Tuesday, June 24, 2014

Trust distributions – 3 reminders for 30 June 2014

Getting ready for 30 June.

For the fourth time in recent weeks we have been fortunate to have an article featured in the Weekly Tax Bulletin. This time it is by fellow View Legal Director Patrick Ellwood and I and is extracted below for those who do not otherwise have easy access.

As regularly addressed in the Weekly Tax Bulletin, a methodical approach is needed when preparing trust distribution resolutions to ensure the intended outcomes are achieved.

With another 30 June fast approaching, it is timely to consider 3 key issues often overlooked, namely:

  1. ensuring that the intended recipient of a distribution is in fact a valid beneficiary of the trust;
  2. avoiding distributions to beneficiaries who appear to be validly appointed under a trust deed, however are in a practical sense excluded; and
  3. complying with any timing requirements under a trust deed, regardless of what the position at law may otherwise be.
Further comments on each of these issues are set out in turn below.

Is the intended recipient a beneficiary?

A beneficiary is a person or entity who has an equitable interest in the trust fund. A beneficiary has enforceable rights against a trustee who fails to comply with their duties, regardless of whether they have ever received distributions of income or capital from the trust. 

The range of eligible beneficiaries will generally be defined in the trust deed and the first step in any proposed distribution should be to ensure that the intended recipient falls within that defined range.

Once the range of eligible beneficiaries has been determined, the next step is to identify classes of specifically excluded beneficiaries.

These exclusions will usually override the provisions in a trust deed which create the class of potential beneficiaries and some common examples include:
  • persons who have either renounced their beneficial interest or have been removed as a beneficiary of the trust fund;
  • the settlor and other members of the settlor's family;
  • any "notional settler"; and
  • the trustee.
A comprehensive review of a trust deed must include an analysis of every variation or resolution of a trustee or other person (such as an appointor) that may impact on the interpretation of the document.

The range of documents that could impact on the potential beneficiaries of a trust at any particular point in time is almost limitless. Some examples include:
  • resolutions of the trustee to add or remove beneficiaries pursuant to a power in the trust deed;
  • nominations or decisions of persons nominated in roles such as a principal, appointor or nominator; and
  • consequential changes triggered by the way in which the trust deed is drafted (eg beneficiaries who are only potential beneficiaries while other named persons are living).

Does the intended recipient appear to be a beneficiary, yet practically is excluded?

It is important to remember that the unilateral actions of a potential beneficiary may impact on whether they can validly receive a distribution. For example, a named beneficiary may disclaim their entitlement to a distribution in any particular year, or may in fact renounce all interests under the trust.

There are also a number of potential issues that can arise in relation to beneficiaries that appear to have been nominated as beneficiaries, as to whether the nomination is effective. These issues can include:
  • whether the appointment needs to be made in writing;
  • whether the appointor has been validly appointed to their role;
  • at what point the nomination needs to take place in the context of the timeframe within which a distribution must be made; and
  • are there any consequential ramifications of the nomination, eg stamp duty, resettlement for tax purposes or asset protection.

Family trust election

In addition to the traditional trust law related restrictions on the potential beneficiaries of a trust, it is important to keep in mind the consequences of a trustee making a family trust election or interposed entity election.

Where such an election has been made, despite what might otherwise be provided for in the trust instrument, the election will effectively limit the range of potential beneficiaries who can receive a distribution without triggering a penal tax consequence (being the family trust distribution tax).

A family trust election will generally be made by a trustee for one or more of the following reasons:
  • access to franking credits;
  • ability to utilise prior year losses and bad debt deductions;
  • simplifying the continuity of ownership test; and
  • eliminating the need to comply with the trustee beneficiary reporting rules.
While a full analysis of the impact of family trust elections and interposed entity elections is outside the scope of this article, it is critical to consider the potential implications of any such election on what might otherwise appear to be a permissible distribution in accordance with the trust deed.

Complying with any timing requirements under the trust deed

Historically, the Commissioner permitted resolutions to be made after 30 June each year via longstanding ITs 328 and 329, however as practitioners will recall, these were withdrawn in 2011.

The current law does allow resolutions in relation to capital gains to be made no later than 2 months after the end of the relevant income year. Any other distributions, including in particular franked distributions, must be made by 30 June in the relevant income year.

Notwithstanding the general position above, the ATO has regularly confirmed its view that regardless of any timing concessions available under the tax legislation or ATO practice, these concessions are subject always to the provisions of the relevant trust instrument.

In recent times, we have reviewed a number of trust deeds by different providers that require all resolutions to be made by a date earlier than 30 June, eg no later than 12pm on 28 June in the relevant financial year. Unfortunately, in every situation we have seen, all distributions for previous income years were dated 30 June, meaning each resolution was in fact invalid under the deed, regardless of the fact that the resolution otherwise complied with the law.

In these situations, arguably the only practical solution is to proceed with lodgment of amended returns, relying on the default provisions under the trust deed – assuming there are adequate default provisions.

Until next week.

Image credit: Steve Corey cc via Flickr

Tuesday, June 17, 2014

What strategies are there available to protect at risk beneficiaries?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What strategies are there available to protect at risk beneficiaries?’ at the following link - http://youtu.be/Joz2vYxhcDY

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

The obvious solution is to try to minimise the number of distributions that go to the at risk beneficiary. That’s obviously a lot easier said than done. Particularly from a tax perspective, there is a bias towards making sure that the income does flow out to an individual beneficiary, particularly if there's a capital gain to be distributed.

Leaving that to one side, there are other ways to manage it, the biggest one seen in practice is making sure that the recipient beneficiary is themselves not exposed.

The classic example would be using a corporate beneficiary or company as the recipient. In that scenario, it's important to remember that the ownership structure of the shares in that company is going to be vital.

You don’t want to create a situation where even though the beneficiary exposed doesn't directly have the asset or the income distributed to them, they're the shareholder of the company, which is the recipient beneficiary. The risk is that the wealth is effectively in just as exposed a position as it would have otherwise been.

Until next week.

Tuesday, June 10, 2014

What are the exceptions to the assets of a testamentary trust being protected?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the exceptions to the assets of a testamentary trust being protected?’ at the following link - http://youtu.be/BzC3jFYyWp4

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

The main exception that comes up in a practical sense is primarily for tax reasons where distributions have gone down to an at risk beneficiary out of the trust and then those amounts remain unpaid, so they become an unpaid present entitlement or they become a credit loan on the balance sheet of that trust.

In that scenario, obviously, if the at risk beneficiary gets into strife and a trustee in bankruptcy is appointed, even though the asset is ultimately inside the trust, that trust has the obligation to repay the debt and the asset effectively comes out sideways in that scenario.

There are however a myriad of other reasons that trusts can be at risk. Some of the obvious ones include where the at risk beneficiary fulfils a really important role in the trust, whether that be an individual trustee, a director of a corporate trustee, a shareholder of a corporate trustee, or perhaps most relevantly, where the at risk beneficiary fulfils the role of an appointor.

Until next week.

Tuesday, June 3, 2014

DVD wills

While not as quickly as other areas of the community, the legal industry is starting to embrace technology changes.

One case that highlights the point is Mellino v Wnuk & Ors [2013] QSC336. As usual, a link to the full decision can be found here. [http://archive.sclqld.org.au/qjudgment/2013/QSC13-336.pdf#!]

In summary, the critical aspects of this case are as follows:
  1. a deceased man, who had committed suicide, had made a DVD shortly before his death;
  2. on the physical copy of DVD, the man had written 'my will';
  3. the content on the DVD also, in a very informal way, explained the intention that the recording was to operate as a will on death;
  4. the court decided that each of the main requirements from a succession law perspective had been satisfied and therefore the DVD could operate as the deceased’s last will;
  5. the three main tests in this regard were as follows:
    1. the DVD was considered to be a 'document';
    2. the clear intention of the document was that it articulated the deceased's testamentary intentions; and
    3. the DVD adequately dealt with all property owned by the deceased at the date of his death.
Until next week.