Tuesday, December 17, 2013

Final Post and Season's Greetings

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2014.

Similarly, my Twitter and LinkedIn postings will also take a hiatus until the New Year as from today.

Thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to, the various posts.

Additional thanks also to those who have purchased (via donation) the various versions of ‘Inside Stories’ – the consolidated book of posts.  An updated version of this book, containing all posts over the last four years should be available in the new year.

Very best wishes for Christmas and the New Year period.

Tuesday, December 10, 2013

Testamentary capacity

Recent posts have considered various aspects of assessing a will maker's testamentary capacity. 

One issue that has come up recently is the ability for the lawyers to make the relevant assessment, where all client meetings are web-based.

Perhaps somewhat counter-intuitively, the ability to assess testamentary capacity via web platform is often superior to the traditional, face-to-face, delivery of legal services. The reasons for this include:
  1. generally lawyers conducting a meeting should have the general rules for assessing the testamentary capacity of a will maker top of mind at the time of conducting the web based meeting, and asks probing questions crafted to test the criteria; 
  2. at View Legal, the estate planning platform via the web is a strictly wholesale platform, each client can only access the solution if their financial adviser or accountant facilitates the process; 
  3. generally, any client that has an ongoing relationship with a financial adviser or accountant has a very good understanding of their financial affairs and the significance of them; 
  4. the financial adviser or accountant facilitating the process will be considered by the client as their 'trusted adviser' and will often have a deep, longstanding and regular relationship with the client. Rarely do traditional law firms enjoy such a relationship with a client; 
  5. as the adviser and View Legal work collaboratively, sensitive issues such as capacity of the client are far easier to raise, discuss and address; 
  6. again, largely due to the collaborative approach between the adviser and View Legal, the lawyer will have received and reviewed a significant amount of detailed information about the client, which in comparison is often far more comprehensive than in the traditional process. This allows View Legal to ask far more probing and relevant questions as part of the web-based meeting; 
  7. the web-based meeting is fully recorded (with the client's consent), which provides significant evidentiary advantages if ever needed, as compared to the traditional approach; and 
  8. finally, the signing meeting is regularly hosted by the referring trusted adviser, who in most instances, will be best placed to very quickly identify if there has been a significant deterioration in the mental capacity of the client.
Until next week.

Tuesday, December 3, 2013

Assessing Testamentary Capacity (Part II)

Last week's post looked at the general rules for assessing the testamentary capacity of a will maker. In particular, six of the twelve main items to consider were listed.

As promised, this week's post lists the other six main issues to consider, which are as follows:
  1. the person does not seem unduly influenced by others about their decision making; 
  2. the person does not display an unreasonably low level of concern with the activities of other people (particularly their immediate family members); 
  3. the person does not display an unduly low ability to adapt to change; 
  4. the person did not appear to be prone to unduly losing things or themselves getting lost; 
  5. there is no reason to believe the person has recently undergone a change in behaviour or experienced a change in personality; and
  6. there is no reason to believe that there are any other factors present that might indicate impaired testamentary or decision-making capacity. 
In next week's post, we will consider some specific issues in relation to assessing testamentary capacity in a web-based environment.

Until next week.

Tuesday, November 26, 2013

Assessing testamentary capacity (part I)

One issue that comes up relatively regularly is the ability of a lawyer to determine whether a client has the required capacity to make a will.

Arguably, the leading case in relation to testamentary capacity dates back many years and is the decision in Banks v Goodfellow [1870] 5 LR QB 549. If you would like a full copy of the court decision please email me directly.

As set out in the decision, and as subsequently adopted and expanded on in many related cases, there are a number of key tests that a lawyer or witness to a will should consider.

The first six of these considerations are set out below (next week's post will summarise another six tests):
  1. there is no reason to consider that the person has a diagnosed condition that may affect their decision-making capacity (such as an intellectual or psychiatric disability, acquired brain injury or dementia); 
  2. the person does not seem unduly forgetful of recent events; 
  3. the person does not repeat themselves unduly; 
  4. the person seems able to grasp new ideas; 
  5. the person does not seem unduly anxious about having to make decisions; and 
  6. the person does not seem unduly irritable or upset about their ability to manage tasks. 
Until next week.

Tuesday, November 19, 2013

Share self-ownership - a structuring warning

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week is extracted below.

Recent articles in this Bulletin (for example, 2013 WTB 38 [1642] and WTB 43 [1821]) have focused on the various issues that can arise in relation to the use of corporate beneficiaries by discretionary trusts.

A separate issue that practitioners must be aware of whenever reviewing existing structures or establishing new entities, arises under the Corporations Act 2001. In particular, the Act expressly prohibits companies from owning shares in themselves.

This can arise in instances where a trustee company is incorrectly established with the trust (for which it is trustee) owning some or all of the shares. As the legal owner of those shares is the trustee, this results in the trustee owning shares in itself.

The relevant section is s 259A, which provides as follows:

"A company must not acquire shares (or units of shares) in itself except:

(a) in buying back shares under section 257A; or

(b) in acquiring an interest (other than a legal interest) in fully-paid shares in the company if no consideration is given for the acquisition by the company or an entity it controls; or

(c) under a court order; or

(d) in circumstances covered by subsection 259B(2) or (3)."

Under s 259F of the Act, if a contravention has occurred, a person who was involved (which is widely defined and includes any person who was, directly or indirectly, knowingly concerned in or party to the contravention) in the contravention may be subject to a civil penalty of up to $200,000. There are also potential criminal consequences that can flow from the breach.

Due to the potentially significant penalties that can arise under the Act, together with the likely adverse commercial ramifications, any identified breach of s 259A should be remedied as soon as practical following identification of the issue.

One option is for the persons involved in the contravention to apply to ASIC for a no-action letter, whereby ASIC confirms it does not intend to take any steps as a result of a particular contravention of the Act.

As flagged above, a breach of the Act in the SME space most typically arises where a trustee company of a family discretionary trust is listed under ASIC records as having its shares owned by the trust. That is, the trustee of the trust owns shares in itself. While "circular" ownership arrangements can be beneficial from an asset protection perspective, they must still comply with the Act.

The preferred approach therefore, where the shares in a corporate beneficiary are to be owned by a trust, is for a structure along the following lines:
  1. the shares in the corporate trustee should be owned by individuals with a low risk profile; 
  2. the corporate trustee should undertake no activities other than its trusteeship and the value of the shares in the trustee company should therefore be limited to their issue price; and 
  3. the trustee company in its capacity as trustee should own all of the shares in the corporate beneficiary.
Until next week.

Tuesday, November 5, 2013

Corporate trustees and SMSFs

Many specialist advisers to self managed superannuation funds (SMSFs) recommend the use of a corporate trustee, as opposed to individual trustees.

While the initial setup costs of a corporate trustee are generally higher than individuals, there are a range of reasons that the use of a company is beneficial, including:
  1. as other posts have demonstrated, the use of a corporate trustee provides limited liability protection. This can be particularly important if the SMSF owns real property; 
  2. special purpose corporate trustees of an SMSF are entitled to discounted annual ASIC fees; 
  3. record keeping and compliance is significantly improved with a special purpose corporate trustee in terms of what the auditor (and ultimately the Tax Office) expects to see; 
  4. from a succession planning perspective, it is significantly easier to regulate the control of a corporate trustee (i.e. by simply changing the directors from time to time) as opposed to individual trustees, where each time an individual trustee changes, there is often a myriad of documentation that needs preparing and notifications that must be made; and 
  5. particularly in relation to sole member funds, the use of a corporate trustee significantly simplifies the overall structure of a SMSF, as a sole director company is permissible. In contrast, it is impossible to create a valid SMSF with an individual trustee and sole member (there must always be an additional individual who acts as a co-trustee in this instance). 
Until next week.

Tuesday, October 29, 2013

Accelerating superannuation contributions

In recent times, particularly given the ongoing adjustments to the limits for concessional superannuation contributions, the way in which to maximise non-concessional contributions has been an area of focus.
The table that we often use, which summarises most of the main strategies available in this regard is set out below.

Member age
Financial year
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Scenario 6
  1. Assuming contributions are made prior to member’s 65th birthday or made after reaching age 65 and the member continues to satisfy the required gainful employment test. 
  2. Assuming contributions are made prior to member’s 65th birthday or the member was aged 65 at any time in the year and continues to satisfy the required gainful employment test of the contributions were made after the member’s 65th birthday. 
Until next week.

Tuesday, October 22, 2013

Adviser liability as a facilitator

Photo Credit: SalFalko cc
A recent post profiled a court decision where a lawyer was held liable for failing to have a client's estate planning instructions implemented within the space of a few days.

A number of advisers have made contact since the earlier post, concerned about their potential liability in similar circumstances.

While there does not appear to be any particular case exactly on point, we believe the broad position is as follows:
  1. advisers will potentially be liable for a failure to deliver to the standards that they promise, or alternatively, the standards expected of a competent adviser working in the area; 
  2. it is therefore important that advisers ensure that both their promotional material and their retainers clearly articulate the level of service being provided and then ensure that they perform at least to that standard; 
  3. in this regard, articulating what will not be done is often at least as important as setting out what will be done; 
  4. it should generally be relatively easy for most advisers to discharge their professional obligation in the estate planning space by simply ensuring that the law firm that they partner with is engaged early in the process, and that the relevant law firm accepts the client’s instructions; 
  5. certainly, a large part of the success of our wholesale platform via View Legal seems to have come from the fact that its entire foundation is built on a collaborative approach with the adviser facilitating the process and the deliberate accepting of all legal risks associated with the process - this is in direct contrast to virtually all other alternatives that advisers have, such as online will providers and ‘will kits’; 
  6. despite the above, there is an increasing amount of publicity about law firms marketing to disgruntled beneficiaries about their ability to sue advisers such as financial planners, accountants and risk advisers (in addition to suing other law firms), and in the vast majority of the promotional material, these law firms advertise their services on a 'no win no fee' basis – this trend would seem to suggest there will be increasing litigation in the area; and 
  7. in this context, the recent situation where the solicitor was sued for negligence is a timely reminder for all advisers to have a bias towards compliance, best practice and continual improvement of their service offering. 
Until next week.

Tuesday, October 15, 2013

One remedy where trust distributions prove problematic

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week is extracted below.

A recent article in this Bulletin focused on the critical need to "read the deed" whenever making trust distributions (see 2013 WTB 38 [1642]).

Even where distributions are made validly to a potential beneficiary, they can prove extremely problematic from an asset protection perspective.

One scenario that seems to arise regularly in this regard is the distribution by a trust to a corporate beneficiary, the shares in which are owned personally by an at-risk individual.

Often, the difficulties with this ownership structure are not identified until after many years of distributions have been made to the bucket company, and anecdotally, the issue is often first identified at a point which is too late, for example, just before litigation proceedings are to commence against the relevant shareholder.

Where this ownership structure is identified and assessed to be inappropriate, the first critical step is to ensure that any future distributions to a corporate beneficiary are directed to a newly established company, the shares in which are owned by a non-risk entity (e.g. a passive family trust).

However, resolving the historical distributions is generally not as simple.

Depending on the circumstances, some form of dividend access share or discretionary dividend share may provide a pathway to remedy the historic distributions, although it will be important to consider the ATO's recent guidance in Draft Taxation Determination TD 2013/D5 (see 2013 WTB 24 [1092]) and Taxpayer Alert TA 2012/4 (see 2012 WTB 30 [1194]) which warned taxpayers of arrangements where accumulated profits of a private company are distributed substantially tax-free to an entity associated with the ordinary shareholders of the private company.

Similarly, since the introduction of the Personal Property Securities Act 2009 (PPSA), steps can often be taken to grant a security interest over the at-risk shares to a low risk related entity.

Broadly, this solution can be achieved by a "gift and loan back" style arrangement, whereby:
  1. the at-risk individual gifts a cash amount equal to the gross value of the shares to a protected environment (e.g. a passive family trust);
  2. the family trust subsequently lends the gifted amount back to the at-risk individual; and
  3. the family trust simultaneously registers a security interest over the shares on the PPS register to secure repayment of the loan. Subject to certain conditions (such as the family trust establishing "control" over the shares) the family trust's interest in the shares should be protected under the PPSA.
The advantages of utilising a gift and loan back, compared to a straight transfer of the shares in the corporate beneficiary can include:
  1. the arrangement achieves broadly equivalent protection for the asset compared with a straight transfer; and
  2. as there is no change in the legal ownership of the shares, transfer duty (where applicable) and capital gains tax will generally not apply. The only transaction cost should be the PPSR registration fee.
The disadvantages of utilising a gift and loan back approach, compared to a straight transfer of the shares can include:
  1. the arrangement is more complex than a simple transfer, and involves the preparation of additional documentation (including a deed of gift, loan agreement and security documentation);
  2. it only protects the amount of net equity in the asset at the time of the gifting, however as mentioned above, there should not be any further distributions made to the inappropriately structured corporate beneficiary; and
  3. the arrangement is subject to the bankruptcy clawback rules and specialist advice should be obtained in relation to the operation of these provisions.
Until next week.

Tuesday, October 8, 2013

PPSA transitional arrangements end on 30 January 2014

Image Credit: Images Money cc via Flickr

A post from February 2012 considered the Personal Property Securities Act 2009 (Cth) (PPSA) which commenced some 18 months ago.

Today’s post focuses on one of the upcoming critical aspects of the regime.

The PPSA is the national system for personal property securities in Australia and replaced many state, territory and Commonwealth registers of personal property securities.

Central to this system is the Personal Property Securities Register (PPSR) where details of security interests in personal property can be registered and searched.

To give creditors an opportunity to adjust to the new regime, the PPSA included transitional provisions. The principal object of these provisions was to maintain priority between security interests that existed before the PPSA commenced on 30 January 2012 for two years. These interests are known as ‘transitional security interests’.

This two year transitional period ends on 30 January 2014.

To ensure transitional security interests continue to be protected they should be reviewed to ensure they are validly registered on the PPSR by 30 January 2014. There is no PPSR fee to register a transitional security interest.

Until next week.

Tuesday, October 1, 2013

Signing estate planning documents

sign here
Image Credit: Robin Hutton cc

We regularly review signed estate planning documentation that has been returned to us for secure storage on a daily basis.

As part of a recent quality control audit, we tracked the most regularly occurring reasons for documents being rejected for a failure to comply with the strict legal requirements in this area.

Set out below is a summary of the most common issues we identified, and it is a timely reminder for any adviser facilitating the estate planning process:
  1. attorneys signing the attorney documents before the principal has signed – an attorney can not accept their appointment before the principal has appointed them; 
  2. leaving documents undated - unlike many other formal documents (for example, tax returns) where clients are specifically told not to date the document, all estate planning documentation must be dated on the day that it is signed; 
  3. failing to sign (and date) in each and every place required; 
  4. having witnesses who are relatives, beneficiaries or appointed in roles of authority (such as executor or attorney), all of whom are largely prohibited from being a witness; 
  5. having unqualified witnesses witness attorney documents when specific qualifications are required; and 
  6. attaching anything to an original document, including by way of paper clip, bulldog clip or post-it note. 
If any of the above issues arise, it virtually guarantees that the relevant document must be reproduced and resigned in order to avoid substantial and unnecessary difficulties when the document ultimately needs to be relied upon.

Until next week.

Tuesday, September 24, 2013

Redline changes

redline, delta view, tracked changes

At the moment, we are assisting a client in relation to the sale of shares in their trading company.

Last week, we received suggested changes to the share sale agreement for the lawyers acting for the purchaser.

As is usual commercial practice, this top tier law firm provided the document to us confirming that all of their suggested changes were made in 'redline'. While we had no particular reason to doubt that all changes would have been shown in mark-up, we used the 'DeltaView' (i.e. document comparison) function in Word to be certain of this before commencing our review.

The DeltaView confirmed that while almost all changes were shown in redline, there were a handful of words changed to one particular clause in the warranties that had not been marked up. These words (if gone undetected) would have potentially left our client in an unnecessarily weak position following settlement.

As we understand it, the oversight of not marking up these changes was a simple mistake, however it highlights the importance of always using the DeltaView function (or another document comparison program) regardless of whether the amendments are otherwise promised to have been marked up.

Until next week.

Tuesday, September 17, 2013

Stamp duty on changes of trustee

One issue that is coming up increasingly regularly is changing trustees of either family trusts or self managed superannuation funds.

Generally, there are no tax consequences on the change of trustee for any form of trust (including a superannuation fund).

In each Australian State, there are also provisions that provide a stamp duty rollover on the change of trusteeship.

Care must always be taken however to review at least two issues from a stamp duty perspective.

Firstly, care must be taken to ensure that the correct state law is being applied. There can be complications in this regard where a trust is setup under one jurisdiction, but it has substantial assets in another state.

Once this threshold issue has been resolved, the exact provisions of the relevant stamp duty legislation need to be considered. While each state has similar provisions, there are differences. One example in this regard is that in New South Wales (among other things), any new trustee cannot be a potential beneficiary under the terms of the trust.

Until next week.

Tuesday, September 10, 2013

Read the deed - another reminder re invalid distributions

A structure diagram of the trust in Harris v Harris [2011] FamCAFC 245 

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week extracted below.

Practitioners will be aware, from many previous articles in this Bulletin (and elsewhere), of the critical importance that trust deeds should be read before making any distribution of income or capital. While the "read the deed" mantra should be indelibly etched in practitioners' minds, regular reminders of the dangers of not doing this are not out of place.

One example of a family law case of Harris v Harris [2011] FamCAFC 245 where the range of potential beneficiaries was critical was profiled in our article at 2012 WTB 39 [1586].

In that case, the trial judge in a family court matter noted that the recipient of trust distributions (being a company), who was being challenged, was not in fact an eligible beneficiary of the relevant trust. If the company had been simply nominated as a potential beneficiary, then the distributions would have most likely been valid.

A more common example of where difficulties with invalid distributions arise, however, relates to where particular potential beneficiaries are in fact expressly excluded by the trust deed. The most common example in this regard is the exclusion of the trustee, be that the current, former or even a future trustee, from being a beneficiary of a trust.

These types of clauses are often found in deeds prepared by New South Wales advisers. This is primarily because s 54(3) of the Duties Act 1997 (NSW) limits the nominal duty exemption for a change of trustee to trust deeds that contain provisions ensuring that:
  1. none of the continuing trustees remaining after the appointment of a new trustee are or can become a beneficiary under the trust; 
  2. none of the trustees of the trust after the appointment of a new trustee are or can become a beneficiary under the trust; and 
  3. the transfer is not part of a scheme for conferring an interest, in relation to the trust property, on a new trustee or any other person, whether as a beneficiary or otherwise, to the detriment of the beneficial interest or potential beneficial interest of any person. 
An example of a clause adopting an approach that ensures access to the stamp duty relief is as follows:

"The Trustee for the time being of the Trust can not be a beneficiary of the Trust. None of the continuing Trustees remaining after the retirement of a Trustee is or can become a beneficiary under the Trust, and none of the Trustees of the Trust after the appointment of a new Trustee is or can become a beneficiary under the Trust."

New South Wales is the only Australian jurisdiction that has this type of restriction on accessing the duty concessions for a change of trustee and, understandably, clauses drafted in this manner are extremely prevalent with deed providers or lawyers based in New South Wales.

In many instances, however, there may in fact be no other connection with New South Wales for anyone associated with the trust.

The risks created by this drafting approach will, therefore, often be less than obvious. Anecdotally, there would seem to be an increasing number of situations where invalid distributions are being discovered that stretch back over many years and involve significant levels of invalid distributions.The exact ramifications of this type of situation will depend on a range of issues, including how any default provision under the relevant trust deed is crafted. This said, an embracing by all advisers involved with the administration of the trust of the mantra "read the deed" would avoid the issue ever arising in the first place.

Until next week.

Tuesday, September 3, 2013

Using court drafted wills to achieve asset protection and tax planning

Courtroom One Gavel
Photo Credit: Joe Gratz via Compfight cc

Last week's post focused on the recent case of Re Matsis. This recent decision was one of the first situations where a court permitted a new will to be prepared for someone who had lost capacity where the primary reason for the application was not that the person had no will. Instead, the catalyst was that the beneficiaries were wanting to ensure the appropriate level of commercial asset protection and tax planning would be available.

The decision is particularly important because there are other cases where, in the past, similar requests have been denied.

Arguably, the important factors here included:
  1. evidence was able to be shown that the will that was in place before the will maker lost capacity was largely seen by him as an 'interim' document; 
  2. the only person who could have brought a challenge against the estate was the will maker's daughter, who indicated in the proceedings that she was independently wealthy and had no intention of challenging the estate; 
  3. the ultimate beneficiaries of the estate (and the people bringing the application) were the will maker's grandsons. While each of them potentially had asset protection risks, none of them were aware of any potential litigation; 
  4. the change to the existing will did not alter any of the provisions in relation to, for example, executorship or any specific gifts; 
  5. while the grandsons lost direct entitlement by the inclusion of the testamentary trusts, they were still ultimately the likely potential beneficiaries via the trust structures; and 
  6. the court accepted evidence that the will maker may well have himself implemented testamentary trust provisions, had he not lost capacity. 
Until next week.

Tuesday, August 27, 2013

Court drafted wills

Canceled by court order

One of the more fundamental developments in relation to estate planning in recent years has been the introduction in most Australian states of government legislation empowering courts to make wills on behalf of people who otherwise lack the capacity.

There have been an increasing number of cases to go through the courts in this area. The recent Queensland case of Re Matsis; Charalambous v Charalambous & Others [2012] QSC 439 is particularly interesting as it appears to be the first case that allowed a court-ordered will where the primary objective was not because the relevant incapacitated person had no will at all. Rather the situation was that the pre-existing will did not achieve the appropriate asset protection and tax planning objectives of the ultimate beneficiaries.

For those interested in reading a full copy of the decision, a link to the judgment is as follows: http://www.austlii.edu.au/au/cases/qld/QSC/2012/349.html.

The case involved a businessman who had accumulated some millions of dollars of wealth and who had signed an 'interim' will, which did not incorporate any testamentary trusts, sometime before losing capacity to dementia.

On the application of the ultimate beneficiaries, the court allowed them to introduce comprehensive testamentary trust provisions into the will as if they were inserted before the will maker's death.

Next week's post will focus on some of the key aspects that the court took into account before allowing the variation to the will.

Until next week.

Tuesday, August 20, 2013

Delay in an attorney accepting their position

sign here
Photo Credit: Robin Hutton cc

Today’s post follows on from the recent post concerning signing of an enduring power of attorney (EPA) and considers the impact of an attorney not accepting their position immediately after the principal executes the document.

The leading case on this point is Whitney v National Australia Bank Ltd [2007] QSC 397. As usual, a full copy of the case is available here - http://www.austlii.edu.au/au/cases/qld/QSC/2007/397.html.

In this case, Mrs Murphy had executed an EPA in 2003 appointing Mr Whitney and Mr Walker as her attorneys. At some time between 2003 and 2007, Mrs Murphy developed dementia, although there was no question about her capacity at the time of her executing the EPA.

In 2007, the attorneys accepted their position by signing the EPA and shortly thereafter attempted to use it with a bank. The bank refused to accept the EPA, stating that it considered that Mrs Murphy did not have capacity at the time the attorneys signed the EPA.

Mr Whitney  applied to the Queensland Supreme Court for a declaration that the attorneys could exercise their powers under the EPA.

The Court confirmed that an attorney may accept their appointment at any time after a principal has validly executed an EPA, even if the principal has since lost capacity, primarily because an EPA is not revoked by a principal’s later loss of capacity.

In this case, the acceptance by the attorneys was therefore valid and the costs for the application were imposed on the bank, whose unequivocal refusal to accept the EPA was found to be unjustified.

Until next week.

Tuesday, August 13, 2013

Alternative RSS readers to Google Reader

With Google Reader shutting down last month, I thought it was a good time to remind followers about alternative RSS readers. The most popular Google Reader alternative is Feedly (iOS/Android/Web) as it is an easy way to follow all of your blog and other RSS feeds in one place.

Here is a good article for alternative RSS readers that you might find helpful: http://lifehacker.com/google-reader-is-shutting-down-here-are-the-best-alter-5990456

If you are not familiar with RSS Readers, you may prefer to subscribe to the blog via email. To subscribe to the blog, please enter your email address in the subscription box in the right hand column.

You can also follow me through social media on Twitter and other platforms which are all linked on my About Me page for your convenience.

Tuesday, August 6, 2013

A further reminder – read the deed

As regular readers are aware, there have been numerous posts highlighting the importance of reading trust deeds and recently we had (yet another) reminder.

Many advisers would be aware that, particularly for deeds established in New South Wales (due to the stamp duty rules there), there is often a prohibition on any trustee, and in some instances any former trustee, being a beneficiary of a trust.

The example that came up again recently (it seems to be one that comes up every few weeks) involved an individual trustee of a standard family discretionary trust. That individual trustee was also the sole primary beneficiary and sole appointor.

While there were potential issues from an asset protection perspective that we were reviewing, the more fundamental concern was that under the trust deed the trustee was specifically prohibited from ever receiving any income or capital distributions. A brief review of the balance sheet of the trust showed that substantial distributions had in fact been made to the trustee as primary beneficiary over a number of years.

There are now a myriad of issues that the trustee and his adviser are needing to work through, not least of which being how to address the enquiries of the lawyers for the trustee’s former spouse who are alleging a breach of trust and what steps will need to be taken from a tax perspective in relation to the various years in which invalid distributions have taken place.

Until next week.

Tuesday, July 30, 2013

Rights to Occupy

Life interest, life estate, right to occupy, estate plan, right to reside

Today's post looks at the creation of a life interest in a residential property under a will.

Traditionally, life estates were created where a will maker wanted to allow a particular beneficiary the right to reside in a property without gifting them it directly. 

For a myriad of reasons, the creation of a life interest is rarely appropriate as part of a modern day estate plan, and we generally see the use of either a specially crafted testamentary trust, or alternatively, a right to occupy as the appropriate approaches to use. 

Some of the reasons that life estates are no longer of particular use include:
  1. A traditional life estate is very inflexible, particularly if the life tenant no longer wishes to reside in the property. 
  2. Some of the reasons that the original property may no longer be appropriate include its size, geographic location or because of the level of care required for the individual (for example, they need to move to a nursing home). 
  3. Often, will makers look to craft the life estate so that it ends on the life tenant entering into a new spousal relationship – the courts have been clear that such a restriction is likely to be struck down as void. 
  4. There are a number of inflexibilities in relation to the way in which the life tenant and remainderman can interrelate – ultimately, it is often very difficult to end the arrangements other than on the death of the life tenant. 
  5. There are significant adverse revenue consequences, both from a tax and stamp duty perspective, that can arise in relation to life estates. These difficulties are particularly detrimental if there is a desire to end the life estate before the death of the life tenant. 
Until next week.

Tuesday, July 23, 2013

When can an attorney accept their position?

sign here
Photo Credit: Robin Hutton cc

Today’s post considers when an attorney may accept their position under an enduring power of attorney (EPA).

This issue was recently considered in DC [2013] QCAT 108. As usual, a full copy of the case is available here - http://www.austlii.edu.au/au/cases/qld/QCAT/2013/108.html.

In this case, DC had executed an EPA appointing his wife and his son as his attorneys. DC subsequently lost capacity, and his attorneys attempted to use the EPA. However it soon came to light that there were numerous errors in the document, and to remedy this, the attorneys applied to the Queensland Civil Administration Tribunal (QCAT) for a ruling that the EPA was valid.

While there were other issues with the EPA, a key concern was that the son had signed his acceptance as attorney before his father signed the document.

QCAT confirmed that an attorney cannot accept their appointment until an EPA has been executed by the principal who is granting the power in the first place. Here, QCAT found that given DC had not signed the EPA before his son, no grant of power had been made and therefore the son’s purported acceptance was invalid.

QCAT also confirmed however that the invalid acceptance could be remedied by the son simply re-executing the EPA to accept his appointment – and this was possible even though DC had already lost capacity.

Until next week.

Tuesday, July 16, 2013

Temporary wills

Photo Credit: SalFalko cc
Today’s post looks at a recent case in which a lawyer was successfully sued for failing to write up and sign a client’s will nine days before she died (as usual, a copy of the case can be found at the following link: http://www.caselaw.nsw.gov.au/action/PJUDG?jgmtid=164444).
The case involved a will maker (Mrs Fischer) who met with a lawyer shortly before Easter 2010 to change a gift of property she had made under her previous will in November 2009 (2009 will).  Under the 2009 will, 25% of the estate passed to Mrs Fischer’s son.  The updated will would have distributed 50% of the estate to the son. 
With Mrs Fischer’s permission, the lawyer delayed preparing the new will until the week after Easter.  Unfortunately, Mrs Fisher passed away before her new will was provided.
The son then claimed damages from the lawyer for the difference between the 50% he would have received and the 25% he actually received.
The Court held that the lawyer was negligent in failing to at least have an informal will signed at the initial meeting.  In particular, it was held that the lawyer should have realised that although Mrs Fischer was not at a risk of imminent death, she was by reason of her age, lack of mobility and need for care susceptible to a risk of losing testamentary capacity or dying in the period of a few days between the initial meeting and the agreed date for providing the updated document.

While the lawyer was ultimately found not liable on appeal, the case remains a timely reminder of best practice in the estate planning arena.
Until next week.

Tuesday, July 9, 2013

Trust distributions and 30 June


In the wash up of the passing of the financial year, an adviser contacted us last week with yet another reminder about the importance of reading trust deeds. 

In this particular instance, the adviser had taken over a client from another firm. One of the key items on the trust checklist completed for every client of this adviser's firm is confirming what date the trust deed requires income distributions to have been made by. 

The Tax Office has a long stated view that regardless of whatever concessions may be available under the tax legislation in terms of the due date for resolutions, these concessions are subject always to the trust instrument. 

The terms of the trust deed here required all resolutions to be made by no later than 12pm on 29 June in the relevant financial year. Unfortunately, the distributions for each of the previous years had all been dated 30 June, which meant they were invalid under the deed. 

The adviser was, therefore, required to begin the process for lodgement of amended returns, relying on the default provisions under the trust deed and sought our guidance on how to best address this. 

Needless to say that the income determination for the current financial year was made and passed by resolution dated 28 June, so as to at least comply with the deed this year. 

Until next week.