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.

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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.

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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.

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