Tuesday, October 31, 2017

(It has) access now - estate planning documents & family law cases **


As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/GyqLtNpPv_8

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

A classic case study example is where there is a mum and dad with adult kids. The parents have set up their estate plan and one of the adult kids then goes through a relationship breakdown.

The type of argument that can be run by the estranged spouse is as follows –

‘I’ve got reason to believe that under the estate plan of my former in-laws that my ex-spouse will be getting a fair entitlement under their estate plan. So on that basis, I want to get access to the documentation that sets out how the estate plan works and I want to get access to how any family trust they may have is setup.

I also want to get access to all the distribution resolutions overtime. Even though none of this is a direct asset or something that is directly within the portfolio of my former spouse, it is all within the overall family unit, and therefore, I am entitled to get access to those documents.’

The case law in this type of situation is somewhat unclear. There are certainly cases to support the fact that parents’ estate planning documentation can be accessed.

Indeed, there are examples where in the actual trial, the parents-in-law are called into the courtroom, the doctors are called in, and there’s a medical assessment of how the mum and dad are tracking, and whether they are actually going to die anytime soon.

All of this is done to allow the court to put a monetary value on what a spouse’s entitlement might be out of their parents’ estate plan.

** for the trainspotters, ‘it has access now’ is a line from the At the Drive-In song ‘One Armed Scissor’, watch hear (sic) - https://www.youtube.com/watch?v=7NYbojdoAQE

Tuesday, October 24, 2017

(A sea of) permutations on reading the deed - regulating family trust assets via wills **


Recent posts have considered aspects of the prohibition on a trustee fettering its discretion, see -
Fettering of a trustee's discretion – when will it be ignored? ** and Leading case about fettering of a trustee’s discretion

One related issue that we see arise from time to time is an attempt to regulate the distribution of the assets of a trust via a will direction. Generally this approach is adopted on the basis that some argue that a will can have legal force over a trust.

The idea that a willmaker can mandate that a company take certain steps in relation to its assets is clearly untenable (even if the will maker is the sole director and shareholder of the company). The analogous argument that a will maker can somehow force a trust to take certain steps seems (at least conservatively) similarly without basis.

In any event, if the outcome of mandating certain trust distributions is required, a simple deed of variation, with an effective date of the willmaker’s death arguably achieves the same outcome, without any of the esoteric debate about whether a willmaker can regulate trust distributions.

While we do from time to time adopt the ‘delayed commencement’ deed of variation approach we generally recommend against it as it goes against virtually all the benefits of having a discretionary trust in the first place (quite aside from the significant tax and duty risks of such a variation).

Instead, our strong preference is to use one or more of strategies such as memorandums of directions, crafting control roles (such as appointor or principal powers), family councils, bespoke constitutions, trust splitting, trust cloning, independent trustees or gift & loan back arrangements to achieve the required objectives.

** for the trainspotters, ‘a sea of permutation’ is a line from the John Cale/Brian Eno song ‘Lay my Love’, listen hear (sic) - https://www.youtube.com/watch?v=pYvXp7_9GPE



Image courtesy of Shutterstock

Tuesday, October 17, 2017

Fettering of a trustee's discretion – when will it be ignored? **


Discretionary trusts are regularly used in commercial transactions, and of course tax issues are always present. But, there is a more fundamental issue that deserves attention – fettering of a trustee's discretion.

Take for example an insurance funded buy-sell arrangement that uses options under the contractual arrangement to help facilitate any ultimate buyout. This is a widely used, and generally very sensible, approach to take. A significant difficulty can arise however where the parties to the buy-sell agreement include trustees of discretionary trusts.

There are cases (admittedly dating back many years) which provide that unless a trust deed for a discretionary trust specifically allows the granting or an acquiring of an option, then the arrangement will not be enforceable as the trustee has effectively fettered its discretion.

In order for a discretionary trust to remain an ongoing valid structure, it is necessary for the trustee to always retain its discretion and therefore not enter into arrangements which will remove this flexibility in the future.

Traditionally, entering into option arrangements has been seen as clearly limiting future decision making ability and therefore prohibited - unless specifically allowed under the trust instrument.

Despite the longstanding rules in this area, many otherwise ‘modern’ trust deeds do not have the required powers to in fact allow a trustee to grant options.

Leading case

As mentioned in last week’s post, the principle in relation to the prohibition on a trustee fettering its discretion is arguably best captured in the decision of Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628.

In this case, the key concepts concerning fettering were summarised as follows –
"… a trustee is not entitled to fetter the exercise of a discretionary power (for example a power to sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In re Vestey's Settlement [1951] Ch D 209.

If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 Ch D 447), though the trustee may be liable in damages for breach of contract …".
Arrangement in breach of fettering trustee's discretion enforced

Arguably the leading case explaining when the prohibition on fettering of discretion will essentially be ignored is Dagenmont Pty Ltd v Lugton [2007] QSC 272.

The background in this case was as follows:
  • a family discretionary trust was established to be the owner of a start up business; 
  • a company was nominated as trustee of the trust, with the shares in the company owned by the husband and wife and the husband as the sole director; 
  • the wife’s brother was listed as the sole appointor, with the right to remove the trustee in his sole discretion; 
  • the wife’s brother had no involvement in the business at any stage, and the husband and his wife claimed they had never understood why the brother was nominated as appointor, nor indeed the extent of his ultimate power; 
  • as part of a succession and estate planning exercise, the wife’s brother agreed to relinquish his rights as appointor; 
  • in particular, an agreement was entered into by the wife’s brother as the original appointor of the discretionary trust and the husband, wife and one of their sons, whereby the wife’s brother would resign as appointor of the trust, in return for guaranteed distributions from the trust for as long as he lived; 
  • the distributions were set at an amount of $150,000 each year, indexed for inflation, in priority to any other distributions from the trust, and regardless of the level of profitability of the business owned by the trust; 
  • the agreement by the trustee to make these future distributions was therefore effectively a fetter on its future discretion; 
  • each party received independent legal advice at the time of the agreement, however some years later the trustee attempted to cease the distributions due to the, argued, invalid fettering of its discretion and in turn the apparent inequality of the original bargain struck – the wife’s brother had never had any involvement in any aspect of the business and indeed had never exercised his power as appointor. 
The Supreme Court specifically acknowledged the general prohibition on a trustee fettering its discretion (based on the case law stretching back over hundreds of years), confirming that:
"trustees cannot fetter the future exercise of powers vested in trustees … any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power."
While therefore agreeing that the agreement was at face value void and should be set aside, the court went on to in fact ignore the fettering and uphold the validity of the agreement.

In rejecting the trustee's attempt to avoid the agreement and in turn the obligation to continue to make the trust distributions of $150,000 a year for the rest of the wife’s brother’s life the court confirmed:
  • a provision in a document authorising a trustee to release powers which they would otherwise have a duty to exercise is valid; 
  • here, the document confirming the agreement between the parties was in essence a release by the trustee of the power conferred on it to exercise an unfettered discretion to distribute amongst all potential beneficiaries; 
  • alternatively, the agreement effectively amounted to a variation of the terms of the original trust deed; 
  • this meant that what would otherwise have been an unfettered trustee discretion became reduced in scope, simultaneously with an obligation being imposed on the trustee (created by the agreement with the wife’s brother as original appointor) to distribute the annual amount of $150,000 (indexed); 
  • arguably, particularly where parties receive independent advice at the time, the court should always uphold bargains where it can, rather than destroy them – even where there is longstanding case law suggesting the opposite conclusion. 
Conclusion

As explored regularly in this blog, while reading the trust deed of a discretionary trust (including all valid variations) is necessary, it will not be sufficient by itself. This is because there are a myriad of related issues that need to be considered that may impact on any intended distribution, aside from whatever powers are set out in the trust instrument.

While not necessarily an obvious example, the rules in relation to trustee fettering are longstanding and go to the heart of a trustee’s duties. A failure to understand the impact of the regime can have significant detrimental impacts both from a trust law perspective and the related tax consequences – regardless of whether any purported fettering is ultimately held to be valid or invalid.

As usual, if you would like copies of any of the cases mentioned in this post please contact me.

The above post is based on the article we recently had published in the Weekly Tax Bulletin.

** for the trainspotters, ‘it will be ignored’ is a line from the Black Rebel Motorcycle Club song ‘At my Door’, listen hear (sic) - https://www.youtube.com/watch?v=SFTZot0hPkA


Image courtesy of Shutterstock

Tuesday, October 10, 2017

Leading case about fettering of a trustee’s discretion


Last week’s post considered the issues of a trustee fettering its discretion in the context of an insurance funded buy sell arrangement, see – Fettering (and flies) of a trustee’s discretion **

The principle in relation to the prohibition on a trustee fettering its discretion is arguably best captured in the decision of Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628. As usual, if you would like a copy of the decision please contact me.

In this case the key concepts concerning fettering were summarised as follows –

‘… a trustee is not entitled to fetter the exercise of a discretionary power (for example a power to sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In re Vestey’s Settlement [1951] Ch D 209.

If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 Ch D 447), though the trustee may be liable in damages for breach of contract …’

Next week's post will consider one of the leading cases where an arrangement that would have been a breach of the fettering of the trustee’s discretion was in fact enforced.

Image courtesy of Shutterstock

Tuesday, October 3, 2017

Fettering (and flies) of a trustee’s discretion **


Last week, an adviser contacted us in relation to an insurance funded buy-sell arrangement that used options under the contractual arrangement to help facilitate any ultimate buyout.

As many would be aware, this is a widely used, and generally very sensible, approach to take.

The difficulty here was that the parties to the buy-sell agreement included trustees of discretionary trusts.

There are cases (admittedly dating back many years) which provide that unless a trust deed for a discretionary trust specifically allows the granting or an acquiring of an option, then the arrangement will not be enforceable as the trustee has effectively fettered its discretion.

In order for a discretionary trust to remain an ongoing valid structure, it is necessary for the trustee to always retain its discretion and therefore not enter into arrangements which will remove this flexibility in the future.

Traditionally, entering into option arrangements has been seen as clearly limiting future decision making ability and therefore prohibited - unless specifically allowed under the trust instrument.

** for the trainspotters, ‘fetters and flies’ is a line from Massive Attack’s song ‘Flat of the Blade’, listen hear (sic) - https://www.youtube.com/watch?v=vAIOQMJAzxE




Image courtesy of Shutterstock