Monday, September 24, 2012

Penalising the under insured

With thanks to co View Legal director Patrick Ellwood, this week’s post looks at a situation we had recently under an insurance funded buy sell arrangement where the parties were wanting to craft the agreement in order to penalise a business owner if they were under insured.

In particular there was a desire to ensure that the agreement discounted the purchase price that was otherwise payable under the agreement if the insurance payout was less than the market value of the interest in the business at the relevant date.

For a number of reasons we recommended against this approach, including:

1.   The overall aim of any business succession agreement is to achieve as smooth a transition of the business as possible.  If a party to the transaction believes that they are not getting fair value then the prospects of a smooth transmission are significantly decreased.

2.   The exiting owner (or their estate) will still be required to pay tax on the transfer of the interest at full market value (even though the price under the agreement would be less than market value) due to the way in which the market value substitution rules under the Tax Act operate.

3.   Practically, if the exiting party had sold their interest the day before the triggering event, they would have received market value.  It is arguably inequitable for an owner to be disadvantaged because of a sudden involuntary exit event, as opposed to a planned voluntary exit.

4.   Generally most agreements (ours included) cater for any shortfall in insurance funding by ensuring that the remaining owners are still required to pay the difference but have an extended period of time (for example, three years) to repay the difference.

Until next week.

Monday, September 17, 2012

Assets of a family trust not necessarily at risk on a matrimonial breakdown

With thanks to team member James Ford, the post this week focuses on another recent decision of the Family Court concerning trusts.

The case is Morton V Morton [2012] FamCA 30. If you would like a copy of the case please email me.

Essentially, the case confirms that, where appropriately structured, the assets of a family trust will not be considered matrimonial property on a relationship breakdown.

Until next week.

Monday, September 3, 2012

When will ‘master’ trusts be uncommercial?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will ‘master’ trusts be uncommercial ?’ at the following link -

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The issue in relation to when the traditional master trust might not in fact be entirely commercial is probably very similar to many other issues in this area in so much as there's a myriad of reasons why it might not be entirely sensible. 

Three common themes that I would probably encourage people to keep an eye out for would be – firstly, that the overall value of the estate just doesn't justify any form of testamentary trust. 

In other words, the ongoing administrative cost and the actual costs to actually set the structure up just don’t make it economical, and part of it might be that because the will makers’ are ultimately wanting to spend the kids’ inheritance, so they're actually going to make sure that it's all gone in the first place.

That would be the first category. 

The second category would be what we would describe as an estate where there is ‘enough wealth to be dangerous’ – so in other words, not wanting to put any actual numbers around it, but if there are, say, ultimately 3 or 4 children that are going to take a benefit, but the overall portfolio of the estate makes it unwise to be trying to lock that into one particular structure, and it would be in fact better for everyone concerned that they each get their own piece of the pie as it were, then that can be another big reason to sort of trend away from master trusts. 

That can often be driven not just by the financial numbers involved, but also practically, if you've got children spread all around the world, it may not be the absolute smartest thing to be trying to lock them into one structure. 

The third big reason tends to be actually at the other end of the scale where you've got significant wealth involved, serious wealth involved, and you've got the will maker sitting there and saying look, at the end of the day, while we're very happy to have the master trust as a big part of what we're trying to achieve here, we need to be able to allocate some money off directly to the ultimate beneficiaries.  So that they actually can have something they can touch and feel - I guess it's called the ‘beer money’ trust on the side.

In those cases, it's not so much that the master trust is uncommercial overall, it's more that if you only had a master trust, that would be an unwise way to go in a particular set of circumstances.

Until next week.