Following on from recent posts, a further issue has come up over the last few days which relates to where a discretionary trust does not have any default provisions that apply for the distribution of capital.
The issues in this regard are quite complex, however like earlier posts, the conservative position is clear – i.e. every discretionary trust should ideally have clear provisions that apply for the distribution of capital in the event that a trustee fails to make a valid distribution.
The position in relation to default provisions for income is not as clear – often where there are no fallback provisions for income, an undistributed amount will simply form part of the capital of the trust.
This said, particularly following the High Court’s decision in Bamford, we have seen a number of advisers focus very carefully on all of the core provisions of their client’s trust deeds and the complete absence of a default distribution of capital, or in some instances, a purported default distribution that does not operate effectively, can be a trigger for looking to at least minimise the assets that are acquired in a trust moving forward.
Until next week.
Monday, May 28, 2012
Monday, May 21, 2012
Family court case on the distinction between a loan and a gift
We are increasingly seeing advisers and clients alike, focussing (very deliberately) on the way in which they advance monies to their children to assist with, for example, the purchase of a family home.
Today’s post looks at a recent case, which was decided last year, and provides a useful example of the distinction between gifting and lending monies from a family law perspective, particularly in the event of a relationship breakdown.
The case of Pelly & Nolan [2011] involved a situation where the husband’s father advanced approximately $520,000 to ‘help his son out’. The initial advance was $320,000 to assist the son and his young family purchase a property. Additional advances were also made to assist with general living expenses totalling approximately $200,000.
The evidence in the case suggested that the father sought repayment for only the $320,000 advanced relating to the property acquisition and not the monies advanced for general living expenses.
As the initial advance was facilitated by a loan agreement and for the purpose of assisting with the property purchase, the court held that such advance was enforceable, even though no interest on the loan had been demanded nor paid.
In relation to the additional $200,000 advanced, there was no evidence to suggest that a repayment would be enforced by the father.
In the circumstances therefore, the court held that the $320,000 advance was indeed a loan and thus a liability that needed to be deducted from the matrimonial assets; whereas the $200,000 advance would be included as property for distribution to the wife (although the fact that it had been contributed by the husband’s father would be taken into account).
A link to the full decision is as follows –
http://www.fmc.gov.au/judge/docs/Pelly%20&%20Nolan%20[2011]%20FMCAfam530.rtf
Until next week.
Today’s post looks at a recent case, which was decided last year, and provides a useful example of the distinction between gifting and lending monies from a family law perspective, particularly in the event of a relationship breakdown.
The case of Pelly & Nolan [2011] involved a situation where the husband’s father advanced approximately $520,000 to ‘help his son out’. The initial advance was $320,000 to assist the son and his young family purchase a property. Additional advances were also made to assist with general living expenses totalling approximately $200,000.
The evidence in the case suggested that the father sought repayment for only the $320,000 advanced relating to the property acquisition and not the monies advanced for general living expenses.
As the initial advance was facilitated by a loan agreement and for the purpose of assisting with the property purchase, the court held that such advance was enforceable, even though no interest on the loan had been demanded nor paid.
In relation to the additional $200,000 advanced, there was no evidence to suggest that a repayment would be enforced by the father.
In the circumstances therefore, the court held that the $320,000 advance was indeed a loan and thus a liability that needed to be deducted from the matrimonial assets; whereas the $200,000 advance would be included as property for distribution to the wife (although the fact that it had been contributed by the husband’s father would be taken into account).
A link to the full decision is as follows –
http://www.fmc.gov.au/judge/docs/Pelly%20&%20Nolan%20[2011]%20FMCAfam530.rtf
Until next week.
Monday, May 14, 2012
What are some of the steps taken in relation to regulating control of testamentary trusts
As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the steps taken in relation to regulating control of testamentary trusts?’ at the following link - http://youtu.be/A104L8JfGGw
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –
The reality I think for many people in this area at the moment that estate planning as a whole, and particularly the use of more bespoke forms of testamentary trusts, is the ‘new black’.
What that has meant I think for a lot of advisers in this area, particularly for those with legally trained advisers is that many of the concepts that you see in wider corporate law or corporations law are now actually being filtered back into traditional estate planning.
What we're finding, particularly where people are wanting to use trusts that are going to last at least 2 generations, possibly even 3 or 4, is that the regulatory regime, if you like, sitting around the control of those structures is becoming far more sophisticated.
Probably the biggest thing we're seeing in that area is the use of specifically set up trustee companies. Not in terms of the government setup structure, but in terms of the actual client setting up a corporate structure and being very particular about the way the constitution of that company is crafted, the way shareholders can be nominated, the way directors are appointed and the way voting takes place within that structure all overseeing the way in which the actual trust is going to be run moving forward.
Until next week.
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –
The reality I think for many people in this area at the moment that estate planning as a whole, and particularly the use of more bespoke forms of testamentary trusts, is the ‘new black’.
What that has meant I think for a lot of advisers in this area, particularly for those with legally trained advisers is that many of the concepts that you see in wider corporate law or corporations law are now actually being filtered back into traditional estate planning.
What we're finding, particularly where people are wanting to use trusts that are going to last at least 2 generations, possibly even 3 or 4, is that the regulatory regime, if you like, sitting around the control of those structures is becoming far more sophisticated.
Probably the biggest thing we're seeing in that area is the use of specifically set up trustee companies. Not in terms of the government setup structure, but in terms of the actual client setting up a corporate structure and being very particular about the way the constitution of that company is crafted, the way shareholders can be nominated, the way directors are appointed and the way voting takes place within that structure all overseeing the way in which the actual trust is going to be run moving forward.
Until next week.
Wednesday, May 9, 2012
What are the stamp duty consequences of assets passing via testamentary trusts
As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the stamp duty consequences of assets passing via testamentary trusts?’ If you would like a link to the video please let me know.
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –
One of the great difficulties in this area, and I think it's an often used phrase, is that in many respects, a lot of these issues, sort of you take one step forward and 2 or 3 steps backwards.
As much as we've touched on already, the great step forward in terms of legislative certainty around the way in which the Tax Office is going to interpret Division 128 from a capital gains tax perspective, conversely what we're seeing from a stamp duty perspective is almost the exact opposite.
So obviously, we still have a situation across Australia where every single state has different stamp duty tests and different stamp duty rules in relation to how they apply distributions under a deceased estate.
It can be said that in every jurisdiction there is certainly an alignment between Division 128 under the Tax Act for the transfer of assets from the will maker to the legal personal representative and from the legal personal representative down into a trust structure.
From there, unfortunately, it really does start to unravel quite significantly, because even in the states that historically allowed assets to be distributed out of an initial trust into a sub trust or out of an initial trust directly to an individual beneficiary, those states are starting to wind back from that position and we've got a situation for many clients where if they're going into the structure, the conservative and prudent advice will probably be that they should expect to pay stamp duty when ultimately taking assets out of the initial trust.
Now I guess that line of reasoning or line of argument needs to be counterbalanced against, and the discussion about whether in fact there will be dutiable property inside the trust; and to the extent that the assets are likely to centre around cash or managed funds or shares, then it may well that for many clients the fact that there's a potential stamp duty risk down the track is in fact irrelevant.
For any adviser working in this space, the ability to give complete signoff from a tax perspective is very much counterbalanced against the fact that from a stamp duty perspective there has to be seen to be a real risk moving forward that there will be double stamp duty potentially.
Until next week.
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –
One of the great difficulties in this area, and I think it's an often used phrase, is that in many respects, a lot of these issues, sort of you take one step forward and 2 or 3 steps backwards.
As much as we've touched on already, the great step forward in terms of legislative certainty around the way in which the Tax Office is going to interpret Division 128 from a capital gains tax perspective, conversely what we're seeing from a stamp duty perspective is almost the exact opposite.
So obviously, we still have a situation across Australia where every single state has different stamp duty tests and different stamp duty rules in relation to how they apply distributions under a deceased estate.
It can be said that in every jurisdiction there is certainly an alignment between Division 128 under the Tax Act for the transfer of assets from the will maker to the legal personal representative and from the legal personal representative down into a trust structure.
From there, unfortunately, it really does start to unravel quite significantly, because even in the states that historically allowed assets to be distributed out of an initial trust into a sub trust or out of an initial trust directly to an individual beneficiary, those states are starting to wind back from that position and we've got a situation for many clients where if they're going into the structure, the conservative and prudent advice will probably be that they should expect to pay stamp duty when ultimately taking assets out of the initial trust.
Now I guess that line of reasoning or line of argument needs to be counterbalanced against, and the discussion about whether in fact there will be dutiable property inside the trust; and to the extent that the assets are likely to centre around cash or managed funds or shares, then it may well that for many clients the fact that there's a potential stamp duty risk down the track is in fact irrelevant.
For any adviser working in this space, the ability to give complete signoff from a tax perspective is very much counterbalanced against the fact that from a stamp duty perspective there has to be seen to be a real risk moving forward that there will be double stamp duty potentially.
Until next week.
Tuesday, May 1, 2012
What are the tax consequences of assets passing via a testamentary trust
As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘what are the tax consequences of assets passing via a testamentary trust ?’ at the following link - http://youtu.be/pqngu0EddtQ
As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below -
The reality has been that ever since the Practice Statement was released in around 2003, there has been a really implicit acceptance across the industry, and one would hope from the Tax Office as well, that the interpretation of Division 128 that allowed the transfer of assets, not only from a legal personal representative down into a testamentary trust, but then from that testamentary trust to another testamentary trust under some form of cascading arrangement, would be free from capital gains tax.
More importantly, any ultimate transfer out of the testamentary trust, whether it be the initial trust or a subsequent trust, would also be free of capital gains tax.
What that Practice Statement did was effectively give that approval from the Tax Office that that approach, that really had been the approach across the industry for many, many years, was not going to be challenged by the Tax Office.
What we've seen in very recent times, particularly with the 2011 federal budget, is that even though that approval seemed to be there from the Tax Office, the level of uncertainty that was created when you read that back with Division 128, meant that legislative reform was required.
We're seeing that coming through the system now with the announcement in the 2011 federal budget, which effectively looks to replicate the position under the Practice Statement from 2003.
Until next week.
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