EPAs and conflicts of interest

With the aging population, conflicts of interest arising particularly in relation to the use of an enduring power of attorney (EPA) are becoming far more prevalent.

Previous posts have looked at cases like Stanford. Recently we had a client situation that underlined how critical it is to include a conflict of interest provision in an EPA. This style of provision is not standard in any government form and indeed many lawyers do not choose to include such a provision.

The situation the client faced was as follows:

1. The main asset in the estate was a family home which was owned as joint tenants. 
2. The husband lacked capacity due to advanced dementia, although was otherwise in good health. 
3. Our client (the wife) wanted to include testamentary discretionary trusts under her will to provide for the children of the relationship. 
4. The husband’s will was a very basic document and did not allow for testamentary discretionary trusts. 
5. To ensure that half the value of the house would pass into an appropriate structure if the wife predeceased the husband she was wanting to rely on her appointment as the husband’s EPA to sever the joint tenancy (for a summary of the distinction between owning assets as joint tenants and tenants in common see http://mwbmcr.blogspot.com/2010/02/what-exactly-does-jointly-mean.html). 
6. Due to an appropriately crafted conflict of interest clause in the EPA, the wife was able to quickly and easily implement the severance and avoid some of the more complex solutions that might also have been available such as the unilateral severance of the tenancy or applying for a court ordered will (the court ordered will process is featured in previous posts: http://mwbmcr.blogspot.com/2013/08/court-drafted-wills.html and http://mwbmcr.blogspot.com.ar/2013/09/using-court-drafted-wills-to-achieve.html). 

Until next week.

Image credit: Schnaars cc

Bankruptcy clawback - a leading case

In any asset protection exercise, the impact of the 'clawback' rules under the bankruptcy legislation needs to be carefully considered. 

One key aspect in this regard is whether a decision by a person to divest themselves of assets was done for the main purpose of defeating creditors.

Recently, I was reminded of arguably the leading case in this area, which is now over 80 years old, namely Williams v Lloyd [1934] HCA1. As usual, a link to the full copy of the decision is as follows - http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1934/1.html?stem=0&synonyms=0&query=title(Williams%20and%20Lloyd%20).

In this case, a bankrupt transferred assets to family members while he was solvent, but knowing that he was likely to start engaging in a 'risky' business activity in the future.

The court held that the transfers could not be clawed back and the key aspect of the decision was as follows –

‘Once it is acknowledged, as upon the evidence I think it must be, that in 1926 the bankrupt was in a perfectly sound financial position and had nothing to fear, subsequent conduct and events form an insufficient basis for a finding that the documents were shams, or that he had an intent to defraud his creditors, or that they were made subject to a suspensory condition allowing them to take effect only in case of attack by creditors.’.

Until next week.

Image credit: EJP Photo cc

Gift and loan back arrangements - some frequently asked questions

Recent posts have looked at various aspects of the 'gift and loan back' strategy (see http://mwbmcr.blogspot.com.ar/2014/03/leading-gift-and-loan-back-case.html and http://mwbmcr.blogspot.com/2014/04/subdivision-ea-giftloan-back.html) 

While there are a myriad of potential issues that always need to be considered, some of the key aspects include:

1. care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business). 
2. while the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor. 
3. the impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home will generally be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act (which will typically be the case). 
4. to the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing their lendings (to whatever level they may be from time to time) as a first priority before the trust's second mortgage. 
5. As flagged in previous posts (http://mwbmcr.blogspot.com/2013/10/one-remedy-where-trust-distributions.html) if no real property is available for registering security over, personal property can be used via the Personal Property Security Register. 

Until next week.

Image credit: Alexander Henning Drachmann via Flickr

Subdivision EA & gift/loan back arrangements

Recent posts have touched on various aspects of the 'gift and loan back' arrangement.

Recently we had a situation where historically a gift and loan back arrangement had been entered into, however the provisions of the Tax Act under subdivision EA had been ignored.

While there has been some significant dilution of the circumstances where subdivision EA will apply given the Tax Office’s approach to unpaid present entitlements, in the situation we were looking at it remained potentially relevant.

In particular, the second 'tranche' of the gift and loan back arrangement involving a loan out of a trust was problematic because at the time the loan was made, there was an unpaid distribution to a corporate beneficiary.

We are working with the relevant adviser to determine the most appropriate approach moving forward, however the example was a timely reminder that in any structuring exercise, it is critical to consider all potential transaction costs and in particular those that are not immediately obvious.

Until next week. 

How gift and loan back arrangements work?

Previous posts have touched on various aspects of the gift and loan back strategy (see http://mwbmcr.blogspot.com.ar/2012/05/family-court-case-on-distinction.html and http://mwbmcr.blogspot.com.ar/2013/10/one-remedy-where-trust-distributions.html).  Recently, and as touched on last week regarding Atia’s case, one of the key aspects of the enforceability of this style of arrangement is that all documentation is drafted correctly and duly signed and processed. 

In this regard, the main critical steps that need to be followed are set out below with an example.

The ‘gift and loan back’ approach involves the owner of an asset gifting an amount equal to their equity in the property or shares in a company to a family trust (or low risk spouse).

The family trust then lends an amount of money to the owner and takes a secured mortgage over the property or registers a security interest on the Personal Property Securities Register over the shares.

Example

Using property as an example, assume that Anne holds 100% of an investment property and the current value of the home is $1,500,000. There is an existing mortgage of $500,000 owing to her financier.

Step 1: Anne gifts the amount of her equity in the property to a trust 

Step 2: The trust subsequently lends the amount back to Anne and takes security over property 

Until next week.