Final Post for 2016 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 2017.

Similarly, the social media contributions by both the View and Matthew will also largely 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 posts.

Additional thanks also to those who have purchased the ‘Inside Stories – the consolidated book of posts 2010-2015’ (see - http://www.amazon.com/Matthew-Burgess/e/B00L5W8TGO/ref=sr_tc_2_0?qid=1413149165&sr=1-2-ent).

The next edition of this book, containing all posts over the last seven years, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2017. Very best wishes for Christmas and the New Year period.

Image courtesy of Shutterstock

Trust Cloning

A recent post focused on trust splitting as a useful tool to improve the administration and management of a discretionary trust http://blog.viewlegal.com.au/2016/03/trust-splitting-some-clarity-at-last.html

As has been widely publicised, trust cloning for family trusts was effectively abolished on 31 October 2008. Since 1 July 2016 trust cloning has been available for trusts that run businesses with an annual turn over of less than $10M – see http://blog.viewlegal.com.au/2016/04/tantalising-opportunities-for-trust.html (the $2M turnover test referred to there is intended to be $10M).

Interestingly, there are still situations when trust cloning might in fact be available, despite the tax concessions being removed on 31 October 2008.

Broadly, the main situations where we see trust cloning being used still are:

1. Where there is no capital gain in relation to the assets to be transferred;
2. Where the capital gains tax that would otherwise be triggered on the trust clone can be rolled over (for example, using the various types of small business CGT concessions or between testamentary trusts); and
3. Where the trust cloning falls within the CGT exemption available for unit trusts.

Generally, there will be stamp duty payable in relation to a trust cloning arrangement to the extent there is dutiable property, although there are areas where there may be a duty exemption, including –

1. In South Australia, for most transfers;
2. In Queensland, for all transfers;
3. In NSW, for business assets and land rich companies; and
4. In Victoria, for business assets.

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Montevento Holdings – A Practical Analysis

An earlier post has looked at various aspects of the leading trust case of Montevento Holdings – see -

http://blog.viewlegal.com.au/2013/03/appointor-succession-choose-wisely.html

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://youtu.be/kUQ9F-Fwow8

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

The case of Montevento Holdings was an estate planning exercise.

As seems to be the case quite regularly, dad died first. Under the estate plan for dad, he gave all of his shares in the trustee company to mum.

Then there was separately a principal power. The principal power being that whoever was the principal had the ability to hire and fire the trustee.

The principal power had two particularly key things in relation to it.

Firstly, the dad had amended the documentation to mandate how the succession of the principal role was to operate.

Namely, the succession was that it went to mum and then it went to mum’s legal personal representative (LPR).

The second point was that the principal could not be the trustee.

Dad’s approach was that he saw the trust as a ‘whole of family’ family trust. He apparently wanted it to be jointly controlled by the two sons.

So mum and dad had decided that under their wills they would give their shares in the trustee company to the two sons. However, mum under her will only put son #1 as her LPR.

Again, we go back to this mantra of reading the deed. Arguably here, no one had actually read the trust instrument.

So turn of events was this. Mum passes away. Yes, the shares go to the 2 brothers.

Son #1 reads the trust instrument, or probably his lawyer reads the trust instrument and says ‘you know what, you are the legal personal representative under your mum’s will, you are the principal of the trust, you may unilaterally decide who that trustee company is’.

‘The only thing you cannot do is you cannot appoint yourself as the trustee’.

Son #1 says ‘well, you know what, I'd like full control of this trust. I'd like to be able to take all the assets of the trust and do what I wish with them without having to refer to my brother who I don’t get on with’.

‘What I will not do is appoint myself as the trustee. What I will do is I'll set up a new trustee company with 100% of the shares in that company owned by me and I will be the sole director’.

‘Once I've taken those steps, and there's specific tax and stamp duty roll-overs available to let me do that, once I've taken those steps, I'll get all those assets out of the trust and give them to me. My brother can make his own arrangements’.

Brother #2 (son # 2) got word of this approach and tried to challenge the arrangement and said there's effectively a fiduciary duty.

That is, even though the trust deed said the principal couldn't be the trustee, surely that also included that the principal couldn't set up a sole director, sole shareholder company and just sidestep the prohibition.

The Supreme Court said yes, you're right son # 2, that’s not fair, you win.

The Court of Appeal said yes, you're right son # 2, that’s not fair, you win.

The High Court said you know what, this wasn’t a very complex trust instrument.

Mum could have quite easily got someone to read that for her, tell her that all of her objectives would be unwound if she only appointed son # 1 as her LPR. We think that what son # 1 has done is entirely in accordance with the trust instrument. Son # 1 wins; not son # 2. So the whole arrangement was held to be valid and son # 1 took the full control of the trust and son # 2 was left to make his own arrangements.

Pierce the veil and the Domino Theory

As alluded to in last week’s post, utilising a corporate trustee as the corporate beneficiary of a trust can be a problematic approach.

Aside from difficulties that often arise in relation to whether the company is in fact a beneficiary under the terms of the deed, a significant issue also exists from an asset protection perspective.

In particular, given a trustee is directly liable for all activities of the trust (subject to an indemnity against the assets of the trust), where the effort has been made to appoint a corporate trustee, it is always preferable to ensure the total assets of that corporate trustee in its own right are limited to a nominal amount (for example $2).

Where a corporate trustee has been used as a corporate beneficiary (even if the distributions remain outstanding as an unpaid present entitlement), the value immediately becomes significantly more than $2.

While steps can generally be taken to ‘unwind’ the adverse aspects of distributing to a corporate trustee, as with many adjacent areas of the law, prevention is always better than the cure.

Image courtesy of Shutterstock

Domino theory

Previous posts have touched on a number of aspects of asset protection.

One issue that comes up very regularly is the concept of 'domino theory'.

Last week, I had a timely reminder of the importance of this theory and the fact that it does not simply apply where there are two assets of substantial value owned via the same structure.

The situation last week involved a trust which owned a very substantial piece of land to be developed, together with a much smaller (and less valuable) adjoining house on a separate title.

The house was leased out to tenants, and given its nominal value, the controllers of the trust had felt it would be appropriate to leave the house in the same trust, because if something did go wrong on the property development, they could bare the economic cost of losing the house.

Unfortunately, what in fact happened was that the development was proceeding very successfully, however the tenants of the house sued the trust in relation to an accident that occurred, allegedly due to the landlord’s negligence. What this meant therefore was that the successful development was the asset that was exposed because the course of action was against the trust as a whole.

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What does 'sufficiently influenced' mean?

Particularly in relation to investments by self-managed superannuation fund (SMSFs) into geared unit trusts that might potentially be a 'related party', the concept of whether a director is 'sufficiently influenced' by other persons is always important.

Generally, a director will be considered to be sufficiently influenced by a third party where they act in accordance with that other party’s directions or wishes.

While the concept is relatively easy to define, its application in any specific factual scenario will almost always depend on an interpretation of the circumstances.

Some examples of where a director has been held to be sufficiently influenced by another person include:

1. A husband and wife (who were the only directors of a company) have been held to be influenced by their sons, because they never made any substantive decision without consultation with the sons and their intention was to ultimately appoint the sons as directors.
2. A company has been held to be controlled solely by one director, even where there was an independent third party as a co-director, because the third party had no input into the management of the company and had simply been appointed to create the impression that the board was independent.
3. A sole director company, where the director was an independent appointment, was held to be controlled by the ultimate shareholders of the company, as the director simply acted in accordance with the directions of the shareholders.

Ultimately, the Tax Office has confirmed that it is necessary to take into account all of the evidence and conduct between parties and the concept of a party 'significantly influencing' a third party will exist where it can be said to be likely that the other party would act in accordance with the wishes expressed.

Image courtesy of Shutterstock

A 101 tip in relation to executors

Last week, I was reminded of the importance in an estate planning context of having at least one backup executor, particularly in a situation where only one executor is appointed initially.

The case last week (admittedly it involved the adviser’s client utilising an online will service) was a situation where a will maker had appointed his brother as his executor.

In rather unfortunate circumstances, both the will maker and his brother died in relatively close succession to each other.

As the will maker had not appointed any backup executor and the executor that he had appointed had died, then the executor under the brother’s will (his wife who was estranged from the will maker) became the executor for the will maker.

For all concerned, this outcome, at best, was unintended.

With the aid of hindsight, it could have been easily solved with the appointment of a backup executor.

Image courtesy of Shutterstock

Richstar – Another Reminder

Earlier posts have looked at various aspects of the leading trust case of Richstar – see -

Impact of Richstar on discretionary trusts

Scope of the Richstar decision

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://youtu.be/pk9xWWtLPgE

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

The Richstar case is out of Western Australia from 2006.

It was a decision that appeared to potentially open up the floodgates in terms of how trusts would be considered from a bankruptcy perspective, and potentially see the assets inside a trust would be treated in the same way as they are under the family law regime and therefore, potentially be exposed on bankruptcy.

The Richstar decision was driven by an ASIC court case, effectively seeking a freezing order across all of the assets of the trust.

The argument being that there was such a high level of control available to the person that had gone bankrupt because they were the appointor or principal of the trust, they owned all the shares in the trustee company, they were director of the trustee company and they historically received distributions to themselves personally. The combination of all these things was enough for the court to hold that the trust was just a shell.

In other words the court held the trust was actually just a brilliant disguise for what was actually going on.

There's been at least another three or four cases after Richstar that say the conclusion in Richstar is not good law. That is – the court can't take the family law principles and put them into the Bankruptcy Act. They're completely different regimes and it's not appropriate.

So what is the reason we're still speaking about Richstar when it was a decision of a sole judge in Western Australia in 2006?

The reason is that the sole judge is now the Chief Justice of the High Court. Therefore as much as there are a number of the cases, particularly in New South Wales, that say Richstar is bad law and something to ignore, there's still that heritage or residual issue that the Chief Justice of the High Court made that decision. There is thus a risk that the courts might revisit that in another context at some point in the future.

Pricing on a page (or 3)

Many would be aware of our passion for up front, guaranteed fixed pricing, rather than the traditional time-billing model of most law firms – previous posts explore this in more detail

The firm of the future is in fact the firm of now

Fixed Pricing and Change Orders

Insights on the Journey to Value Pricing

Much of our inspiration in this regard comes from the VeraSage Institute, a revolutionary international think tank which.

For many years VeraSage has been challenging professional services firms to price their services other than with reference to the Marxist derived labour theory of value that is time billing.

The VeraSage Institute founder (and LinkedIn Influencer) Ron Baker was recently in Australia.

View were very fortunate to host Ron present both a webinar and in person workshop. For those who missed the events and would like to access streamed versions of the recordings click here.

For those interested, leading Australian based VeraSage fellow John Chisholm (see - https://www.linkedin.com/in/chisholmjohn) also profiled a sketch note of the workshop or as he described it ‘pricing on a whiteboard’ in one of his recent posts – see - http://www.chisconsult.com/pricing-on-a-whiteboard/

Image credit: Dyan Burgess

A gift for you, some prizes for some and a reminder of the intersection between law and IT

Most will be aware of our passion for being ‘for friends’ – our ‘why’ that ensures we create solutions that we would be proud to offer to our closest friends.

A significant part of where we invest our skills to achieve this 'why' is in the ‘uberification’ of estate planning law, which means we heavily focus on technology enabled solutions.

This also means we have become used to ‘failing fast’.

Most of our fails are private and do not hit your inbox. Sometimes, like yesterday, our fails are public and involve dumb things like promoting an upcoming webinar AFTER the webinar has been held …. That is, our promotion of the webinar we held earlier this week - ‘Adviser Facilitated Estate Planning – Everything you need to know to deliver exceptional value’.

In seeking your forgiveness, we (as those who attended the webinar were promised) offer anyone who sees this email the following:
- a full copy of the slides
- an electronic copy of our 2015 edition of consolidated blog posts (you are free to use any of this content however you wish – with or without acknowledging source)
- the weblink for free access to the webinar recording, under the heading ‘Free recorded webinars’

For the 5 most interesting (as unilaterally determined by our team) one liners about our fail (or lawyers generally) shared on our LinkedIn page over the next week we will send you a proof of one of most popular book releases yet – ‘40 Forms of Trusts’ and free access to the 90 minute webinar that View presented recently which explains each of the 40 trusts – seehttps://viewlegal.com.au/product/recorded-webinar-package/

For those who attended the webinar (or view the recording), attached are our solutions in relation to estate planning, business owners solutions, trust succession and superannuation benefits.

You can view a summary of our wholesale solutions at https://viewlegal.com.au/pricing/(please note that you will need to be logged in to the website to view this page).

If you would like us to consider the appropriate package for your client’s circumstances, you can submit a free review on our website under https://viewlegal.com.au/estate-planning-free-review/

Finally, some useful flyers and videos are available in our estate planning toolkit to assist the clients with their estate planning and can be viewed at https://viewlegal.com.au/resources/

We confirm CPD/CE points for most professional bodies are self-assessed and this email can be produced as evidence of attendance at the webinar which ran for 60 minutes of technical content. If any other particular requirements are needed other than this email please let us know.

A final disclaimer – one liners and lawyer jokes submitted may form part of the next edition of our book ‘101 best lawyer jokes ever’ – see https://viewlegal.com.au/product/101-lawyer-jokes/

Harris and the Missing Beneficiary

Earlier posts have looked at various aspects of the leading family law and trust case of Harris – see -

A Practical Analysis of Harris

Read the deed - another reminder re invalid distributions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://youtu.be/xO0rrLqGSkU

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

A further very interesting aspect in the case of Harris, is that over many years, there'd been distributions made to a bucket company by the relevant family trust.

The 100% shareholder in that bucket company was the husband. So the wife had a legitimate expectation in relation to that company that she would be absolutely entitled to at least 50% of that under the property settlement.

There was over $1 million worth of distributions that had been made to that bucket company over time out of the family trust that owned the business.

What the court did was that they actually read the trust instrument.

The trust instrument was quite particular on who the beneficiaries were, including saying that any bucket company must be expressly listed as a beneficiary. Here the relevant company wasn’t listed as a beneficiary.

This meant there had about eight or nine years’ worth of distributions that had been purportedly made to the bucket company which were in fact all void.

The family court said we don’t need to get our hands dirty on what the Tax Office might think about that, but we suspect they will be interested. For the purposes of the family law case, the husband was ‘fine’ because the bucket company was in fact valued at nothing.

A Practical Analysis of Harris

A previous post has looked at various aspects of the leading family law and trust case of Harris – see - Read the deed - another reminder re invalid distributions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case and trust splitting in a ‘vidcast’ at the following link - https://vimeo.com/154687783/

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

Harris is an example of the interplay between using a bespoke constitution, but not doing a trust splitting exercise.

In this situation, under an estate planning arrangement, the dad was the original shareholder and director of the corporate trustee. He died and under his estate plan, he gave shares in the company to the adviser, he gave shares to the husband (his son) and then mum (the wife) retained her shares in the trustee company.

These shareholders also acted as the board of the trustee company.

Inside that family trust was a family business that had been running for many years. The husband was, on all the evidence, important to that business and had a really key role. At no stage did the family attempt to split the trust though.

The husband had siblings, it was clearly still the ‘family’s trust’ and there were still all of the normal rules and obligations you'd expect. The husband had not otherwise been given any significant control. Thus, on his argument, the trust was not an asset of his in the family court scenario.

The wife said the opposite. The wife said even though the family hadn't gone through a trust splitting exercise in a formal sense, there were significant assets that were the husband’s, and therefore, they're things she was entitled to 50% of.

The court held that family law cases will turn on the facts.

Here, they were satisfied that the husband has no control.

There was no de facto splitting.

The terms of the corporate trustee constitution meant that the trustee directors must act jointly and in concert.

There was no evidence to allow the court to assume that the mum was somehow under the manipulation or control or acting as the mere puppet of the husband.

This meant the court essentially ignored the trust.

The reality however is that if the family had gone down the trust splitting path, you can almost guarantee that the earlier family law case of Pittman (email me if you would like a copy of that decision) would have been followed. In that case the court held that assets of a family trust, being a business, were exposed to a family law settlement.

Trust Splitting and Kennon v Spry

Earlier posts have looked at various aspects of the leading family law and trust case of Kennon v Spry – see -

Impact of the Spry decision on trusts

Spry - one year on

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://vimeo.com/148843224

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

The trust split that took place in Kennon v Spry was probably the fundamental thing that meant the whole structure and intended strategy fell over.

After the separation with his wife, Dr Spry took steps to split the trust or segregate the assets of what was in the initial family trust and create four separate sub-trusts for each of the four daughters of the relationship.

Dr Spry did that effectively, in the court’s view, as a way to mean that not only did he not have the assets, so that he could be subject to giving them up to his wife, it also meant that his wife didn’t have them either.

Essentially it was his way of saying to the family court ‘catch me if you can’.

Where the court landed was that they effectively ignored the attempted trust split.

While it might have been effective for tax purposes, while it might have been effective for stamp duty purposes, while it may have even been effective from an estate planning perspective, it was done after the relationship had broken down.

Although there were a myriad of other factual issues that called into question the way Dr Spry conducted himself, the court effectively simply ignored the trust split.

What that meant in a practical sense was that all of the assets that had otherwise been given to the control and benefit of the four daughters of the relationship were returned back into the head trust and the control of that trust was deemed to be solely with Dr Spry.

Once the court had gone through the unwinding of the estate planning exercise, or what was argued to be an estate planning exercise, once all that was unwound and all the assets were back up under the main trust, it was then quite easy for the court to say that trust was under the sole direction and coercion of Dr Spry. Therefore, those assets could then be administered under the terms of the family court order and pass entirely to the benefit of the wife.

One of a kind pricing app launched

Following the successful recent relaunch of the 7 'Tinder-ised' View Legal apps (in areas such as estate planning, business succession and SMSFs, see the previous post - Tinder-isation of the law, we have now developed and launched another Apple and Android app.

The new app is unique in the legal marketplace and provides a guaranteed fixed price in relation to over 23 adviser facilitated estate planning (’AFEP’) solutions.

The View AFEP Pricing App can be downloaded via the following links –

1. Apple – https://itunes.apple.com/us/app/afep-pricing/id1133858018?mt=8
2. Android – https://play.google.com/store/apps/details?id=view.legal.pricing&hl=en

Estate planning is the process of ensuring wealth is dealt with, after death, as intended, while minimising the impact of challenges against the arrangements and costs such as stamp duty, tax and administration expenses.

The AFEP Pricing App is designed for advisers to confirm the upfront fixed price for a range of estate planning adviser facilitated solutions.

If you would like us to consider the appropriate package for your client’s circumstances based on a detailed review of the relevant background material, you can also submit a free review via our website at https://viewlegal.com.au/estate-planning-free-review/

All 8 of the View apps can be downloaded via our website – see - http://viewlegal.com.au/download-our-latest-apps/

Family Provision Applications and Notional Estates

As mentioned in a number of recent posts, one of the ways in which a disgruntled beneficiary can challenge a person's will is by making an application to the court for further and better provision from the estate.

Historically, in all Australian jurisdictions, courts have only been able to make further provision for a beneficiary out of the assets that directly form part of the deceased’s estate.

In New South Wales however, special rules have been implemented that allow the courts to make orders in relation to assets that do not in fact form part of a deceased’s personal estate.

In many respects, the rules are analogous to the bankruptcy legislation in that will makers who take steps to remove assets from their personal name leave those assets exposed to be 'clawed back' into the estate for the purposes of family provision applications made within 3 years of the date of their death.

While the rules apply to anyone living in New South Wales at the date of death, they also potentially apply where the will maker has any assets connected with New South Wales (including shares in companies whose registered office is located there). While there have to date been very few cases that have applied the notional estate provisions, we are seeing an increasing number of clients implementing specific strategies to reduce the risk of the rules applying to their estate plan.

Challenging a Will under a Family Provision Application

A recent post listed the five main ways in which a will can be challenged – see - Ways to contest a will

One of the aspects listed was the ability to challenge a will due to the will maker’s failure to make adequate provision for certain beneficiaries.

The laws underpinning family provision applications are often referred to as an example of the courts applying 'The Vibe', as popularised in the classic Australian movie 'The Castle' -see - The Castle (1997 Australian film) and It's the constitution. It's Mabo. It's justice. It's law. It's the vibe....

Certainly family provision applications are by their very nature extremely subjective and therefore often turn almost entirely on the court's interpretation of the factual matrix.

This said, there are a number of key components to a family provision application, including:

1. Before a person can make an application for further provision, they must be within a defined category set out under the legislation:
1. Generally, children (including adult children), current spouses or anyone that is financially dependent on the will maker are able to make an application for further provision;
2. There are other potential categories other than those listed above including in certain situations, stepchildren and de facto spouses (even where the will maker is also lawfully married);
2. The test then applied by a court is to determine whether a person within the defined category has received adequate provision from the will maker’s estate for their proper maintenance and support, as determined by the court in its discretion;
3. If a court determines that adequate support was not provided, it then can make such further provision as it again determines in its discretion; and
4. One of the key aspects of family provision applications is that generally it is only the assets that form part of the will maker’s personal wealth that can be reallocated by a court.

The One-Day Trust

Earlier posts have looked at various aspects of the mantra ‘read the deed’ – see -

Another reminder to ‘read the deed’

ATO reminder – read the deed

Read the deed - another reminder re invalid distributions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to the read the deed mantra in a ‘vidcast’ at the following link - https://vimeo.com/145349504

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

This case study involves a family trust deed produced by a reputable deed provider – or at least a well-known deed provider, producing a deed in 2009.

This particular deed provider had adopted a ‘schedule’ approach. That is, in the back of the document, they had a schedule. Under that schedule, they listed a number of key things. For example, they had the date of establishment, the trustee, the principal and the beneficiaries.

They then had the vesting date.

A further reminder - this is a well-known provider, with a well-known accounting firm, with a high net wealth client.

The date of establishment of the trust was listed in the schedule as 28 June 2009.

The vesting date was listed as 29 June 2009.

That is they had created a one-day trust.

This trust deed came to us 2015 as the client wanted to do a trust split and we said ‘we need to read the trust instrument’.

Ironically we had trouble getting a copy of the trust instrument.

For some weeks we only had a photocopy of the undated document, however we held firm that we really needed to see the entire document, with the schedule completed. When we finally got the stamped trust deed and completed schedule our entire advice was one sentence – that is ‘do you realise your trust ended over six years ago. What are we going to do about this?’

The continuing saga of how many powers of attorney it takes to create authority

In one of the LinkedIn discussion groups I am a member of, the issue was raised recently about what documents are required when someone has assets or spends time in more than one state around the country.

The issue is particularly prevalent in communities near state borders. However it can potentially arise in any situation. Indeed, the issue can also arise across international borders.

Our view, which seems to align with the general consensus of those regularly advising in this area, is captured succinctly in my earlier post – see How many powers of attorney does it take to create authority?

Interestingly, the post from 2011 flags the ‘ongoing push' to have uniform succession laws across Australia. In the five years that have passed since that post, most would agree no progress at all has been made in this area.

In adopting the approach recommended in the earlier post of preparing a document in each jurisdiction that a person has significant assets or spends significant time, it is generally seen as best practice to include ‘duplication acknowledgement' wording.

Some example base wording in this regard is as follows:

1. For the avoidance of doubt I confirm that I have executed an Instrument Appointing an [#Name of medical EPA in relevant jurisdiction eg Enduring Guardian] pursuant to the [#insert relevant state act] ('the [#insert state acronym eg NSW] [#Name of medical EPA in relevant jurisdiction eg Enduring Guardian]’) for any matter that requires signing by an [#Name of medical EPA in relevant jurisdiction eg Enduring Guardian] duly appointed by the laws of [#Insert state eg New South Wales].


2. By this Power of Attorney for personal and health matters ('the [#insert state acronym eg QLD] [#Name of medical EPA in relevant jurisdiction eg Power of Attorney for personal and health matters]) I appoint my Attorneys in respect of any personal or health matter not strictly required to be signed by an [#Name of medical EPA in relevant jurisdiction eg Enduring Guardian] appointed by the laws of [#Insert state eg New South Wales].


3. To the extent there is any inconsistency or overlap between the [#insert state acronym eg QLD] [#Name of medical EPA in relevant jurisdiction eg Power of Attorney for personal and health matters] and the [#insert state acronym eg NSW] [#Name of medical EPA in relevant jurisdiction eg Enduring Guardian], the [#insert state acronym eg NSW] [#Name of medical EPA in relevant jurisdiction] is to prevail and the [#insert state acronym eg QLD] [#Name of medical EPA in relevant jurisdiction eg Power of Attorney for personal and health matters] is to be modified (and its operation suspended to that extent only) for such time as the [#insert state acronym eg NSW] [#Name of medical EPA in relevant jurisdiction eg Enduring Guardian] remains in existence.


4. In all other respects the [#insert state acronym eg QLD] [#Name of medical EPA in relevant jurisdiction eg Power of Attorney for personal and health matters] shall apply and remain in force.

Image courtesy of Shutterstock

ASIC Records and Trust Ownership

In the early 2000’s, the ASIC started requiring shareholders to disclose whether they owned their shares on trust.

The particular question on the ASIC records is 'are the shares owned beneficially?'

We regularly see situations where the ASIC records do not reflect wider accounting, tax and trust records.

Strictly, the inaccurate ASIC records are a breach of the law. More problematically however, where ASIC records do not reflect what is otherwise being argued for tax or asset protection purposes, it can place clients in an unnecessarily difficult position.

There are a number of mechanisms to correct ASIC records, in some cases without any penalty, so whenever inconsistencies are identified, we recommend proactive steps be taken to update ASIC records immediately.

It is important to note however that there can often be a trade off between adopting the simplest alternative to making ASIC records accurate and the best practice approach in relation to tax planning and asset protection. Similarly, the late fees of a best practice approach can also be prohibitive.

Image courtesy of Shutterstock

A Practical Perspective on Resettlements

Earlier posts have looked at various aspects of the Clark decision and trust resettlements – see -

Statement of principles to be (finally) amended (?)

ATO releases draft determination on trust resettlements

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to resettlements in a ‘vidcast’ at the following link - https://vimeo.com/145339753

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

If you go back to Clark as a benchmark, that decision followed a whole thread of decisions starting right back to Commercial Nominees, which was a superannuation resettlement case.

There was significant white noise around that decision from the Tax Office’s perspective, because they were arguing that the principles about amending trust instruments out of Commercial Nominees were really only available for superannuation funds. Therefore while, a super fund could amend its deed significantly, that didn't apply to any other form of trust.

Clark, somewhat interestingly, was a case that involved a unit trust. But ultimately the Tax Office following that case was comfortable that the principles, as initially confirmed by the High Court in Commercial Nominees, did in fact apply to any form of trust.

Even though Clark involved a unit trust, there were really quite radical changes to the way in which the trust instrument was crafted. There were changes to the unitholders, the trusteeship, and the way in which the trust instrument actually worked.

Despite all of those changes, the court held that the trust was an ongoing trust and there had been no tax event, that is there had been no resettlement, which would have notionally meant that all of the assets of the trust were disposed of from the original trust and reacquired by the new trust, effectively creating a tax event.

What Clark in theory should allow in any trust splitting arrangement, is permit amendments to whatever trust instrument is involved, to allow whatever is desired to be achieved from a trust splitting perspective.

Tinder-isation of the law

For most likely readers of View posts, Tinder is not an app that features on their handheld device (see - https://www.gotinder.com/).

This said, Tinder's historical 'swipe right for yes; swipe left for no' has become ubiquitous.

As 'gamification' similarly becomes expected across all aspects of our lives we have relaunched each of our 7 apps on both Apple and Android.

You can now use the Tinder inspired 'swipe right' approach to narrow down some of the broad areas that might be relevant in relation to a range of estate planning related topics.

Each app generates a free white paper or template legal document.

The apps are as follows -

1. estate planning;

2. self managed superannuation funds;

3. estate admin;

4. business succession;

5. memorandum of directions;

6. directors duties;

7. binding death benefit nominations.

All 7 of the View apps can be downloaded via our website – see - http://viewlegal.com.au/download-our-latest-apps/

Bespoke Corporate Trustee Constitutions

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses some of the key issues in relation to ‘bespoke’ corporate trustee constitutions’ and trust splitting in a ‘vidcast’ at the following link - https://vimeo.com/145236253

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

One of the things that we're spending a lot more time working with is what we loosely call a ‘de facto corporatisation’ or indeed a de facto trust splitting exercise.

In other words, tailoring what would otherwise be a constitution for a shelf company, so as to provide all of the same outcomes that you might otherwise see under a trust split, and embedding those arrangements at least into the company’s constitution, but may be also into the trust instrument itself.

As part of segregating particular assets sitting underneath the trust structure, you can put in place a bespoke or a tailored company constitution, and regulate the way in which directors are appointed to that company, regulate the way in which the shareholders can operate, regulate the way decisions are made in relation to particular assets sitting down inside the trust.

If you actually contractually go and put that into the terms of the constitution, what you can effectively have is, for example, if you're talking about this in an estate planning context, kid 1 controlling part of the trustee company, and giving kid 1 complete autonomy over decisions in relation to assets that are related to that part of the trustee company.

You can then have kid 2 likewise in relation to another control part of the structure and so on.

Alternatively, many people will only look to regulate control in relation to the trustee company.

So they’ll say look, we'll put in place voting requirements, we'll say that one kid has a super vote, or we'll actually appoint an independent board to that company and regulate how those decisions might be made, and this will be an overall strategy for the trust at the trustee company level.

Challenging a Will due to Existence of Mutual Wills

A recent post listed the five main ways in which a will can be challenged – see 'Ways to contest a will'

One of the aspects listed was that wills are always subject to any contractual arrangements that a will maker may have entered into before their death.

One particular approach that is used from time to time is the concept of creating 'mutual wills'.

Essentially, a mutual will is a contract whereby two people agree to make their wills in a certain way and to then not change the document without the express consent of the other party to the agreement.

Traditionally, mutual wills are made between spouses, often where one or both of the spouses are in their second or subsequent life relationship. Alternatively, mutual wills can be implemented where there are particular assets in the estate that both spouses want to ensure are dealt with in a particular way, regardless of when they may each die.

The creation of a mutual will, if crafted correctly, can allow a party who would otherwise have received a benefit, but for a person entering into a new will in breach of the mutual will, to sue on the basis of a breach of contract.

While in theory, litigation for the breach of contract should be easier to succeed in, there have been a number of cases that have seen attempted mutual will arrangements fail.

Furthermore, the significant inflexibility created by mutual wills mean that most specialist advisers caution against their use.

New Financial Year; new small business roll-over in play

With the new financial year underway, the roll-over provisions under subdivision 328-G are now available to small business entities to restructure without adverse capital gain tax (CGT) consequences.

The rules significantly increase the flexibility to restructure businesses, particularly as part of an estate planning exercise.

This post considers the eligibility requirements for accessing the roll-over. A previous post has considered in detail a number of the main opportunities available under the provisions, see - 'Tantalising opportunities for trust restructures under new Subdiv 328-G'

Unlike other CGT roll-overs, the provisions allow direct roll-over of non-CGT assets such as trading stock, depreciating assets and revenue assets. The provisions do not however provide any relief in relation to related transaction costs such as GST or stamp duty.

Eligibility

The concessions are available to small business entities being individuals, companies or trusts whose annual turnover is less than $2M.

In order for the roll-over to apply, the following criteria must also be met:

1. the CGT asset must be an active asset; 
2. an election must be made; 
3. the transferor and transferee must be Australian residents; 
4. the transactions must not change the ‘ultimate economic ownership’; and 
5. the transferee cannot be an exempt entity (for example, a superannuation fund). 

The definition of active asset includes captures all assets used in a business except for company loans to shareholders and unpaid present entitlements which cannot be transferred under the provisions.

Ultimate Economic Ownership and Discretionary Trusts

The rules require that each relevant individual’s interest in the assets of the business remain in proportion after a restructure. Tracking economic ownership when using the provisions to transfer assets from an individual to a company, or from company to company is relatively easy.

Given the nature of a discretionary trust, where beneficiaries do not have a direct interest in the trust assets, the provisions set out how to determine whether ultimate economic ownership is maintained.

In particular, the rules create a ‘safety net’ test that allows access to roll-over relief if a trust has made (or makes) a family trust election. Where such an election is made, it effectively limits the range of potential beneficiaries who can receive a distribution without triggering a penal tax consequence (being the family trust distribution tax).

Integrity measures and the safe harbour rule

Given the very broad potential application of the provisions a discrete integrity measure has been included.

In particular, there is the requirement that any transaction is a 'genuine' restructure of an ongoing business.

While ‘genuine’ is not itself defined, a transaction will be deemed to fall within a safe harbour under the rules if for three years after the relevant restructure:

1. there is no change in the ultimate economic ownership of significant assets; 
2. the significant assets transferred continue to be active assets; and 
3. the significant assets transferred are not used for personal purposes. 

Conclusion

The 328-G concessions are arguably the most comprehensive CGT roll-over provisions introduced since the commencement of CGT. The new rules will provide small business entities with a myriad of restructuring opportunities.

View Legal will be live streaming a webinar on 21 July 2016 covering everything you need to know about the new small business roll-over rules.

For more information about the webinar and your opportunity to register, see the link below - https://viewlegal.com.au/product/webinar-small-business-rollover-rules/

The webinar will explore all technical aspects of the provisions and use numerous case studies, including:

1. what constitutes a ‘genuine restructure’; 
2. using trust cloning and trust splitting as a restructuring method;
3. restructuring heritage trusts with proximate vesting dates or limited variation powers; 
4. how to restructure from a sole-trader to a company owned by a family trust; and 
5. other planning opportunities.

Image courtesy of Shutterstock

The firm of the future is in fact the firm of now

For those that do not otherwise have access to the ALPMA post feed, a recent article by View is extracted below.

The evidence has been collected.

The submissions have been heard.

Judgment has been handed down - the incumbent law firm business model is broken.

The great lawyer bubble

One of the first people to starkly address the fundamental problems at the heart of the legal profession was Stephen Harper and his book 'The Lawyer Bubble'.

The book details why the legal profession, similar to most other professions, will struggle in the short term to reinvent core aspects of their business model, particularly in relation to time billing, in the short term.

While a myriad of reasons are provided, perhaps the most compelling is the fact that universities across the western world have become factories for producing professional service firm graduates, who specialise in the areas rewarded by time billing such as:

• long hours;
• rote learning;
• technology adverse; and
• engrained arrogance, particularly in relation to solutions that undermine the traditional personalised bespoke service offering (such as alternative business models, offshoring, outsourcing and automation).

Catalysts for change
Harper argues that any change to the 'BigLaw' business model from within the profession will require the university system to start rewarding students who are able to demonstrate more innovative attributes than those outlined above.

Just as importantly, the owners of the incumbent firms must themselves create a demand for this style of graduate.

Another leading thinker, Clayton Christensen (in The Innovator's Dilemma), predicts that the prospect of the incumbent firms having the vision to truly cannibalise their existing business model is at best remote.

Maister still matters
While much of Harper’s work was ground-breaking at the time, the framework for many of the answers to what law firms should be doing right now to re-engineer their businesses was provided a generation ago by another US consultant, David Maister.

Maister categorised the delivery of all professional services, including the law, into four broad categories, each of which has the prospect of being highly profitable.

The price is right
The price sensitivity goes from least to most through the following four components:

• unique services (or as Maister describes them ‘brain surgery’);
• experiential services (or as Maister describes them ‘physiotherapy’);
• brand name services (or as Maister describes them ‘nursing’);
• commodity services (or as Maister describes them ‘chemist’).

Arguably, due to the internet, there are two further categories further down the value chain:
wholesale; and
online, with product produced only on demand.

Ultimately, the internet has increased the rate at which all technology disruption has historically taken place.

What the winners do

Winning firms understand that success ultimately depends on being:

• differentiated or unique;
• of demonstrable value; and
• delivered in a way that is difficult to replicate.

Sustaining innovation is ultimately just as important as any disruptive one; the challenge is that both types require different visions, metrics and practices.

The disruptive business model requires funding, resource allocation and working environments that are significantly different from those of the traditional firm.

History doesn’t repeat; although it does rhyme
History shows the vast majority of traditional firms are unable to allocate resources away from the primary revenue source, because of their focus on short-term profitability and the need to avoid any perception that there is a 'cannibalising' of the core business model.

The key to a sustainable and successful business model is being self aware enough to know that unless they cannibalise their existing lines of revenue, competitors certainly will. Further, those competitors will have complete disregard for the ongoing profitability of the incumbent firms.

Primarily due to the embedded restraints of being a start up, innovative firms find ways to:

• monetise ideas quickly;
• minimise upfront cash expenses;
• understand that a product in market is always better than a delay to launch in order to ensure the quality is better - in other words, if you are not embarrassed by version 1 of the solution, you have launched too late;
• recycle and reuse what they have immediate access to; and
• understand that everything can look like a failure during the 'middle part'.

What will the changes look like?
To give some insight to what we believe a ‘firm of the future now' looks like, 10 examples from our business are listed below – five that we have abandoned and five that we have embraced.

Five things abandoned

• Timesheets – with timesheets, all we ever focused on was what was chargeable – without timesheets, we now focus on what is valuable.
• No leave policies – leave policies are a hangover from the industrial age – it is time to move on.

• No individual budgets – while we certainly have team goals, these are never broken down into individual monetary targets. Our targets are aligned around our performance in the eyes of customers. If we get those right, everything else flows (including money).
• No performance reviews – again, a very poor hangover from the industrial age.
• No diversity goals – seeking to mandate minimum percentages of certain genders, cultures, religious beliefs or sexuality disguise much bigger problems with the underlying business model.

Five features embraced

• Guaranteed fixed pricing – the definition of a competent service provider is someone who can devise a scope of work and provide an upfront fixed price that they are willing to refund in full if the customer is not satisfied with the performance.
• ROWE – if you do not know what this is, Google it or see - https://en.wikipedia.org/wiki/ROWE and join the movement.
• Solution choreographed teams – we work with whomever and on whatever terms are best to achieve the client’s objectives.
• AAR – again, if you do not know what it is, Google it or see - https://en.wikipedia.org/wiki/After-action_review and embed it into your business today.
• Diversity of thought – when two people in business are constantly of the same opinion, one or more is irrelevant. Raise diversity in every sense of the word and arbitrary politically correct percentages become irrelevant.

As mentioned in previous posts, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago.

For many, the journey has started more recently and we believe it important to share our learnings.

In this regard, there is still time to register for our upcoming Roadshow that will be a full day example of our contribution in this space.

Download the brochure.

Watch the promo video below.

Later in the year, we are excited to be presenting at the 2016 ALPMA Summit, A Blue Print for Change, 7-9 September in Melbourne – see -http://www.alpma.com.au/Summit

Your free access to our white paper on PSF innovation

It is exciting to confirm the release of our professional service firm innovation white paper.

Titled – ‘How I learned to stop building faster horse carriages and love disruption’, the release is with the support of LexisNexis.

To access a free copy of the 3,000 word white paper click here - http://lexisnexis.com.au/media-centre/blog-articles/2016-June-17-How-I-learned-to-stop-building-faster-horse-carriages-and-love-disruption

As mentioned in previous posts, we began the journey to address many of the challenges of redefining the professional services firm business model over 10 years ago.

For many, the journey has started more recently and we believe it important to share our learnings.

In this regard, we are excited to be presenting at the 2016 ALPMA Summit, A Blue Print for Change, 7-9 September in Melbourne – see http://www.alpma.com.au/Summit

Before then, there is still time to register for our upcoming Roadshow that will be a full day example of our contribution in this space.

Download the brochure.

Watch the promo video below.

Vesting Dates and Trust Distributions: measure twice; cut once – read the deed … and then some

For those that do not otherwise have access to the Weekly Tax Bulletin, a further recent article by View is extracted below.

As previously reported by us in the Weekly Tax Bulletin, there are a range of issues often overlooked in relation to trust distributions (see 2014 WTB 43 [1426]) and extensions to vesting dates (see 2014 WTB 44 [1446]). Rarely, however, do these issues arise together in the same factual scenario.

In the lead up to another 30 June, the decision in Domazet v Jure Investments Pty Limited [2016] ACTSC 33 (7 March 2016) is a timely example of the problems that can arise when a deed is not carefully reviewed before trust distributions are made.

The decision

In summary, a Family Trust was settled in the ACT on 1 April 1980. The Family Trust deed gave the trustee the power to nominate additional beneficiaries, including trusts, so long as the vesting date of the other trust was not longer than that of the Family Trust.

In 2009, a new trust (referred to as the "Finance Trust"), which was part of the same family group was purportedly appointed as a general beneficiary of the Family Trust.

The Family Trust had a cascading optional perpetuity period, which the parties wrongly interpreted as allowing the vesting date to be 80 years from the date of settlement. In fact, the Family Trust vesting date was 21 years after the death of King George VI's living issue as at 1 April 1980.

The Finance Trust, established in 2005, was set to vest either upon the election of the Trustee or a maximum of 80 years from settlement, making it prima facie ineligible. In an attempt to ensure the Finance Trust was an eligible beneficiary of the Family Trust, the vesting date was then amended to be one day before 80 years from 1 April 1980 (ie 31 March 2060).

Practically speaking, this meant that in order for the Finance Trust to be an eligible beneficiary of the Family Trust, it needed to be absolutely certain that at least one of King George VI's living issue in 1980 would still be living on 31 March 2039 (that is, 21 years before 2060), which the Court thought was possible, but not absolutely certain. This meant the appointment of the Finance Trust as a general beneficiary was invalid.

It appears from the decision that a number of capital distributions were purported to be made after the Finance Trust was invalidly appointed as an additional beneficiary. The invalid appointment meant that the distributions made to the Finance Trust would have been done in breach of trust. Furthermore, the invalid distributions would have also caused adverse tax consequences for the parties. This seems to have been a potential issue because the ATO had made submissions as part of the proceedings.

Perpetuity rules

It is critically important to not just read the deed, but also specifically consider which perpetuity rules apply. The difficulties arose in this case because amendments to the rule against perpetuities were progressively rolled out throughout Australia. The advisers which prepared the documents had wrongly assumed the ACT rules, which came into effect on 18 December 1985 (after the Family Trust was settled), were implemented at the same time as the Queensland rules were introduced (1 April 1973).

In this respect, the earliest change to the rule against perpetuities occurred in Victoria in 1968, whereas Tasmania only introduced new rules in 1992. When reviewing trusts which span between these dates, it is therefore critically important to firstly determine the trust's governing jurisdiction, but also consider which perpetuities rules apply.

Some possible workarounds

With the aid of hindsight, there were a number of alternatives that could have avoided the outcome that the parties ultimately faced: a substantive trust to trust distribution being invalid. In summary, the other alternatives that could have been adopted include:

1. The vesting date of the recipient trust could have been amended to provide that - notwithstanding any other provision of either trust instrument, it would automatically vest on or before the date of the distributing trust.
2. The requirement in the distributing trust that the recipient trust needed to vest before it could have simply been deleted. While it still would have been necessary for the recipient trust to have ultimately vested by the date of the distributing trust, it would have been possible to rely on the 'wait and see' rule rather than the distribution being void immediately on the date that it was made.
3. Depending on the factual matrix, the distributing trust could have made a distribution directly to the ultimate intended beneficiaries, even if that may have required a variation to the trust instrument (and thereby avoid the need to distribute to an interposed trust).

In any of the above cases, again with the aid of hindsight, a private ruling could have been sought from the ATO, or indeed a declaration from the Court could have been obtained. While both of these approaches obviously create significant time delays and cost exposure where (as here) there are significant funds at risk, these additional costs can be an appropriate investment.

In regards to the "wait and see" rule, the approach to be taken was summarised in the case of Nemesis Australia Pty Ltd v FCT [2005] FCA 1273 (14 September 2005) (reported at 2005 WTB 40 [1638]). The case confirmed that the "wait and see rule" in each jurisdiction can be relied on in a situation where a trust distributes to another trust with a later perpetuity date.

The "wait and see" rule means the initial distribution will not be void when made, and will not become void until such time as there is a failure to distribute out of the recipient trust before the vesting date of the original distributing trust.

Rectification

The final main alternative to the issues faced in this case, which was the one ultimately adopted, was to seek rectification of the documentation from the Court.

The case provides a very detailed analysis of the way in which the rectification rules work, including heavily quoting Dr Spry, who has been featured prominently in trust related areas, both for his academic writing and his legal challenges in a personal family law dispute (see Kennon v Spry (2008) 238 CLR 366 (reported at 2008 WTB 51 [2303]).

Ultimately, although with some reservation, the Court did rectify the relevant documents to essentially adopt the approach outlined at paragraph (a) above. While it cannot be certain, it is likely that the rectification order settles a number of the potential taxation consequences resulting from what would have otherwise been invalid distributions.