read the deed, read the deed, read the deed.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the Queen song ‘Another one bites the dust’.

Tuesday, September 8, 2020

Can(‘t) explain Family Constitutions?**

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.

In relation to the classic form of family constitution, there is no legal enforceability of the terms of the document.

One clear advantage of this is that there are therefore definitely no transaction cost issues with entering into a family constitution.

This is because the document is simply a memorandum of understanding, a statement of intent, a handshake agreement, a best wishes or best endeavours arrangement, but nothing else.

In other words, there is no change in legal ownership of any assets.

Thus, there is no stamp duty triggered.

Similarly, there is no tax event triggered.

It is simply a non-binding arrangement that doesn’t actually have any other legal impact.

Some families therefore rightly ask – “Why is there any need for approaches such as umbrella trusts, trust splitting, trust cloning, and related ideas? Let’s just keep it simple with a family constitution. We may not even get any professional involved in drafting it up because we can download one off the Internet. Let’s just make it up as we go along, and really, as long as the communication levels are there, we don’t need anything else.”

This said, our experience is that for many families, even when they are confident that the informal approach will succeed, they have a mantra of ‘in times of peace, prepare for war’.

In other words, if the family is robust enough to be able to have the critical discussions and get a non-binding family constitution in place, that’s the exact type of family that should build on the positive platform, go to the next level, and get legally binding arrangements in place as well.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the Who song ‘Can’t explain’.