Tuesday, March 26, 2013

Why would a professional partnership incorporate?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Why would a professional partnership incorporate?’. 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 listen to the presentation is below –

The number of answers to this question are probably only limited to the number of professional practices there are out there.  There are a range of reasons. 

Tax is one and we keep coming back to that, but that can sometimes be in the eye of the beholder from that perspective. 

We're seeing, certainly from a risk management perspective and asset protection and the credit crunch and everything else that’s going on and the changes to the bankruptcy rules in the recent past mean that everyone is much more aware that when things go wrong, it's very attractive to have your liability limited.  

Obviously, that’s probably the biggest advantage of an incorporated model. 

There's also I guess the sense from people talking about retaining key staff and the skills shortage that many professional organisations are facing these days that it tends to make sharing of equity a lot easier if you've got a true corporate model. 

That can sometimes be as simple from a perception viewpoint that a lot of times staff or key employees are much more aligned and find it much easier to understand a company setup as opposed to some sort of fancy trust arrangement or a service trust arrangement for that matter. 

Certainly, the transaction costs side of things, in terms of the hard costs, particularly stamp duty, in most states now, the concept of having to pay stamp duty on the transfer of listed shares is basically a thing of the past.  So that can be very attractive to people. 

The last main reason and perhaps this is touching on the perception side of it again, I think the corporate model from a governance perspective, it tends to be a lot easier for people to understand.  We've done a lot of work in this area and it is interesting that by becoming a director, and by having a board and by having shareholders and all of these sorts of more formal things, even though the deck chairs haven't really changed in the organisation, there seems to be an air of governance around the place that just wasn't there while they remained as a partnership.

Until next week.

Tuesday, March 19, 2013

How should a partnership of discretionary trusts be structured?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘How should a partnership of discretionary trusts be structured?’ by way of audio podcast (not video) at the following link - http://youtu.be/qPJJ_1NRwcw

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

There's a number of aspects relevant here. 

The biggest one, if we pick up on that idea of it being a little bit of a messy structure, is that ideally there should be some sort of corporate entity that’s the face to the outside world.  We see that being used very regularly. 
Now whether that's a standalone nominee or agent company that’s appointed to act on behalf of all the trusts or whether in fact you just have one company acting as trustee for all of the trusts is probably a mute point. 
The outcome that’s delivered to the outside world is that they're not having to deal with numerous separate trusts; as far as the clients know, all they see is that standalone Pty Ltd company.  That would probably be the biggest thing. 
The other types of things that need to be thought about I guess are looking at the constitution of that company and making sure that you've got an appropriate balance between directorship powers and shareholder powers. 
You'd also obviously, particularly if you're going to use the same company as trustee for a number of trusts, need to have a fairly good understanding of how an appointor or principal or nominee type power under the trust documents work, to give everyone the comfort of knowing that they do have ultimate say over ‘their’ particular trust. 
Probably, the final point would be, and we've got recurring themes coming through here, (this harks back to this concept of asset protection) and that is, if you're serious about maintaining protection against issues that might go wrong in the practice, it would really be quite important in our view that the trust that is involved as a partner in the partnership of trusts do nothing else but be a partner in that partnership. 
So in other words, you don’t buy the investment property in that trust and you don't have a listed share portfolio in that trust, because otherwise you're potentially exposing all those passive assets to the risks of the business.

Until next week.

Monday, March 11, 2013

Appointor succession - read the deed

As highlighted in previous posts, it is critical to 'read the deed' when providing advice that involves a trust.

Following last week's post (and again with thanks to Tara Lucke) about Montevento Holdings, this post reinforces the importance of reading a trust deed before taking any step. 

In Montevento Holdings, a disgruntled beneficiary sought to rely on a technical interpretation of the way the appointor could exercise their power under the trust deed to change the trustee to support the argument that the change was ineffective. 

The relevant clause precluded individual appointors from personally being appointed as trustee.  As mentioned last week, the individual appointor appointed a company as trustee of which he was personally the sole director and shareholder. 

The High Court held that the ordinary and natural meaning of the clause was that an individual person holding the office of appointor could not personally appoint themselves as trustee.  However, because the trust deed consistently distinguished between individuals and companies, it did not prohibit the appointment of a corporate trustee, even if that trustee was controlled by the individual appointor.

Until next week.

Monday, March 4, 2013

Appointor succession – choose wisely

With thanks to co View Legal director Tara Lucke, today’s post looks at how the role of the appointor is often the most important to consider when establishing or reviewing a trust. There does not necessarily need to be an appointor provision under a trust deed, however where there is, a trust deed will normally set out in some detail the way in which the role of appointor is dealt with on the death or incapacity of the person (or people) originally appointed.

Failing to understand succession arrangements of an appointor can create a range of difficulties as highlighted in the recent case of Montevento Holdings Pty Ltd v Scaffidi (2012) HCA 48. A full copy of the case is available at http://www.austlii.edu.au/au/cases/cth/HCA/2012/48.html

The case concerned a challenge by a beneficiary of a discretionary trust to a change of trustee by the appointor. The challenging beneficiary was Guiseppe Scaffidi who, along with Maria (his mother) and Eugenio (his brother), was within the range of potential beneficiaries of the Scaffidi Family Trust.

The original appointor of the trust was Antonio Scaffidi (the father). On Antonio’s death, Maria became the appointor and by deed Maria subsequently appointed Eugenio Scaffidi as the appointor.

After his appointment, Eugenio appointed Montevento Holdings Pty Ltd (a company of which he was the sole director and shareholder) as the sole trustee, effectively giving him complete control over the trust and its assets.

Guiseppe’s challenge to the appointment of the trustee company ultimately failed before the High Court, essentially because the appointment complied with the provisions of the trust deed. The decision highlights that the role of appointor can often give ultimate control of a trust. Furthermore, it is a timely reminder of the importance of regularly reviewing the appropriateness of the appointor role in the context of succession planning, particularly where multiple beneficiaries are arguably intended to benefit from a discretionary trust over time.

The mechanics of the decision will be explored further in next week’s post.

Until next week.