Tuesday, October 15, 2019

Is too much ain’t enough** value to justify a testamentary trust?

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation is below -

Question: Do you usually set a minimum amount in the pool of assets that would suggest that a testamentary discretionary trust is worthwhile?

Answer: My thinking on this has evolved a bit over the last couple of years.

Historically, I used to say about a million dollars’ worth of assets is usually the threshold where the tax benefits of having a testamentary trust start to offset the ongoing compliance costs.

Now I'm coming down a bit and think the threshold is more like $500,000, because while the tax calculations are important, we've seen so many instances over the last few years where the tax is actually a secondary consideration where there is a child that’s going through a divorce, is getting sued for something that happened in their business, or there is a child who’s got a gambling problem.

When we have clients who know that their children have (or is likely to have) one of these problems, then there’s almost no minimum.

If the alternative to a testamentary trust is losing 50% of the inheritance to a spouse or 100% of the inheritance to a creditor, even if it’s a $100,000 pool of assets, that may well still justify setting up a testamentary trust for a period of time, in the context that these trusts can usually be wound up at any time that the trustee determines.

While we would typically structure the testamentary trust in a way that allows it to last for 80 years, if there’s a specific risk we’re trying to deal with today because the child is going through a matrimonial breakdown or one of the other problems mentioned above, regardless of the value of the assets that are involved, we might still have it go into the testamentary trust where it is protected and preserved for that child. We would then look to wind up that testamentary trust and extract the assets once that issue is resolved.

** For the trainspotters, ‘Too much ain’t enough (love)’ is a song by Jimmy Barnes from 1987.

Tuesday, October 8, 2019

Storing up an inheritance** against family law claims

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation is below -

Bonnici v Bonnici was a family law case involving a 20-year marriage, where there was an inheritance received by the husband about six months prior to the separation.

The couple were together for 20 years, 19.5 years in, the husband receives a significant inheritance in his personal name and six months later he separated from his wife.

The wife argued that that inheritance that he received should be included in the pool of matrimonial assets available for division between the two of them.

The husband tried to argue the inheritance should be a financial resource only, because it was an amount that he received from his parents and wasn’t an amount that he and his wife had built up during the relationship.

The court held that an inheritance is not protected from family law proceedings just because it is an inheritance.

They said there might be instances where an inheritance is protected and is not available as a matrimonial property, but there would need to be some exceptional circumstances in order for that to be the case.

Therefore in Bonnici, that entire inheritance was included in the matrimonial pool, subject to the parties then making submissions about their respective contributions.

One of the factors which was relevant in Bonnici was that the wife argued (and the Court accepted) that she had actually contributed to the value of the wealth that was inherited by the husband, because the husband and wife had been actively involved in a restaurant business owned by the parents and she had made contributions to the success of that business for remuneration which was less than market value.

Her argument was that she had done unpaid work in the business and had also had homemaking duties while her husband contributed to the business.

One of the factors that the court considered when deciding that inheritance was matrimonial property was the fact that the wife had contributed to the overall value of the parents’ estate that passed to the husband and as a result, the inheritance was exposed in the family law proceedings.

** For the trainspotters, ‘storing up inheritance’ is a line from the Johnny Cash song ‘What is Man’.

Tuesday, October 1, 2019

Are there no limits** to an Attorney’s Powers?

Previous posts have looked at various aspects of powers of attorney, see for example:
  1. EPAs and conflicts of interest; and
  2. Incapacity and SMSF control.
A validly appointed financial attorney has extremely wide powers in relation to what they may do on behalf of the donor.

Following on from last week’s post there were questions raised about the limitations imposed on attorneys.

While the rules in each state are slightly different, generally speaking, an attorney is prohibited from doing any of the following on behalf of a donor:
  1. acting as a director in place of the donor – a directorship is a personal role and cannot be delegated;
  2. voting in government elections;
  3. signing affidavits in relation to information that is known only to the donor;
  4. marrying or divorcing a spouse;
  5. making a will on behalf of the donor; and
  6. entering into transactions where the donor’s interests conflict with the attorney's, unless the document appointing the attorney waives potential conflicts of interests. 
While most of the prohibitions on attorney conduct are clear, there remains some confusion about the ability of an attorney to implement or change a binding death benefit nomination for the donor’s superannuation entitlements.

Some of the key issues in this regard were also explored in an earlier post.

** For the trainspotters, ‘no limits’ is a line from the Bjork song from 2007, namely ‘Hope’.

Tuesday, September 24, 2019

The firm of ‘now’ – 5 things about the way you do the things you do**

Following on from recent posts, to give some insight to what we believe a ‘firm of the future now' looks like, 5 examples from our business that we have abandoned as compared to a traditional model are as follows:
  1. 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.
  2. ROWE – if you do not know what this is for, Google it or click here and join the movement.
  3.  Solution choreographed teams – we work with whomever and on whatever terms are best to achieve the client’s objectives.
  4. AAR – again, if you do not know what it is, Google it or click here, and embed it into your business today.
  5. Diversity of thought – when two people in business are constantly of the same opinion, one or more is irrelevant. It raises diversity in every sense of the word and arbitrary politically correct percentages become irrelevant.
** For the trainspotters, ‘The way you do the things you do’ is a song by the Temptations from 1965, The version I first heard was by Hall & Oates.

Tuesday, September 17, 2019

The time is now** for the firm of ‘now’ – 5 things not to do

Following on from recent posts, to give some insight to what we believe a ‘firm of the future now' looks like, 5 examples from our business that we have abandoned as compared to a traditional model are as follows:
  1. No Timesheets – with timesheets, all we ever focused on was what was chargeable – without timesheets, we now focus on what is valuable.
  2. No leave policies – leave policies are a hangover from the industrial age – it is time to move on.
  3. 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).
  4. No performance reviews – again, a very poor hangover from the industrial age.
  5. 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.
** For the trainspotters, ‘Time is Now’ is a song by Moloko from 2000.

Tuesday, September 10, 2019

What’s Your Story?** … Tax Sharing & Funding Agreements

Though originally designed to primarily assist 'the big end of town', the tax consolidations regime is available to any Australian company and often can be very useful for small to medium size business operators.

One of the key consequences of forming a tax consolidated group is that all of the members of the group are jointly and severally liable for the tax liabilities of the group as a whole.

If however, each member of the group signs a valid tax sharing agreement (TSA), then it is possible for each member of the group to only be responsible for a 'reasonable' portion of the Group's tax liability.

A TSA is generally seen as a document that should be in place whenever a tax consolidated group is formed.

Generally, a TSA will also set out how any member of the group can make a 'clean exit', ensuring that it will not bear any future liability in relation to taxes that arise once the entity has left the group, even where they relate to a period where the entity was in fact a member.

Often, a TSA will be implemented in conjunction with a tax funding agreement (TFA).

Due to the way in which the tax consolidations regime is structured, the head entity of a consolidated group is the one that is ultimately liable for the tax of the group as a whole.

In order to ensure that the head company has the funds to meet the tax liability, a TFA can be utilised to regulate the manner in which that funding is to occur, particularly with reference to relevant accounting standards.

While most consolidated groups in the small to medium enterprise space will (or at least should) implement a TSA, often TFAs are only utilised by larger tax consolidated groups, given that they are more mechanical and technical in nature.

** For the trainspotters, ‘what’s your story’ is a line from the Red Hot Chili Peppers’ song from their 1986 album Stadium Arcadium, namely ‘Tell Me Baby’.

Tuesday, September 3, 2019

2+2 made 5** … adding testamentary trusts by Court Order – a family law perspective

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’.

As usual, an edited transcript of the presentation is below -

One very interesting decision was originally published as ADT v LRT and then the appeal, the appeal decision was released as GAU v GVT.

The case involved a mother who had a will that she’d signed giving a significant number of assets to her son in his personal name.

The son was going through divorce proceedings and the mother had lost capacity and was unable to change her will.

The Court was asked by the son to incorporate a testamentary trust into her will for the express purpose of protecting the son’s future inheritance from his matrimonial proceedings.

The inheritance was estimated to be about $5 million, which was significant in terms of the matrimonial proceedings if it was successfully excluded.

In the first instance (ADT v LRT), the Court said that they agreed the testator would have made the change if she still had capacity, but then concluded that it was inappropriate to interfere with Family Court proceedings and therefore refused to grant the order.

On appeal (GAU v GVT), the son was successful and the Court said that the will maker’s intentions were the critical test and there was no doubt she would have made the change if she still had capacity.

The Court said the Family Court proceedings were only relevant at the margins and it agreed to grant the order incorporating the testamentary trust into the mother’s will.

** For the trainspotters, ‘Two and two made five’ is a song by Ned’s Atomic Dustbin from 1992.

Tuesday, August 27, 2019

Legal Professional Privilege** in adviser facilitated estate planning

A question came up recently from a financial planning licensee about whether an adviser attending an estate planning meeting between a client and their lawyer inadvertently waives the client’s legal professional privilege over those estate planning discussions.

As mentioned in last week’s post, legal professional privilege protects communications between a client and their lawyer from third parties, if the communications are brought into existence for the dominant purpose of obtaining legal advice. However, legal professional privilege over communications between a lawyer and a client can be waived if the information is disclosed to a third party.

Broadly we confirmed that we do not believe legal professional privilege is particularly relevant in the context of most estate planning discussions with clients. In particular, the advice generally provided to the client in a meeting is unlikely to be of the nature that legal professional privilege would need to be claimed. Furthermore, the legal documents (i.e. the final wills and powers of attorney) themselves are not generally privileged.

Indeed, in an adviser facilitated estate planning scenario, the client will have, in most cases, already disclosed most (if not all) of the information that will be discussed in the online meeting to the adviser as part of the initial fact finding process before the lawyer commences the legal aspects of the estate planning exercise.

We therefore believe that the risk of any implied waiver of legal professional privilege by having a client’s adviser sitting through the online meeting with the client is low and it would be an unnecessary step looking to avoid having the adviser attend the online meeting.

As most readers will be aware, our strong preference is to have the adviser attend the meeting as, generally speaking, their insights about the appropriateness of the estate planning strategy for the client’s family and financial circumstances is highly valuable.

** For the trainspotters, last week I mentioned that ‘privilege on privilege’ is a line from one of my favourite privilege related songs, from the Church and their 1986 album Heyday, namely ‘Myrrh’. Based on further research, this song is not simply one of my favourite privilege related songs, it is the only decent song I can find, thus listen again.

Tuesday, August 20, 2019

Financial Advisers to become qualified witnesses - Young Guns (do not necessarily) go for it **

Very positive to see the announcement that financial advisers will be granted the status to witness a Commonwealth statutory declaration.  

A step that sees advisers become the ''equal'' of medical practitioners, justices of the peace and lawyers.  

And arguably a long overdue iteration to provide an easy and far more cost effective way for customers to have documents witnessed. And yet it must be asked, when will all states follow this lead?  

Particularly in the (state regulated) estate planning space, one of the single biggest roadblocks we see is the witnessing of attorney documents. Particularly in Victoria, New South Wales and (to a lesser extent) Queensland the existing witnessing requirements appear to remain unchanged.  

Thus, especially in NSW, you essentially need a lawyer to do the witnessing (kudos to the NSW lawyers union for achieving this position).  

In other words, simply because a person (ie a financial adviser) is eligible to witness statutory declarations is not sufficient to make them qualified for the purpose of witnessing attorney documents.  

** For the trainspotters, an oldie and a goodie, Wham's 'Young Guns' is the inspiration for the title to the post today.

Legal privilege (on privilege)** and estate planning

Often one of the most important aspects of advice provided by lawyers is the ability for that advice to remain private and confidential to the client on the basis of legal professional privilege.

Particularly in relation to tax planning and asset protection, the ability to maintain confidentiality can often be very important and the case of Nolan v Nolan [2013] QSC140 is an important example of this principle. As usual, if you would like a copy of the decision please contact me.

In summary, the situation in this case was as follows:
  1. a wife and husband had been married for some years;
  2. following a breakdown in their relationship, the wife claimed an interest in the farming property of the husband's parents;
  3. because the husband's parents were still alive, the wife tried to gain access to their estate planning documentation; and
  4. the parents of the husband sought to deny access to the documents on the basis of legal professional privilege.
In deciding the case, the court confirmed:
  1. the dominant purpose for the creation of various estate planning documents including letters of advice and handwritten notes, both by the estate planning lawyer and the parents, was to obtain legal advice;
  2. on this basis, legal professional privilege could apply to deny the wife the ability to access the documents; 
  3. unfortunately, because the lawyers for the parents did not raise the issue of privilege until after the relevant documents had been disclosed, the court held that notwithstanding the documents could have otherwise retained their confidentiality, the disclosure of them had waived the protection of privilege; and
  4. importantly, it was also confirmed that it is not necessarily automatically the case that wills and related files are protected by legal professional privilege.
** For the trainspotters, ‘privilege on privilege’ is a line from one of my favourite privilege related songs, from the Church and their 1986 album Heyday, namely ‘Myrrh’.

Tuesday, August 13, 2019

Family Court: ‘I’ve Got the Power’** to make orders against third parties

The powers of the family court in relation to structures such as trusts are potentially extensive.

At a simplistic level, there is the specific power to force the change of a trustee of a trust.

Potentially, there is also the ability to bring forward the vesting date of a trust to require it to end immediately and thereby crystallise the interests of a party to the relationship.

One leading case in this regard is the decision in AC and ORS & VC and ANOR [2013] 93 FLC 540 FamCAFC 60. As usual, if you would like a copy of the decision please contact me.

Briefly in that case:
  1. The husband’s mother was in control of the corporate trustee and the trust at the relevant times.
  2. The husband and his former wife had a fixed entitlement to the capital of the trust on its vesting, which, at the time of the property settlement, was still 50 years in the future. That is, the trust was not a traditional discretionary trust where there are no fixed entitlements.
  3. The court found that the entitlement was rightly considered property of the parties and therefore ordered the trustee to vest the trust.
  4. The Attorney General intervened in the proceedings, given that the practical result of the decision was that the property entitlements of a third party were substantially altered.
  5. Critically, it was held that the husband and wife did in fact have an interest in the trust property despite the fact that it was accepted that the control of the trust was with the husband’s mother. 
  6. In other words, the ability to alter the structure of trusts can be made even where a party to the marriage is not in control of the trust.
  7. In a more traditional discretionary trust however there may not be the required nexus between the trust assets and the parties to the marriage.
  8. For completeness however, in this particular case, the forced vesting of the trust ultimately failed due to the appeal court’s conclusion that procedural fairness had not been given to the husband’s mother, particularly given that the parties to the marriage had other assets that could have likely achieved financial closure between the parties without the need to impose orders on a third party.
** For the trainspotters, ‘I’ve Got the Power’ is a song by Snap! from 1990.

Tuesday, August 6, 2019

I’m gonna break into your heart** (and anything else you get): family law and post separation inheritances

One ongoing area of contention (admittedly amongst many others) in family law is how post-separation inheritances are treated on a matrimonial property settlement. 

In very broad terms, the Family Court is required to consider all relevant factors before distributing any share of one party’s inheritance to their former spouse.

Depending on the exact factual matrix, the Courts will, in broad terms, take one of the following approaches:
  1. Completely ignore the inheritance for all purposes in relation to the division of matrimonial property.
  2. Exclude the inheritance from the division of matrimonial property, however make an adjustment on the division of the matrimonial property to take into account the access to the inheritance that one spouse will have.
  3. Include the inheritance as part of the pool of property to be distributed between the parties, while making some adjustment to acknowledge the ‘contribution' that one party made to bringing the asset to the matrimonial pool.
  4. Simply including the inheritance as part of the matrimonial asset pool, with no specific adjustments. 
However, based on the published cases to date, it is important to note that it is very rare for the recipient of an inheritance or similar ‘windfall' to have those assets completely quarantined, regardless of when they are received up until the final date of the property settlement.

** For the trainspotters, ‘Break into your heart’ is a song by Iggy Pop from his album with Josh Homme (QOTSA) in 2016 ‘Post Pop Depression’.

Tuesday, July 30, 2019

Hallo Spaceboy** - Distributions ‘outside’ a family group

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’.

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

One strategy we are seeing implemented by an increasing number of clients is the amending of a trust instrument to reflect what the position is due to the family trust election that has been made for that particular trust.

See here for a visual of the family tree as it is defined under the legislation as to what forms part of the family when a family trust election has been made.

This can mean that following the mantra of reading the deed can be misleading. This is because if you have looked at the trust instrument and you have decided that a particular party is a potential beneficiary, then that should always be overlaid with what the family trust election permits.

In other words, simply because a party is a potential beneficiary under the trust instrument, this doesn't mean that it’s necessarily a smart idea to distribute to that entity. This is because if the distribution is outside the family group, then the tax is effectively at 50 cents in the dollar.

Indeed, even if the distribution is otherwise a discounted capital gain, the penal family trust distribution tax is triggered.

Historically, the concept of quite radically redrafting a trust deed to ensure that it reflects what the family trust election says has not been popular.

Now however, we see an increasing number of clients amending their trust deeds to minimise the risk of distributions outside the family group.

** For the trainspotters, 'Hallo Spaceboy' is the lead single from the David Bowie’s 1995 album ‘Outside’.

Tuesday, July 23, 2019

Presumption** of disclosure of beneficial share ownership

Recent posts have considered a number of aspects of the ASIC requirement that the beneficial ownership of shares in a private company be disclosed.
  1. (Stripped) Bare** trust share ownership;
  2. Updating ASIC records – Simple (Simon); and
  3. Relationships of share ownership and the ASIC.
One potential difficulty in relation to ASIC’s requirements in this regard involves situations where the legal owner holds the share on an undisclosed trust for another party or entity.

In this type of situation reading of the relevant ASIC provisions suggests that the company report should disclose the fact that the legal owner holds the share non beneficially.

This said, in a true undisclosed trust situation most advisers will recommend that the ASIC records in fact are completed in a way that shows the legal owner is also the beneficial owner.

If this approach is adopted then full supporting documentation should be retained by the legal owner to rebut the presumption created by the way in which the ASIC records are completed.

** For the trainspotters, ‘presumption’ is a key word from Midnight Oil’s song from 1998, ‘Blot’.

Tuesday, July 16, 2019

(Stripped) Bare** trust share ownership

Recent posts Updating ASIC records – Simple (Simon) and Relationships of share ownership and the ASIC have looked at the various issues in relation to notifying the ASIC of the beneficial ownership of shareholdings in a private company.

One aspect of this style of situation that arises relatively regularly relates to companies that were incorporated prior to 1997. Before this date, every private company was required to have at least two shareholders.

In order to provide a practical solution where a person was wanting to be the sole shareholder a practice developed whereby a second party would be listed as a legal shareholder, however they would simply hold that share on a bare trust for the intended sole shareholder.

Where such a structure exists, assuming that the articles of association or constitution have now been updated, it is generally possible to vest (or bring to an end) the bare trust arrangement and have the ASIC records updated to simply list the sole shareholder.

** For the trainspotters, ‘stripped bare’ is a line from the U2 song from 1983 ‘October’. 

Tuesday, July 9, 2019

Updating ASIC records – Simple (Simon)**

Last week’s post touched on some of the issues in relation to disclosure of beneficial ownership of shares on ASIC records.

In situations where the beneficial ownership is incorrectly recorded there are three broad alternatives available, namely:

1) Leaving the ASIC records unchanged. From a compliance perspective while this approach is possible, it is not recommended.

2) Simply lodging an annual return or ASIC form 484 that updates the ASIC records from that date. In many cases this approach will be pragmatically appropriate and is certainly the easiest and most cost effective approach. There is a risk however that there may be adverse revenue consequences or challenges from a third party (for example a trustee in bankruptcy).

3) The final approach involves effectively rectifying ASIC records from the date the error first occurred and then arranging for the annual returns for every subsequent year to also be amended. Obviously, this approach can be a significant exercise and is generally only adopted where there are concerns from a tax, stamp duty or asset protection perspective.

** For the trainspotters, the title today is riffed from INXS’ first ever single, from 1980.

Tuesday, July 2, 2019

Relationships of share ownership** and the ASIC

Up until the early 2000’s, the ASIC required only very basic information in relation to the share ownership in companies.

From around 2002, the ASIC began requiring that all private companies disclose the basis on which shares were owned, in particular whether shares were owned beneficially or non beneficially.

Broadly the distinction is as follows:

1) If a share is owned beneficially this means that the legal owner listed in the ASIC records also has full beneficial ownership.

2) If a share is owned non beneficially then the legal owner holds the share subject to the terms of some form of trust arrangement (often this trust will be a standard discretionary trust).

Unfortunately the disclosure of beneficial ownership is an area of significant confusion and often the confusion does not arise until resolution of the issue is time sensitive (for example in lead up to a sale transaction or as part of an asset protection audit).

Some of the issues that arise in this regard include:

 (a) anecdotally, it appears that when ASIC was first imputing this data following the change of approach, many companies had their notifications reversed during the data entry process (that is shares that were owned beneficially were noted on ASIC records as being owned non beneficially);

(b) similarly many companies were confused about the distinction and therefore provided incorrect notification to ASIC; and

(c) in some instances a full search of all company records was not performed (for example all aspects of the company register) so the company provided incorrect information to ASIC.

Next week’s post will consider the three main alternatives for rectification where the beneficial ownership of shares is incorrectly recorded on ASIC records. 

** For the trainspotters, ‘relationships of ownership’ is a line from the Bob Dylan song from ‘Gates of Eden’.

Tuesday, June 25, 2019

Tinder-isation + simplification of the law

As mentioned in a previous post 'gamification' has become expected across all aspects of our lives. This was part of the reason for us in ‘tinder-ising’ each of the View apps on both Apple and Android.

Based on adviser feedback, our latest app release now allows access to all 8 of the View apps, through a ‘master app’.

The 8 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; and

8) adviser facilitated estate planning fixed pricing.

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

The ‘View Apps’ App can be downloaded below:

1) Apple

2) Android

All View apps can also be accessed via our website.

Tuesday, June 18, 2019

Don’t ask me (why)** would a trust have made a family trust election?

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.

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

Why would a trust have made a family trust election?

Historically, primarily an election would be made because there are franking credits that are flowing through the trust.

In particular, if there are more than $5,000 worth of franking credits to be claimed, then you can't actually access them unless you've made a family trust election. This would be the main reason, and by far, in our experience, the most relevant one.

The other reasons include that there are losses or bad debts. It is infinitely easier to satisfy those rules with an election in place.

The last main reason is ‘because’ ... and that’s not a scientific term.

That's a term that ends with ‘because’.

There's nothing that actually comes after the because.

It is so easy to make these elections. You just tick the box and it's done. Our sense is that many accountants went through, particularly in the late 2000s, and made elections without any thought at all, and it was because.

When the election is then reviewed as part of an estate planning exercise, and we think this is going to come up more and more as part of the 328-G provisions, the conclusion will be ‘we don’t know why we've made that election and it's more restrictive than we need it to be’.

There might therefore be a planning opportunity for a trust that has made a family trust election that is later viewed as inappropriate.

In particular, under 328-G, it should be possible to transfer business assets across to a new trust that will not need to have made a family trust election.

** For the trainspotters, the title today is riffed from PiL’s song of the same name, from 1990.

Tuesday, June 11, 2019

Super death benefits and conflicts of interest: Guilt is a useless emotion**

As mentioned in last week’s post, arguably, the highest profile decision in relation to the obligation of a legal personal representative (LPR) to avoid creating a conflict of interest is the decision in MacIntosh.

The decision in Brine v Carter [2015] SASC 205 provides another example of the key issues that need to be considered by LPRs, who are also potential beneficiaries of a superannuation death benefit. As usual, a link to the decision is here.

In summary, the factual scenario was as follows:

1) The deceased appointed his de facto partner and three children from an earlier relationship as his LPR.

2) The de facto made an application for the superannuation death benefits to be paid to her directly, as opposed to the estate.

3) If the superannuation proceeds had been paid to the estate, the three children would have been entitled.

4) For a period of time prior to the death benefit being paid, the de facto partner withheld details of the superannuation death benefit from the three children.

5) Importantly however, by the time the super fund trustee exercised its discretion, the three children were aware of all relevant information concerning the death benefits and had themselves made an application for the death benefits to be paid to the estate.

6) It was held that this was a critical point, that is, the other LPRs had effectively consented to the de facto making her individual claim by themselves making a claim on behalf of the estate in full knowledge of all relevant circumstances.

While the decision of the superannuation fund to pay the entitlements to the de facto ultimately was upheld, a number of key principles were explained by the court, including:

1) Where an LPR seeks payment of a death benefit to themselves personally (i.e. not to the estate), they will be in a position of conflict, unless the will expressly permits the conduct.

2) Where there is no express provision waiving conflict, an LPR should renounce their position before taking any active steps to seek personal payment of the death benefit.

3) Alternatively, the LPR can seek the consent of all other LPRs (if any).

4) In seeking the consent of the other LPRs, there is no obligation to also receive consent from each beneficiary under the will.

5) Complications will likely arise where there is a sole LPR. In that instance, if they choose not to renounce their role, there would be an obligation to receive the informed consent of each potential beneficiary.

Ultimately, the decision is yet another reminder of the importance of a holistic approach to every estate plan.

** For the trainspotters, the title today is riffed from New Order’s song of the same name, from 2005.

Tuesday, June 4, 2019

The View** on workarounds to avoid the McIntosh decision

As mentioned last week, the McIntosh case was concerning given that the son’s apparent objective of providing for his mother was not achieved.

While there are obviously a number of issues in relation to this case, three critical steps that could have been taken are as follows:

1) To the extent that they were available, binding nominations could have been made to the mother personally (in this regard, non-binding nominations had in fact been made nominating the mother solely).

2) With the aid of hindsight, the mother should not have applied to administer the deceased estate. This would have relieved her of any duty to act in the best interests of the estate and therefore she could have proceeded to make the application for superannuation benefits to be paid to her personally without her actions being challenged.

3) The son should have made a will at least appointing his mother as executor (this would have potentially meant that she did not have any conflict of interest as the son would have been deemed to have been aware of the potential when making the nomination). Ideally, the will would have also nominated the mother as the sole beneficiary of the estate – thereby meaning that even if the funds were not paid to her directly, she should have ultimately received them in any event.

Next week’s post will consider another case which further informs the key issues in this regard.

** For the trainspotters, the title today is riffed from The Church’s song of the same name, from 1985 (and no, View was not named after this song …).

Tuesday, May 28, 2019

Superannuation nominations – here we go again**

Several previous posts have considered various aspects of superannuation nominations and the payment of death benefits

1) Double entrenching binding nominations

2) Receipt of superannuation death benefits

3) Superannuation and binding death benefit nominations (BDBN)

4) Superannuation death benefits

5) Death benefit nominations – read the deed

The decision of McIntosh vs. McIntosh [2014] QSC99 provides another reminder of the types of issues that advisers must be aware of.

As usual, if you would like a copy of the case please contact me.

The background to the case was that a son who had lived with his mother for most of his life (including at the time of his death) died without any other immediate family other than his father and without a valid will.

Although his mother and father had been estranged since he was a young child, pursuant to the intestacy rules, they were entitled to share the estate equally.

The mother sought approval from the court to administer the son’s estate, and as part of her application, confirmed her intention to collect all relevant assets and then divide them equally between herself and her former husband.

In relation to the superannuation entitlements, the mother applied in her own capacity (i.e. not on behalf of the estate) to have those entitlements (which represented the vast majority of the son’s wealth) paid to her directly on the basis of the interdependency between herself and her late son.

All superannuation entitlements were paid to the mother directly (reflecting the direction given by the son in non binding nominations) and the father successfully challenged this outcome on the basis that his former wife had a duty as the administrator of the son’s estate to actively do everything within her power to ensure the superannuation benefits were paid to the legal personal representative, and then in turn, be divided equally between the father and the mother.

Next week’s post will consider what steps, with the aid of hindsight, might have helped ensure the outcome that appeared to be the son’s objective.

** For the trainspotters, the title today is riffed from Whitesnake’s song of the same name, from 1982.

Tuesday, May 21, 2019

Is it the end of the trust as we know it?**

A critical aspect of every trust is the period for which a trust can last – often referred to as the perpetuity period or the vesting day of the trust.

As a rule of thumb, any review of a trust deed that we perform always starts with checking the exact vesting date. We have had countless situations where this review has in fact led to the discovery that the trust itself has ended (in one instance, almost 7 years earlier).

Generally, so long as steps are taken before a trust vests, it should be possible to extend the life of a trust to the maximum period allowed at law (ie the perpetuity period), which in most cases is 80 years – see the following posts for more comments in this regard –

Extensions to vesting dates – some lessons from Re Arthur Brady Family Trust; Re Trekmore Trading Trust

Fairytale of Canberra - The Tax Office plays Secret Santa as the long awaited guidance on trust vesting gets released

In some cases, it may also be possible to extend the life of the trust so that it complies with the laws of South Australia – as most people are aware, there is effectively an unlimited perpetuity period available via South Australian law.

** For the trainspotters, the title today is riffed from REM’s song of the same name, from 1987.

Tuesday, May 14, 2019

Sunny Afternoons - Counter-intuitive Tax Planning **

We had an adviser recently wanting to explore having a client make distributions from a family trust directly to a superannuation fund.

Historically (during the mid-1990s), this was a strategy that many were using until the government closed the loophole.

The way in which the loophole was closed was to treat all such income as 'special income' of the super fund or, as it was then renamed, 'non-arm’s length income'. This type of income is taxed at a flat rate to the fund of 45%.

Interestingly, what the adviser had realised however was that many trust distributions are now effectively taxed at 47% if they go to beneficiaries on the top marginal rate, given the increase in the Medicare levy.

Trust distributions to a superannuation fund may therefore be (marginally) tax effective initially and also a good way to ensure that superannuation savings are increased at a far greater rate than would otherwise be available if relying on the contributions within contribution caps.

** For the trainspotters, ‘Sunny Afternoon’ is one of the first tax referencing rock songs by the Kinks from 1966.

Tuesday, May 7, 2019

Is death (not) the end**; or can a will be varied after death?

One of the significant distinctions between a family trust and a testamentary trust is that the ability to vary a testamentary trust is generally very limited after the testamentary trust comes into effect.

Obviously while the testamentary trust is incorporated into a will, where the will maker has yet to die, then this document may be varied at any time.

In contrast, once the will maker has died, the general position is that it cannot be amended without court consent.

One potential exception to this general position is that if the will allows variations to be made and if the variation relates only to administrative type issues (as opposed to the substantive provisions in the will), then there may in fact be the ability to vary the document.

** For the trainspotters, the title today is riffed from Bob Dylan’s song of the same name, arguably made famous by Nick Cave and the Bad Seeds, listen hear (sic):

Tuesday, April 30, 2019

Unit trusts and excluding trustee Liability**

When establishing a unit trust structure, it is important to ensure the deed is properly crafted to expressly limit liability of the unitholders for debts of the trust.

As is well known, in a corporate structure, shareholders are not liable for the debts of the company.

Similarly, there is generally no right of indemnity for a trustee of a discretionary trust from the beneficiaries of the trust as they are not absolutely entitled to the trust assets.

In relation to unit trusts however there is a general principle that unless specifically excluded by the trust deed, the trustee will have a right of indemnity for the liabilities of the trust against both the trust assets and the unitholders.

Failing to exclude this right of indemnity against the unitholders can therefore significantly undermine the asset protection advantages offered by structuring the investment through a unit trust.

The position in relation to unit trusts was confirmed in the decision in JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd & Anor (1985) 3 ACLC 355. As usual, if you would like a copy of the case please contact me.

In this case a liquidator of a trustee company of a unit trust was able to force the unitholders to make good the deficiency of trust liabilities over its assets. The unitholders would have not been liable however if the trust deed had contained the relevant exclusion.

Including this type of exclusion expressly in a unit trust deed has been a relatively standard practice by most deed providers since this decision, for firms that do specialise in the area.

Where the exclusion does not exist in a current deed it is normally possible to implement the provisions by a deed of variation, so long as there are no potential issues on foot.

** For the trainspotters, the title today is riffed from Lorde’s song of the same name from 2017 listen hear (sic):

Tuesday, April 23, 2019

Oops! … I did it again**: amending existing agreements

An issue that often arises is the desire to amend an existing agreement, with effect from a particular date – regularly that date will be on and from the day the original agreement was entered into.

It is generally accepted that, as between the parties, an agreement can be effective and binding on whatever basis is desired. This does not mean however that an agreement can be changed such that it is binding retrospectively on third parties, such as revenue authorities.

Arguably the leading case in this area is Davis v Commissioner of Taxation; Sirise Pty Ltd v Commissioner of Taxation 2000 ATC 4201. As usual, if you would like a copy of the case please contact me.

In this case the parties purported to have an agreement entered into that caused adverse tax consequences amended some time later, with effect from the date of the original document.

In rejecting the effectiveness of the amended agreement in binding the Tax Office it was confirmed that a rectification by a court or by deed between the parties is the only approach that binds third parties. Such an approach however is only available where the parties are under a mutual mistake that the document they signed recorded the terms of their bargain, when in fact it did not.

Rectification does not operate to ‘alter the past’, rather it simply recognises what had in fact always been the case, namely that the true agreement between the parties was not correctly recorded in the document that was mistakenly signed.

Critically, rectification requires that there must have been a mutual mistake. In other words, ‘a common intention between the parties as to the effect that the instrument they signed would have had which was inconsistent with the effect which the instrument which they executed in fact had’.

A mistake or misunderstanding, for example, as to the revenue consequences of an agreement is not a mutual mistake allowing rectification.

** For the trainspotters, the title today is riffed from Britney Spears song of the same name from 2000 see hear (sic):

Tuesday, April 16, 2019

How does it feel** - when a deed of rectification causes a resettlement?

Recently we revisited a Tax Office private ruling in relation to a decision by the trustee of a discretionary trust to rectify a trust deed so it correctly reflected the intentions of the settlor at the time of establishing the trust some years earlier.

The exact ruling is Authorisation Number 37630. As usual if you would like a copy please contact me.

Critically, the ruling is based on the assumption that a court would in fact approve the rectification – a rectification requires a court to make an order to correct a trust instrument that, due to mistake, does not reflect the true intention of the parties. 

The specific issue of concern was whether the rectification would create a new trust, or in other words, a resettlement, to be triggered.

The private ruling remains a very useful reminder of the usefulness of rectifications, even though it is from 2004 and therefore predates the substantial changes in approach about resettlements in 2012 of the Tax Office (see the following posts Statement of principles to be finally amended, ATO releases draft determination on trust resettlements, and More comments on ATO resettlements determination).

The ruling confirms that where a trust deed fails to accurately express the true agreement between the parties, equity will allow rectification of the document.

In particular, it was confirmed that:

‘The object of rectification is not to make a new contract for the parties or to alter the terms of an agreement, nor to rescind the existing contract it does not create new rights but to rectify the erroneous expression of agreements in documents' (see GE Dal Pont, DRC Chalmers - Equity and trusts in Australia and New Zealand).

Importantly, a rectification also has retrospective effect.

That is, a rectification is 'to be read as if it had been originally drawn in its rectified form' (see Craddock Bros v. Hunt [1923] 2 Ch 136.

As there is no change in the intended beneficial interest of the beneficiaries there are also no changes to the terms and conditions of the trust. Therefore, a rectification does not result in the creation of a new trust.

** For the trainspotters, ‘how does it feel’ is a line from the New Order song from 1983 ‘Blue Monday’ listen hear (sic):

Tuesday, April 9, 2019

Have you got time to rectify?**

Previous posts have looked at various aspects of deeds of variation, and in particular, the critical need to 'read the deed' before implementing any variation (see more here).

Where a purported deed of variation later proves to be ineffective due to a failure to follow the provisions of the trust deed, one approach that can provide a solution is a deed of rectification and clarification.

Generally, this approach will be a valid way to address previous inconsistencies, without the need for court approval.

Critically however, any attempt to rectify or clarify historical issues with a trust deed cannot do something that is beyond what was originally contemplated by the parties involved.

One example in this regard that we reviewed recently, involved a situation where a trustee was incorrectly inserted under a deed of variation as a beneficiary, in direct conflict with another provision of the trust instrument.

On discovery of the conflict some years after the deed of variation, it was clear that the only way to rectify the error would be to change the trustee with retrospective effect to a new entity. The deed of rectification approach was unavailable as the deed could not ignore the clear intention of the parties, which at the time was that the trustee should remain in its role and a rectification workaround would have ignored that fact.

** For the trainspotters, ‘time to rectify’ is a line from the Beatles song from 1965’s Rubber Soul ‘Think for Yourself’ listen hear (sic):

Tuesday, April 2, 2019

I can see clearly now ** – how to use a deed of clarification

Last week’s post, explored the difficulties that can arise when steps are taken (for example to change a trustee of a family trust) without having reviewed the trust deed.

Over the last few weeks, we have been working with an adviser where this type of situation had arisen and a third party financier was refusing to complete a transaction until steps were taken to resolve the issue.

In this particular instance, the only pathway we had been able to develop (and which the bank has accepted) has been to prepare a detailed 'deed of clarification'.

In many respects, this document is a self serving one, however in very general terms, it:

1) provides a summary of the purported changes;

2) confirms that the purported changes did not in fact comply with the deed;

3) restates the changes in a way that does in fact comply with the deed; and

4) has the trustee, appointor and some of the main beneficiaries of the trust all consenting to the changes, effectively with retrospective application.

** For the trainspotters, ‘I can see clearly now’ is a song by The Hothouse Flowers from 1990.

Tuesday, March 26, 2019

Take it easy** but get it right with changes of trusteeship

This blog regularly highlights the critical importance of reading the ‘Read the Deed’ mantra before taking any step of substance in relation to a trust.

Last week, I had another example of this in relation to a purported change of trusteeship.

The documentation in relation to changing the trustee of the family trust appeared on its face to be relatively standard.

The difficulty was that the particular trust deed had some quite bespoke provisions concerning how the trustee could be changed, and unfortunately, those provisions had not been followed.

The further difficulty with this particular case was that no one had discovered this error until some years later (when the bank was refusing to complete on a property transaction).

We are now working with the bank to try and resolve the issue that simply would not have arisen if the time had been taken to have read the trust deed in the first place.

** For the trainspotters, ‘Take it Easy’ is a song by The Eagles from 1972. See a live rendition from 1977.


Tuesday, March 19, 2019

Let Love Rule - Specific Requirements of Binding Nominations **

Previous posts have considered various aspects of superannuation nominations, including binding death benefit nominations (BDBN). Some of the previous posts are available below:

1) Superannuation death benefits

2) Superannuation and binding death benefit nominations (BDBN)

3) Double entrenching binding nominations

As with many other aspects of estate planning, whenever considering a BDBN, the starting point should always be the requirements set out under the trust deed. Indeed, a BDBN can only be used where the deed allows one to be made.

Below is an example of some of the requirements that are generally set out in trust deeds before a nomination will be held to be binding, the first three of which are generally required by legislation:

1) must be in writing;

2) must be signed, and dated, by the Member in the presence of 2 witnesses, each of whom has turned 18 and neither of whom is a person mentioned in the notice;

3) must contain a declaration signed and dated by the witnesses stating that the notice was signed by the Member in their presence;

4) will not lapse by the passing of time;

5) may be revoked by the Member by written notice to the Trustee at any time;

6) must contain sufficient details to identify the Member; and

7) must contain sufficient details to identify one or more Beneficiaries for each category of benefits selected.

While almost all trust deeds that allow BDBNs will have provisions along the lines outlined above, at times there will be additional provisions that are not necessarily expected. Some examples in this regard include:

1) a requirement that the trust deed for the superannuation fund cannot be amended in a way that impacts on any BDBN without the consent of each member who has made one;

2) a provision that empowers the trustee to accept amended BDBNs from the financial attorney of a member;

3) the trustee may be required to consider and accept a BDBN before it is valid; and

4) there may be a particular table or form that is required to be embedded into the BDBN, which sets out the percentage entitlement of each beneficiary.

** For the trainspotters, ‘Let Love Rule’ is a song by Lenny Kravitz from 1989.


Tuesday, March 12, 2019

BFA’s - What does the High Court decision mean (to me)**?

As mentioned in last week’s post, the key issues undermining the validity of the BFA in this matter related to the conduct of the husband and the existence of unconscionable conduct and (by majority) undue influence.

Unconscionable conduct was summarised as follows:

‘a special disadvantage may also be discerned from the relationship between parties to a transaction; for instance, where there is ‘a strong emotional dependence or attachment’ … Whichever matters are relevant to a given case, it is not sufficient that they give rise to inequality of bargaining power: a special disadvantage is one that 'seriously affects' the weaker party’s ability to safeguard their interests.’

Undue influence is said to occur when a party is deprived of ‘free agency’ in entering into an arrangement. In other words, when there is something so strong that the influenced party is under the belief that while the document is not what they want, they feel compelled to sign it anyway.

The High Court listed the following six factors (noting that they are however not exclusive) relevant in assessing whether there has been undue influence in the context of BFAs:

1) Whether the agreement was offered on a basis that it was not subject to negotiation.

2) The emotional circumstances in which the agreement was entered, including any explicit or implicit threat to end a marriage or to end an engagement.

3) Whether there was any time for careful reflection.

4) The nature of the parties’ relationship.

5) The relative financial positions of the parties.

6) The independent advice that was received and whether there was time to reflect on that advice.

Admittedly, with the benefit of hindsight, arguably, the case does not significantly change the position in relation to the effectiveness of BFAs.

Indeed, the agreement may well have been held to be valid if some of the basic recommendations featured regularly in these posts were embraced.

In particular, if the arrangements had been put in place earlier in the relationship or at least not so approximate to the wedding, that would have increased the robustness of the agreement.

Similarly, if steps were taken to ensure that the independent lawyer was able to endorse the appropriateness of the agreement by way of a collaborative negotiation, then it would have almost certainly been the case that the arrangements would have been upheld.

This said, BFAs remain a stark reminder of a key asset protection mantra, that being the need to 'measure twice and cut once' if there is a desire for the arrangement to be enforceable.

  ** for the trainspotters the title of the post today is riffed from 1986 and Crowded House’s Mean to Me