Monday, November 26, 2012

Single v multiple testamentary trusts: The debate continues

Last week’s post set out a number of reasons as to why a single testamentary discretionary trust (TDT) might be the preferred structure, even if there are multiple family members to benefit under an estate plan.

As noted there are a number of factors that need to be taken into account in any particular estate planning exercise and there are a wide range of the factors that might be relevant in deciding to implement multiple TDTs.

Many of these factors have a practical focus and can include:

1              the different geographical locations of the children - particularly if one or more children live overseas;

2              poor relationships between siblings (or their respective spouses) meaning that jointly controlling wealth is likely to further fragment family dynamics;

3              the risk profiles of each child’s investment outlook;

4              the underlying nature of the wealth – for example, if particular assets are earmarked for the sole control of a particular beneficiary;

5              differences in the ‘life cycle’ of each beneficiary – for example if one child themselves has young (or no) children whereas another child has adult children, their investment objectives can look quite different;

6              the desire to have different control mechanisms in relation to different children – for example one child might be the sole controller of their TDT whereas another child may have one or more co-trustees, or indeed, not be a trustee at all; and

7              there can be a myriad of difficulties that arise if a single TDT is utilised and it is still running in, say, two generations time both in terms of overall management of the structure and how income and capital is ultimately allocated.

In the next post we will look at one further variation on this debate, the so called ‘hybrid’ approach.

Until next week.

Monday, November 19, 2012

Single v multiple testamentary trusts: The debate

One issue that comes up regularly in estate planning exercises where there is more than one family unit ultimately to benefit, is whether a single or multiple testamentary discretionary trusts (TDTs) should be implemented.

For example, if there are three adult children, each to share an estate, should those three children jointly control a single TDT or should each child (perhaps with a co-trustee) control a separate TDT, with each TDT receiving one-third of the estate.

As with many aspects of estate planning, there is no ‘correct’ approach.  This said, some of the factors that would tend to support using a single TDT include:

1              if some (or all) of the children are under the age of 18 – an estate planning exercise should always be undertaken on the assumption that the willmaker dies shortly after signing the document.  Therefore the primary focus should be on the needs of the surviving spouse.  In these circumstances, it is generally not appropriate for the wealth to be held across multiple TDTs where the surviving spouse will likely be in control for many years;

2              if asset protection (for example guarding against a relationship breakdown of any of the children) is critical, then generally a single TDT will be the more robust approach;

3              if the vision of the will maker is to have the next generation (i.e. their children) effectively act as ‘custodian’ for future generations, then this is normally more easily achieved via a single trust; and

4              if the underlying nature of the assets would make a ‘split’ ownership structure unduly complicated – for example if there is, say, one significant asset (such a property or business).

The next post will focus on some of the reasons that a multiple TDT strategy might be more appropriate.

Until next week.

Monday, November 12, 2012

Deferral of property settlements

This week’s post looks at a recent Family Court case - Pratt [2012] FamCAFC 81 (13 June 2012).  A link to the full copy of the decision is as follows:

The husband and wife were graziers.  The main issue in dispute was that a valuer had confirmed there had been a $10 million decrease in value of their two cattle stations over recent years as a result of exceptional circumstances (such as the restrictions on live cattle export).  The parties agreed that as a result, the bank debt over the properties substantially exceeded the value of the land.

The wife sought a three year adjournment under the Family Law Act to enable a ‘just and equitable property settlement’, on the basis of the valuer’s statement that the land should increase in value substantially over the next two years, as market conditions return to normal. 

The husband opposed the delay on the basis that the parties’ debts exceeded their assets and he could not meet the interest owed to the bank.  The adjournment was originally granted but appealed by the husband.

Normally an adjournment is only available where a ‘significant change’ in financial circumstances is likely and the delay will probably do justice, more so than an immediate division of property.

Ultimately, the Court accepted the husband’s argument and ordered that the property settlement be finalised immediately.  A key aspect of the decision to deny an adjournment was the failure in the original decision to factor in the cost of maintaining an increasing debt through interest on the loan facility and the ongoing costs of running the properties.

In other words, it was held that in order to delay a property settlement, all relevant financial issues must be considered.  It is not sufficient for there simply to be a ‘significant change’ in the gross value of the assets.

Until next week.

Monday, November 5, 2012

Wholesale deed updates post Bamford

During our recent master class seminars on trusts, one specific issue that was addressed related to updating family trusts after the Bamford decision and related legislation.

The post today is the 4th and final one in this series of posts via the following video link under the heading ‘Wholesale deed updates post Bamford’. If you would like a link to the video please let me know.

As with other video posts, for those that do not have easy access to the streaming or would otherwise prefer to read the transcript, this is set out below -

The third idea is the ‘wholesale update’ approach.

The providers around are saying for $x you can go and get all of your deeds across the board 2012 compliant, really adopting the same approach that you do with an SMSF trust deed. People accept that with an SMSF, you're going to have to update it every 5 years probably. That’s just the life that you lead running an SMSF.

We would argue that people have never really had that attitude with family trusts. Whether that’s right or wrong is another question. But by and large, people have not really had that wholesale approach. We'll speak about Clark and why that may be the case from a resettlement perspective.

What we're saying with the third option is that you just go and do the update for all clients. Are you running the risk that you'll have to go and do that again in 3 or 4 years’ time? Absolutely you are. But in the meantime, are you investing in your clients by saying you will read the deed once, make sure that every deed across the entire client base has the exact same provisions, can start getting some efficiencies in terms of resolutions, in terms of the review process.

It may be a little bit of pain upfront, however hopefully, any subsequent changes won't be too prohibitive anyway and many are saying may be this is the way to go.

Until next week.