The 'Jodee Rich' changes

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘The ‘Jodee Rich' changes’ at the following link - https://www.youtube.com/watch?v=8YzQI7nsYI8

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

The Jodee Rich case related to Mr Rich who was one of the directors of One.Tel.

The allegations were that almost immediately before, that is a matter of days, before it became public knowledge that One.Tel had been insolvently trading, Mr Rich took steps to transfer significant assets out of his name and put them into his spouse's name. He did that using particular provisions under the family law legislation, which at the time actually took priority over the bankruptcy laws. 

As most will know, the bankruptcy legislation allows trustees in bankruptcy to clawback assets that are disposed of immediately before bankruptcy. When Mr Rich did the transfers, the family law rules allowed the bankruptcy rules to be ignored, so the creditors would have been left exposed. 

In the particular factual scenario of Mr Rich's situation, he actually voluntarily agreed to unwind the transfers.  However, the fact that Mr Rich had even tried to do the transfers was enough of a catalyst for the government at the time to bring in amending legislation. 

The law now requires anyone that has both a relationship issue and creditors in play at the same time, for all of those parties to be heard before the same judge and for that judge to then make a decision as to how the assets should be dealt with.

Tax equalisation provisions

One issue that comes up from time to time in estate planning exercises is the use of 'tax equalisation' provisions in wills.

Generally speaking, the approach is to seek to ensure that the after tax benefit received by each beneficiary is equal.

For a myriad of reasons, this style of clause is rarely appropriate, for example:

1. often a client will only want to take into account the tax position in relation to a particular asset (for example, superannuation). This can lead to significant imbalances in relation to other assets in the estate – most classically, a family home which, like superannuation, can often be received tax free by a beneficiary;


2. while there are embedded tax attributes in relation to certain assets, there can also be embedded tax attributes with the recipient – for example, if a beneficiary is a non resident at the date they receive the asset, this can trigger a completely different tax outcome as compared to a beneficiary who is an Australian resident;


3. where assets are to pass via a testamentary trust, this can cause a wide range of potential tax differentials, many of which may be unknown for a significant period of time;


4. similarly, to the extent that there are assets held in related entities (for example, family trusts or private companies), there may be a wide range of potential tax ramifications which again may be unknown for a significant period of time;


5. the calculations in relation to the net position of each beneficiary can potentially be limitless – for example, additional payments made to one beneficiary to compensate for the fact that they received assets that may have a latent tax liability may themselves cause a further tax liability, which then would trigger a further payment, which of itself would cause a further tax liability; and


6. most clauses in this area are also crafted with reference to precise tax provisions at a particular moment in time – invariably those tax rules will have changed by the time the will actually comes into effect.

In light of the above difficulties, it is therefore normally preferable to simply set out directions in the memorandum of directions to the trustees of the estate to ensure that they seek specialist advice at the point of administering the will to ensure that the optimal legitimate tax outcome is achieved for the estate (and therefore the underlying beneficiaries) as a whole.

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View Legal and superannuation proceeds trusts

Last week’s post explained the broad requirements and main benefits of a Superannuation Proceeds Trust (SPT) established under a will. This week’s post focuses on how View Legal’s testamentary trust (TT) wills deal with any superannuation benefits that are paid to a will maker's estate.

Generally, the range of potential beneficiaries listed under a TT are wider than dependants for tax purposes. The way in which View Legal crafts its TTs however gives the trustee complete discretion about which of the beneficiaries may receive any superannuation benefits available for distribution.

In particular, the terms of the will allow the trustee to essentially establish a 'sub trust' of the TT for receipt of the superannuation proceeds – with the only beneficiaries being those who satisfy the definition of a tax dependant.

In this way, the various benefits of having a SPT, as outlined in last week's post, can be achieved.

If the trustee chooses to utilise a SPT, an example of how the estate assets could flow is as follows:

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Superannuation proceeds trusts

Following last week’s post an issue has been raised as to whether the View wills provide for a Superannuation Proceeds Trust (SPT) -  and the answer is: Yes they do.

A SPT within a will (as opposed to last week’s post that related to a structure established outside a will) is a trust that is set up solely to receive the superannuation benefits of a member following death.

Generally, the beneficiaries of a SPT must be confined to persons who are ‘death benefit dependants’ of the deceased, being a:

a. spouse or former spouse of the deceased;

b. child, aged below 18, of the deceased;

c. person with whom the deceased had an ‘interdependency relationship’; or

d. person financially dependent on the deceased just before they died.

The benefits of having a SPT in a will are:

1. It provides greater asset protection compared to the superannuation death benefits being paid directly to a death benefit dependant - for example, against relationship breakdowns, creditors or spendthrift beneficiaries;

2. Distributions from the SPT will generally be excepted trust income, such that recipients under the age of 18 will be treated as adults;

3. The distribution of the superannuation death benefits to the SPT is taxed in the same way as if they had been paid directly to the death benefit dependant (provided the beneficiaries of the SPT are limited to tax dependants).

 Next week we will look in more detail at how View Legal structures SPTs in wills.

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Why superannuation proceeds trusts should only be an avenue of last resort

A 2014 post touched on the use of a superannuation proceeds trust (SPT) - http://blog.viewlegal.com.au/2014/09/what-are-superannuation-proceeds-trusts.html.

The question arose because of a decision to avoid establishing testamentary trusts on the death of one spouse. 

As identified recently by one adviser we work with, such an approach was arguably not appropriate in all the circumstances because:  

1. SPTs are generally a structure of last resort.  This is for a combination of reasons, not least of which because under superannuation law there is no clear pathway to allow a superannuation trustee to distribute to a SPT; and 

2. Conversely under taxation law, unless the money passes directly from the superannuation fund into the SPT, there is a real risk that the Tax Office will not allow access to the excepted trust income provisions. 

For these reasons it is generally preferable that the funds are paid to the legal personal representative and then distributed under the will into a testamentary discretionary trust which is crafted in a way to create a 'sub-trust' in relation to the superannuation proceeds. 

This approach ensures that the surviving spouse will have the flexibility to have all funds in a trust environment while also ensuring the proceeds are received tax free into the estate. 

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