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 2021.
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.
The 2021 edition of this book, containing all posts over the last year, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2021.
Very best wishes for Christmas and the New Year period.
P.S. Too cool seeing the latest release Barbie House at the local department a Christmas or 2 back.
As shown in this image, Lawyer Barbie (or was it Yoga Barbie or perhaps even Presidential Candidate Barbie) was passed out on the floor, unable to make it into her bed.
Totally capturing the spirit of Christmas for the young ones.
** For the trainspotters, name checking Russell Morris and his tune 'The Real Thing'
For many years in Australia, one of the most popular tax planning tools to manage death duties involved assets being held as joint tenants, instead of tenants in common.
Previous posts have the distinction between these two ownership structures. As usual, please contact me if you would like access to this content.
A surviving joint tenant receives the asset automatically (without anything passing via the deceased owner's estate). Joint tenancy ownership was often seen as the easiest way to delay the imposition of a death duty for as long as possible.
In jurisdictions that still have death duties, this ownership structure can provide a pathway to manage the tax impost.
Interestingly, under Australian law, the strategy can still provide planning opportunities.
In particular, where an asset is owned as joint tenants with a non-resident, the tax that would otherwise be paid by a non-resident on the death of a co-owner under capital gains tax (CGT) event K3 can potentially be avoided if the relevant asset is owned as a joint tenancy. This is because CGT event K3 is only triggered where assets actually pass via an estate.
It is important to note that in recent years the federal government moved to close this potential 'loophole'. At this stage however, no such changes have occurred.
** for the trainspotters, the title here is riffed from a Sonic Youth tune ‘Death to our friends’.
Last week’s post mentioned in passing the ability to unilaterally sever a joint tenancy.
Interestingly, there are in fact 6 ways to sever ownership of a property owned as joint tenants, namely:
an agreement to sever is reached between all parties (this is arguably the most common approach);
by mutual intention, as demonstrated by the conduct of the parties (relatively difficult to prove);
by court order;
due to the bankruptcy of a party (as explored in previous posts);
due to the homicide committed by one joint tenant against another (fortunately, relatively rare); and
a joint tenant unilaterally severs the tenancy.
It is also important to as mentioned last week, that where an asset owned on title records as joint tenants is a partnership asset it will be deemed to in fact be effectively owned as tenants in common. Previous posts have explored this aspect of the rules.
The ability to unilaterally sever a jointly owned property is enshrined in state-based legislation that permits any person who owns a property as a joint tenant to notify all other owners of their intention to sever the joint tenancy and for the registration of that severance to take place without the prior approval of the other owners.
If there are more than two owners of a property and only one owner wishes to sever the joint tenancy, the other owners will still hold their reduced interest in the property as joint tenants.
The legislative provisions in this regard generally require that the other joint tenants be notified by the Titles Office Registrar.
The Registrar may also require the full details of the other joint tenants and a statement by the party seeking to sever that they are unaware of any limitation on their right to do so.
For tax purposes, assets owned via a joint tenancy are deemed to be owned as tenants in common, in equal shares. This means that the conversion from one ownership mode to the other has no tax consequences. It also means that the death of a joint tenant owner will cause a tax event.
For example, on the death of one of two joint tenant owners of a pre-capital gains tax property, converting the ‘notional’ half share of the deceased owner into a post CGT asset (with a market value as at the date of death).
Similarly, there are stamp duty concessions for the conversion.
These conclusions in relation to the legal ability to convert the ownership structure without any tax or stamp duty consequences are however predicated on the basis that each owner will retain their deemed proportionate share in the asset.
In other words, if there are two owners, then they must each have a 50% share as tenants in common, if there are three owners, they must each have a one third share etc.
As usual, please contact me if you would like access to any of the additional content mentioned in this post.
In the context of recent posts, it is an important estate planning issue to understand that where an asset owned on title records as joint tenants is a partnership asset it will be deemed to in fact be effectively owned as tenants in common.
If this deeming rule applies then the death of a partner essentially causes the value of their interest to pass under their will, and not by survivorship to the other owners.
The Partnership Acts in most states codify the rules in this regard. These rules generally state that unless the contrary intention appears, property bought with money belonging to the partnership is deemed to have been bought on account of the partnership and is considered partnership property.
The rules in this area were perhaps best explained in the case of Spence v FCT [1967] HCA 32. As usual, if you would like a copy of the case please let me know.
In this case it was relevantly held:
“It is … a mistake to say she got it simply by virtue of her joint tenancy. The legal estate devolved in accordance with the joint tenancy. To that extent the maxim which was mentioned – ‘ius accrescendi inter mercatores locum non habet' – does not apply: see Lindley on Partnership, 11th ed. (1951), p. 428. But it is applicable in equity; partners who hold as joint tenants in law hold beneficially as tenants in common. That is an old rule. It is more exactly stated today in terms of the Partnership Acts (the relevant provisions are ss. 30 and 32 in the Western Australian Act) the legal estate devolves according to its nature and tenure but in trust so far as necessary for the persons beneficially interested; and as between partners land which is partnership property is to be treated as personal estate.”
The ‘old rule’ reference in the quote above comes from cases such as Lake v. Craddock (1732) 3 P Wms 158; 24 ER 1011. Again, if you would like a copy of the case please let me know.
** for the trainspotters, another classic song from Pearl Jam this week, namely ‘Not for you’.
The interplay between legal principles, family law rules and estate planning can be complex.
Arguably, one of the highest profile examples of this was the High Court’s decision in Stanford, which was analysed in an earlier post (please contact me if you would like access to this content).
The decision in Paxton v Paxton [2016] FCCA 1689 (7 July 2016) provides another useful example. As usual, if you would like a full copy of the decision, please let me know.
Broadly, the factual matrix was as follows:
A married couple owned a home as joint tenants, as opposed to tenants in common.
Some years later, the husband of the marriage and commenced a de facto relationship.
Some years later again, the husband then commenced property proceedings seeking division of the matrimonial home, although he died before any decision was handed down.
The court confirmed that the key principle from Stanford contained two limbs namely:
Would the court have made an order in relation to property if the relevant party had not died?
Is it appropriate, despite the death, to still make that same order?
In confirming that the wife was entitled to keep the entirety of the property as the surviving joint tenant, the court confirmed:
So long as property proceedings commence before death, the person’s estate is permitted to continue with the proceedings.
Even though the parties had previously agreed that the property should be sold, the court refused to enforce this on the basis that it would not be just and equitable in all the circumstances. The relevant circumstances included the fact that the wife was of ill health, financially destitute, had limited employment prospects and had to care for an adult child from the marriage who had a disability.
Furthermore, the executor of the former husband’s estate was required to pay the wife’s costs of the proceedings.
While obviously open to conjecture, there is every chance that if the joint tenancy ownership of the property had been severed so that the parties owned it as tenants in common, the husband’s estate would have been likely entitled to retain most, if not all, of the 50% interest.
In this regard, it is important to note that the joint tenancy can be severed by the unilateral actions of one party (i.e. without requiring the consent of the other owner or owners as the case may be).
** for the trainspotters, a classic song from Pearl Jam’s album ‘Ten’, namely ‘Even flow’.
Recent posts have looked at various aspects of the bankruptcy regime in relation to jointly owned assets.
As set out in last week's post, from an asset protection perspective, it is generally preferable to own assets with other parties on a tenants in common basis, so that if a co-owner dies, their interest can be distributed to a testamentary trust.
Arguably the leading case in this area is Peldan v Anderson [2006] HCA 48.
As usual, if you would like a copy of the case please contact me.
In this case, the wife as one of the co-owners of a house, who was in no financial difficulty, was diagnosed with an illness that meant she did not have long to live.
Driven largely by asset protection objectives, given the husband’s financial difficulties, the two owners decided to change the ownership structure of the property from joint tenants to tenants in common.
This meant that the husband as co-owner who was also at risk would not receive 100% of the property automatically on the death of his wife, rather her 50% would pass via a will, which was structured to include a testamentary trust.
The High Court held that this change in ownership was not a transaction that was void against the trustee in bankruptcy and therefore only the husband’s 50% interest was exposed to his creditors.
** for the trainspotters, the title here is riffed from the David Bowie song ‘Changes’.
A fundamental aspect to create a valid will, and indeed
most binding death benefit nominations, is that there must be two witnesses and
they must be present and observe the willmaker sign (and date) the document.
The rule in this regard is inflexible, particularly where
a lawyer is involved.
Background
The decision in the case of Lewis v Lewis [2020] NSWSC
1306 is another stark reminder of the legal system’s view of ideas such as
backdating, witnessing without witnessing, retro-dating, retro-witnessing and
similar ‘near enough is good enough’ strategies.
In particular, one of the key aspects of the case for
advisers involved an analysis of the requirements of signing a will validly
Factual matrix
Relevantly in relation to the witnessing aspect, the
factual matrix in Lewis involved a son who was a qualified lawyer and prepared
a will on behalf of his mother.
Likely realising that if he was one of the witnesses he
would be automatically excluded from taking any benefit under the document (see
Hill trading as R F Hill & Associates v Van Erp (1997) 188 CLR 159), he
arranged for 2 neighbours to be the witnesses.
After handing the will to his mother and explaining the
witnesses would be over later in the day the son went out. When he
returned his mother had gone to bed, leaving the will, signed, on a table in
the lounge room.
When the witnesses arrived the son told them that his
mother had already signed the will and gone to bed and said 'This is not the
right way to witness the will but I will have to deal with it at a later stage.
Do you mind signing anyway?'.
Court’s view
The approach the son suggested at least somewhat
reminiscent of the conduct nab found itself in trouble over for regularly
allowing advisers to witness binding death benefit nominations with only one
witness in attendance - and a second witness later signing; despite not
actually having been present.
During the hearing when the lawyer was questioned as to
why he had knowingly procured false attestations, he evidently did not seem
especially troubled - and indeed responded by saying he offered the witnesses a
choice and that they could always have refused if they were worried.
The court confirmed its view that the lawyer's conduct
was completely unsatisfactory and it was grossly improper of him to ask the
witnesses to make solemn statements that they had witnessed the willmaker
signing the will when in fact they had not.
Furthermore, the attempt to deflect blame on to the
witnesses was described as 'positively discreditable'.
Ultimately, the court concluded that the conduct of the
lawyer may have justified referral to the Law Society for consideration of
disciplinary action, although gave the lawyer the right to make submissions
against this occurring.
Based on the decision in Council of the Law Society of
New South Wales v Renfrew [2019] NSWCATOD 63, there is every chance of
disciplinary consequences. In that case a lawyer was the only witness to
a will at the time the willmaker signed, and then arranged for a second witness
to sign some period of time later (after the willmaker had died), before then attempting
to mislead the court on a probate application that both witnesses had in fact
been present. Although there were other issues of concern, this aspect
was held to amount to professional misconduct.
As
usual, please contact me if you would like access to any of the content
mentioned in this post.
** for the
trainspotters, the title today is riffed from the Silverchair song
‘Insomnia’.
Generally, from an asset protection perspective, it is preferable to own an asset such as a house jointly with someone as a tenant in common, as opposed to joint tenants.
This is because if one party passes away, their ownership interest then can be directed to a testamentary trust under their will, effectively protecting that share of the property.
In contrast, if the asset was owned as joint tenants and the owner with the low risk profile passes away, the at-risk owner would then automatically have 100% of the property in their name.
For tax purposes, it is important to note that assets owned via a joint tenancy are deemed to be owned as tenants in common, in equal shares.
This means that the conversion from one ownership mode to the other has no tax consequences.
It also means that the death of a joint tenant owner will cause a tax event.
For example, on the death of one of two joint tenant owners of a pre-capital gains tax (CGT) property, the ‘notional’ half share of the deceased owner is converted into a post CGT asset (with a market value as at the date of death).
One of the leading cases in the area will be summarised in next week's post.
** for the trainspotters, the title here is riffed from the Massive Attack song ‘Protection’.
Previous posts have considered the distinction between owning an asset as joint tenants compared to tenants in common, let me know if you would like access to this content.
From time to time, we have advisers, on behalf of their clients, contact us about whether there is any advantage in ensuring an asset is owned as joint tenants so as to try to prevent a trustee in bankruptcy getting access to the asset.
The argument being that because each joint tenant effectively owns an interest in the entire property, this makes it very difficult for a trustee in bankruptcy to seize the property.
The reality however is that under the Bankruptcy Act, as soon as a person who owns an asset as joint tenant with somebody else becomes bankrupt, the joint tenancy is effectively severed, so the trustee in bankruptcy can unilaterally secure their ownership of the relevant share of the property discretely.
Where a trustee in bankruptcy gains ownership of a discrete share of a property, the remaining co-owners are able to negotiate with the trustee in bankruptcy to acquire it for market value.
The trustee in bankruptcy is however not obliged to accept the offer from a co-owner, and can proceed to sell the property on the open market.
Even if the co-owner wanted to oppose such a sale, the trustee in bankruptcy can obtain court permission for a statutory sale.
Following the statutory sale, the co-owner and trustee in bankruptcy share the proceeds in accordance with their proportionate ownership interests.
** for the trainspotters, the title here is riffed from the Kylie Minogue song ‘Spinning around’.
Last week's post considered some of the key issues in relation to the Family Court's ability to access assets of a trust.
The decision in Harris & Dewell and Anor [2018] FamCAFC 94 provides more context to the approach of the court in this area. As usual if you would like a copy of the case please contact me.
In summary, the factual matrix was as follows:
A unit trust was established about 5 years before the start of the relevant relationship.
The husband and husband’s father were the sole shareholders in the corporate trustee of the unit trust (the father owning 67%, the husband 33%). Although the husband was for many years a director of the corporate trustee, he had retired from this role some years before the trial, replaced by his solicitor. The solicitor was however accustomed to acting in accordance with the husband's wishes.
At trial the husband’s father was the sole unit holder of the unit trust (and the husband had never owned any units), although it was assumed that the husband would inherit the units on his father's death (the father was aged 99 at the time of the trial).
It was concluded that the level of control held by the husband over the trust was clearly significant.
In holding that the trust was not an asset of the husband (although it was taken into account as a financial resource) the court confirmed as follows:
Property of a trust can be treated as property of a party only where evidence establishes that the person or entity in whom the trust deed vests effective control is the ‘puppet’ or ‘creature’ of that party.
Control of itself is not sufficient to deem trust assets to be the property of a party to a relationship. Instead, what is required is control over a person or entity who, by reason of the powers contained in the trust deed can obtain, or effect the obtaining of, a beneficial interest in the property of the trust.
In other words, the spouse must have an actual ‘lawful right to benefit from the assets of the trust’.
Here, despite the extensive control held by the husband, he did not have the ability to guarantee benefit of the assets to himself - that right at all times rested with the husband's father.
In a sentence, the trust was not the husband's alter-ego nor a device used by him for his sole benefit.
Therefore, the assets of the trust were not property of the husband for the purposes of the settlement proceedings with the former wife.
** for the trainspotters closely behind Dennis Denuto and his vibe principle is the refrain ‘tell ‘em they’re dreaming’.
Previous posts have referenced the legal principle known as ‘The Vibe’, as developed by the legendary Australian movie ‘The Castle’.
In an arguably analogous decision the family law case of Romano & June [2013] FamCA 344 is relevant. As usual, if you would like a copy of the decision please let me know.
The case was complex and the judgement took over 19 months to be issued by the court following completion of the trial and ran to almost 100 pages in length.
It is important to note that the court held that the husband was not being honest about many of his arguments concerning the trust. Furthermore, several of the witnesses whose evidence the husband also relied upon (for example, close friends and colleagues) was also held not to be honest.
One, of many examples, listed in the case of the courts view of the husband is best captured in the following extract -
“I am quite satisfied that the husband’s resignation as a director of [British Virgin Island company] X1 and several other companies, after the commencement of these proceedings, was effected not for the reasons advanced by the husband and those of his witnesses who gave evidence about the matter, but so that he could not be required to obtain access to any of the records of the companies that directors lawfully have access to. That he did so resign after being put on notice by the solicitors for the wife that he should not do so gives me added cause for such satisfaction, on the balance of probabilities.”
Briefly, the factual matrix was as follows:
the relationship was around 16 years in length (9 years of marriage);
there were no children of the union;
the husband had set up a family trust some years before meeting the wife as part of a number of entities, including (for example) a company the husband was deemed to control (despite having no legal ownership) in the British Virgin Islands, that was set up around the time the husband was advised to (and did) move to Monaco (apparently for tax planning purposes);
at all relevant times the husband was one of two directors of the corporate trustee of the trust and a primary beneficiary of the trust; and
the husband however was never an appointor of the trust, nor a shareholder of the corporate trustee.
In rejecting the husband's argument that he did not control the trust (and was merely a potential beneficiary of future distributions), the court confirmed:
while the husband did not have legal control of the trust, he did have effective control;
the husband deliberately looked to avoid being in legal control of the trust, while in reality regarding the assets of the trust as his; and
given the level of control the husband exercised over the trust assets, it was appropriate to include them as assets of the marriage and available for division in the property settlement.
The key aspect of the court's reasoning is arguably best captured by the combination of its assessment of the husband's lack of honesty and the following extract from the judgement
“The question whether the property of the trust is, in reality, the property of the parties or one of them.... is a matter dependent upon the facts and circumstances of each particular case including the terms of the relevant trust deed ... [Here the] husband’s actual control would allow him to cause those assets to be appointed to himself or his wife along with his and her right to due consideration constitute property of the parties.”
** for the trainspotters Dennis Denuto and his need no introduction.
The last two posts have each mentioned seven key issues that should generally be considered whenever establishing or amending a discretionary trust deed.
Set out below are a further seven issues that should generally be taken into account:
If there is an appointor, is the role automatically terminated on certain events (for example death, bankruptcy)?
If the appointor ceases to act, do their powers pass to anyone else, and if so, who?
If there is more than one appointor, must they act jointly?
Is the appointor a beneficiary of the trust?
Will the trust own more than one asset class?
For an existing trust, has there been a pattern of income or capital distributions to at risk individuals associated with the trust?
For an existing trust, have there been variations to the deed following establishment that impact on the overall control of the trust?
** for the trainspotters, a classic song from Led Zeppelin album ‘III’, namely ‘Immigrant song’.
Over the years we have developed a checklist of some of the key issues that should be considered whenever establishing or varying a discretionary trust.
Obviously, the relevance of each issue depends on the exact circumstances of the client and over this and the next two posts, each of the 21 issues in our non-exhaustive list will be summarised.
The various issues are not listed in any particular order of priority and the first seven items on the checklist are as follows:
Who is the trustee of the trust?
If the trustee ceases to act, do their powers pass to anyone else, and if so, who?
Is the trustee an individual or a company?
If the trustee is a company, who are the directors?
Is there a default distribution of the income and capital of the trust to certain beneficiaries?
Does the trust deed restrict the range of beneficiaries who can receive income or capital distributions?
Does the trustee need consent/approval of any other person for distribution?
** for the trainspotters, a classic song from George Michael album ‘Listen without prejudice (Vol. 1)’, namely ‘Freedom 90’.
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.
The following case study falls under the mantra ‘Read the Deed’.
Here, the factual scenario centred on a standard family trust.
However, when I say ‘standard’, I should put an asterisk. This is because we thought it was standard and the accountants that had sent the job in to us had been operating for about 10 years on the basis that it was a ‘standard’ family trust.
Under the trust deed, there was a principal (often also referred to as an appointor). In other words, there was a person who had the right to hire and fire the trustee.
As is well understood, in some trust instruments where there is a principal or an appointor, there is then under the power to vary a requirement that that principal or appointor consent to any purported variation before the trustee is permitted to proceed with the proposed variation.
Here, arguably, re-enforcing the assumption that the deed did seem to be a standard family trust, pursuant to the variation power, the principal was not required to consent to any variation.
Importantly, there was a variation that had been done about 12 years ago, which was two years before the current accountant became involved. Under the variation, there was the nomination of a bucket company. In other words, the nomination of a corporate beneficiary to help cap the tax rate at 30 cents – a standard strategy.
As part of a review and updating of the trust deed, we, in conjunction with the accountant, actually sat down and read the entire trust instrument.
What we discovered was that the second to last clause in the deed, buried with the general powers (for example, powers about the power to lend, the power to invest), was a clause that had a nebulous title of ‘Further Provision’.
The Further Provision clause was said to apply in relation to any exercise of the power to vary that resulted in the nomination of a new beneficiary.
The clause mandated that the trustee must obtain the principal’s consent before relying on the variation power.
The relevant deed of variation however did not have the principal’s consent. There was therefore 12 years of distributions to the bucket company, and every single one of those was void for the failure to comply with the trust instrument.
The only real solution, with the aid of hindsight, is to ensure in the future, always - read the deed, read the deed, read the deed, read the deed.
As always thanks to the Television Education Network for the video content here.
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.
In relation to the classic form of family constitution, there is no legal enforceability of the terms of the document.
One clear advantage of this is that there are therefore definitely no transaction cost issues with entering into a family constitution.
This is because the document is simply a memorandum of understanding, a statement of intent, a handshake agreement, a best wishes or best endeavours arrangement, but nothing else.
In other words, there is no change in legal ownership of any assets.
Thus, there is no stamp duty triggered.
Similarly, there is no tax event triggered.
It is simply a non-binding arrangement that doesn’t actually have any other legal impact.
Some families therefore rightly ask – “Why is there any need for approaches such as umbrella trusts, trust splitting, trust cloning, and related ideas? Let’s just keep it simple with a family constitution. We may not even get any professional involved in drafting it up because we can download one off the Internet. Let’s just make it up as we go along, and really, as long as the communication levels are there, we don’t need anything else.”
This said, our experience is that for many families, even when they are confident that the informal approach will succeed, they have a mantra of ‘in times of peace, prepare for war’.
In other words, if the family is robust enough to be able to have the critical discussions and get a non-binding family constitution in place, that’s the exact type of family that should build on the positive platform, go to the next level, and get legally binding arrangements in place as well.
As always thanks to the Television Education Network for the video content here.
** for the trainspotters, the title here is riffed from the Who song ‘Can’t explain’.
Recent posts have considered some of the key issues in relation to assessing testamentary capacity.
One case often referred to due to its detailed explanation of the key factors the courts take into account when assessing the validity of a will is Bailey v Bailey (1924) 34 CLR 558. As usual if you would like a copy of the case please contact me.
The key factors listed are as follows:
The onus of proving that an instrument is the last will of the will maker is with the party propounding it.
The court must determine the validity of the will on the balance of the whole of the evidence.
The proponent can discharge the onus by establishing a ‘prima facie’ case.
A prima facie case is one which, having regard to the circumstances established by the proponent’s testimony, satisfies the Court that the will is the last will of a free and capable will maker.
It is the capacity of the will maker’s mind, not body, that is relevant.
The quantum of evidence sufficient to establish validity of a will always depends on the circumstances of each case. Relevant factors may include:
the simplicity or complexity of the will, its rational or irrational provisions and its exclusion or non-exclusion of beneficiaries;
the exclusion of persons naturally having a claim upon the will maker’s estate;
extreme age or, sickness of the will maker; and
existence of any person having motive and opportunity and exercising undue influence, then taking a substantial benefit under the will.
Once the proponent establishes a prima facie case of sound mind, memory and understanding with reference to the particular will, then the onus of proof switches to the party challenging the will.
To displace a prima facie case of capacity and due signing, mere proof of serious illness is not sufficient; there must be clear evidence that undue influence was in fact exercised, or that the illness of the will maker so affected their mental faculties as to make them unable to validly dispose of their property.
The opinion of witnesses to the signing of the will as to the testamentary capacity of the will maker is usually of little weight on the direct issue, as the court must decide based on the facts, not opinions.
Where instructions for a will are given some time before its signing, it is the capacity as at the date of giving the instructions that is most relevant.
** for the trainspotters, the title here is riffed from the Hall & Oates song ‘Your kiss is on my list’.
Recent posts have considered some of the key issues in relation to assessing testamentary capacity.
Another case that provides an informative perspective on the key issues is Carr v Homersham [2018] NSWCA 65. As usual if you would like a copy of the case please contact me.
The decision confirms that there is a presumption of mental competence that arises in relation to any will that is rational on its face and is duly executed.
The presumption is only displaced by circumstances which raise a doubt as to the existence of the deceased's testamentary capacity at the time the will was signed.
Relevantly, the existence of an 'insane delusion' under which the deceased laboured does not of itself preclude a finding of testamentary capacity if the delusion had no effect upon the will. Helpfully, the case confirms the key factors that are relevant in this regard as follows:
It is insufficient to demonstrate the absence of testamentary capacity to prove that the deceased acted on a material mistaken belief in making their will.
Instead, for a mistaken belief to rise to the level of a 'delusion' which affects the validity of the will, there must at least be a high degree of irrationality in the belief.
Ordinarily, evidence will be required that there has been an attempt to reason the deceased out of the belief, such that the deceased's adherence to it suggests that the deceased has a mental disorder or deficiency precluding the deceased from comprehending and appreciating 'the claims to which they ought to give effect'.
Generally, the circumstances must be such that it can be inferred that the deceased was wedded to a mistaken belief, irrespective of its truth. If that is not the case, the belief is likely to be no more than a mistaken view, the holding of which cannot be inferred to reflect on the deceased's mental competence.
Applying the above principles to the factual matrix of the case it was held:
A mere mistaken belief is not sufficient to invalidate a will. Instead, there must be an element of irrationality such that an inference can be drawn that the deceased has adhered to the belief regardless of evidence demonstrating its falsity.
If the mistaken belief is one that the Court can infer the deceased could have been reasoned out of by the presentation of evidence of its falsity, its origin in a mental deficiency will not be able to be inferred.
The fact that the deceased suffered from dementia, was not inconsistent with her retaining testamentary capacity at the relevant time. While it was clear that the deceased's memory difficulties were at least in part reflective of that disorder, there was no evidence indicating that the existence dementia impacted on the deceased's mistaken belief that was in issue in the case.
** for the trainspotters, the title here is riffed from the Panic at the Disco song ‘New Perspective’.
Last week’s post considered some of the key issues in relation to assessing testamentary capacity.
A case that provides an interesting further insight into the issues that should be considered is Roche v Roche & Anor [2017] SASC 8. As usual if you would like a copy of the case please contact me.
Relevantly, the decision confirms that, as with many other 19th century common law principles governing the legal effect of mental illness, the statements in Banks v Goodfellow (see the links in last week’s post that provide a summary of this case) no longer fully reflect modern medical knowledge.
That is, it is now recognised that there are a broad range of cognitive, emotional and mental dysfunctions, the effects of which are difficult to identify precisely or delineate from the exercise of ones ‘natural faculties’ and the reasoning capacity of a ‘sound’ mind.
What this means in a practical sense is that the rules as to assessing testamentary capacity must recognise and allow for the natural decline in cognitive functioning and mental state due to old age.
While the rules in the Banks decision therefore still provide a useful starting point, the courts also acknowledge that many wills are made by people of advanced years.
In these situations, slowness, illness, feebleness and eccentricity will sometimes be apparent. However, the presence of these factors is not ordinarily sufficient, if proved, to disentitle a will maker of the right to dispose of their property by will.
** for the trainspotters, a classic song from The Church album ‘Further, Deeper’, namely ‘Miami’.
Earlier posts have examined the 12 general rules that should be used when assessing the testamentary capacity of a will maker, as usual, please let me know if you would like access to this content.
The decision of Ruskey-Fleming v Cook [2013] QSC 142 provides an interesting further example of the issues that should be considered and as usual if you would like a copy of the case please contact me.
The case involved an application to court by Ms Ruskey-Fleming (the will maker's daughter) to confirm the validity of the deceased’s 2007 will. The deceased’s son claimed that his father did not have testamentary capacity to execute the 2007 will and that an earlier document, made in 2000, should be treated as the last will.
Importantly, the 2007 will made greater provision for the daughter compared to the 2000 will.
The court reaffirmed the test outlined in Banks v Goodfellow (1870) LR 5 QB 549 as the starting point for assessing testamentary capacity. It was also confirmed that this test needs to be adapted to reflect modern life, particularly in relation to how financial affairs are now managed.
It was held that a will maker does not need to know the details and value of every single asset they own in order to prove that they have testamentary capacity, particularly where share portfolios are involved. What is important is that the will maker is aware generally of their assets and value.
The court found that the testator did not have testamentary capacity in relation to the 2007 will as he:
suffered from confusion and disorientation over a lengthy period of time which was evident from medical records and MMSE test results;
could not correctly answer the solicitor’s questions in relation to the number and identity of his children and grandchildren;
was not aware if he had previously executed an enduring power of attorney;
was not able to provide the solicitor with details about his assets and their value; and
could not provide a reason for why he was changing his will – which would favour the daughter over the son.
** for the trainspotters, the title here is riffed from the No Doubt song ‘Artificial Sweetener’.
Last week, we had to look at a relatively interesting question concerning a series of wills that had been made by someone who died recently.
Due to evidence on the death certificate, the validity of the most recently will has been called into question because of a lack of capacity (namely, long term dementia).
There are a number of things that may happen from here, however in very broad terms, if the most recent will is held to be invalid, then the will made immediately before the most recent will is the one likely to be submitted to probate.
If that immediately preceding will is also shown to be invalid because of a lack of capacity, then the court is required to keep going back through previously made wills until they find one that does not fail on the basis of the incapacity issues.
The above approach assumes of course that the previous wills can be accessed, and the court can ultimately satisfy itself that a valid will was made at a time when capacity was not in doubt.
If the court is unable to satisfy itself, the default position is that the intestacy rules apply.
** for the trainspotters, the title here is riffed from the Kate Bush song ‘Cloudbusting’
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 of the most interesting family law trust cases is what I refer to as The Blues Brothers case, otherwise known as Morton and Morton.
In this case, there were two brothers, the Blues Brothers as I call them.
They were both shareholders of the corporate trustee. They were both directors of the corporate trustee. They were the two primary beneficiaries and joint appointors of the trust. The trust itself owned the bucket company 100%. The bucket company’s two directors were the two brothers. You’re likely starting to see the pattern.
Brother one busts up with his wife. His wife says, “He is the 50% owner - all day every day he is 50%. Therefore, I get half of his 50% end of story.”
The court said, “No, he’s not 50%. Because he has no casting vote, because he is an equal appointor, equal shareholder, equal director, he’s received broadly equal distributions, he’s not 50%. He is a 0%.” Therefore, the assets of the trust were protected.
Some will argue here, “Hang on Matthew, that’s quite unique, we’re not always going to be able to set up with 2 siblings.” Agreed and understood. But if you’re looking at wider succession of a family unit and protection of intergenerational wealth, we believe the principles from The Blues Brothers case are seriously important to have in mind.
As always thanks to the Television Education Network for the video content here.
** for the trainspotters, a classic song from the Blues Brother today, ‘Gimme some lovin’.
There were a number of enquiries following last week’s post, and in summary, the answer to a number of these queries was that before implementing the kind of strategy explored, care should always be taken to make sure that all of the commercial, legal and transaction cost issues are properly considered.
One question that is also worth exploring further is the appropriate quantum of insurance cover in this type of situations.
Obviously, while we do an extensive amount of work in this area, we do not actually provide insurance product solutions, and instead work with specialists in this area to help clients get appropriate strategies implemented.
The advice that we often give however is that for a variety of reasons, we prefer that wherever possible the parties involved look to maximise the level of insurance cover able to be obtained.
Obviously, this approach is subject to specialist advice in these circumstances and the ability for the clients to commercially justify the insurance premium, however some of the practical advantages with this approach that we see include:
It reduces the need to uplift the quantum of insurance cover as circumstances change.
It reduces the risk that in the future appropriate levels of cover may not be able to be accessed (due to health reasons).
It guards against the risk that the underlying assets involved increases more rapidly than insurance protection is able to be updated.
If structured appropriately, the excess insurance can also be used to facilitate other non-business succession objectives.
** for the trainspotters, the title here is riffed from the Dinosaur Jnr song ‘Over it’.
During the week, in the context of reviewing a buy-sell deed, we had to provide advice about whether the terms of the buy-sell deed would overrule the provisions of one of the partner’s wills.
While there were a number of factors that may potentially impact on the answer to this question, in very simple terms, contractual arrangements will always override the provisions of a will.
As the buy-sell deed was crafted on the basis of option agreements, then the position was therefore that they would override any inconsistent provision of the will.
In the context of the buy-sell arrangement here, there were two individual partners who had implemented buy-sell arrangements.
For a combination of reasons, the parties agreed to implement wills whereby they would each gift their respective partnership interest to their co-partner on death.
The agreement to make these gifts however was predicated on the assumption that the exiting partner’s estate would receive insurance proceeds at least equal to (if not greater than) the market value of their partnership interests.
Option agreements were still put in place however to cover the partners against a range of risks, including:
a partner changing their will;
the will of an exiting partner being challenged; and
the insurance proceeds received being inadequate as compared to the market value at the date of death.
** for the trainspotters, the title here is riffed from the Michael Jackson song ‘Beat it’.
Last week’s post considered some key aspects impact of the introduction of the 50% general discount on business succession.
A further significant related transaction cost issue that has also changed over the last few years to further encourage purchasers to consider a share acquisition relates to the tax consolidation rules.
In particular, it was historically the case that in order for a purchaser to be able to claim depreciation in relation to the market value of the assets they had acquired, they needed to physically acquire those assets.
In contrast, if the shares in the relevant company were acquired, then there was no adjustment to the tax carrying costs of its assets.
In very broad terms, if a purchaser acquires shares in another company and that company becomes a member of the purchaser’s tax consolidated corporate group, then it is permitted to 'reset' the tax carrying costs of all assets of the company.
Although there can be a number of problems that arise with this resetting, in very general terms, the intention of ensuring that the tax outcome for a purchaser on a share sale as compared to an asset sale in what is otherwise an identical transaction are normally broadly achieved.
One last permutation worth remembering relates to where a purchaser is open to consider a share sale arrangement but wants to ensure that any historical difficulties with the company currently operating the business are quarantined to the maximum extent possible.
In these circumstances, it is often sensible for the vendor to suggest that a restructure be done before completion (often the finalisation of the restructure will be a settlement day condition precedent) whereby the assets of the existing company are 'rolled over' into a cleanskin company.
Obviously, there are a number of commercial, tax and stamp duty issues that need to be considered with this approach, however in many instances, it can deliver the precise outcome that each of the parties are aiming for.
** for the trainspotters, the title here is riffed from the U2 song ‘New Year’s Day’.
Given that it is 30 June, it seemed like an appropriate day to focus on the impact of the introduction of the 50% general discount on business succession.
Since its introduction (and certainly with the various evolutions of the small business capital gains tax concessions), we have seen an ever-increasing number of merger and acquisition transactions take place by way of share sale.
Historically, many (if not all) of these transactions would have taken place by way of asset sale.
Due to the difficulties with accessing the various tax concessions when assets are sold by a company, the attractiveness of a share sale has become significant.
The additional issue in this regard can often be that the share sale will legitimately avoid any stamp duty consequence, which is still in some states not the case in relation to a business sale.
One of the key ramifications of the increased number of share sales is that many vendors will actively embark on a 'vendor due diligence' exercise.
Broadly, this involves, sometimes many months before any sale transaction is entered into, the vendor prepares a complete set of due diligence material from its own perspective.
Such an approach can help to significantly reduce the overall costs and risks that might otherwise be associated with a share sale transaction.
Next week’s post will further explore two other key aspects to consider in relation to share sale arrangements.
** for the trainspotters, the title here is keeping it very real by being riffed from a line in the Hannah Montana song ‘Let’s get crazy’.
Previous posts have considered the key issues in relation to lost trust deeds (let me know if you want access to any of these). A related issue that comes up regularly is the loss of other essential documents, and in particular, the constitutions for companies.
In most instances, the ramifications of losing a constitution for a company (or as they were formally known the 'memorandum and articles') are normally not as problematic as with the case with discretionary trust deeds.
This said, we would always normally recommend that, if possible, at least a copy of the constitution be located, and particularly for older companies, this can often be achieved via the microfiche records retained by the ASIC.
As many advisers will be aware, up until around the 1990s, all company constitutions had to be lodged with the ASIC on registration of a company.
Where no copy can be found, there is also a process available to adopt a replacement constitution, however some difficulties (particularly from a tax perspective) can arise in this regard if there is uncertainty as to the rights attaching to the shares on issue in the company.
** for the trainspotters, the title here is riffed from the Supremes song ‘Have I lost you’.
The one (very key) change to the excepted trust income rules this week for distributions to minors via testamentary trusts is shown by the redline version of the legislation passed this week attached.
The redline version shows what the final rules state, as compared to the exposure draft ... thankfully the wacky approach originally to make two thirds of the rules turn on the "Commissioner’s opinion" was removed ...
** For the trainspotters, the title of today's post is riffed from the Kraftwerk song ‘Numbers’.
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.
The Richstar case has featured in many previous posts. As usual, if you would like access to those posts, please contact me.
In terms then of who should be an appointor, despite what Richstar says, which was that the appointor is highly critically important from an asset protection perspective, that’s not actually the law. Richstar has been rebutted. Therefore, we would argue that in the ordinary course, it does not matter who the appointor is.
Now as with all trust areas, I would argue there is an exception to that general rule.
The exception to the general rule is do not set your client up to fail unnecessarily.
Therefore, you want to have at least two other things on your list when you’re looking at an appointor I would argue at the bare minimum.
Point number 1, make sure that embedded into the trust instrument, there is an automatic disqualification of the appointor if they commit any act that allows the court to look at the act. By crafting the provisions that way, you do a couple of things.
First, it sets the rules of the game before the trust is even started. It’s therefore almost impossible for anyone to argue that that was some sort of inappropriate strategy because it was there from the very start.
The second thing is that if any court comes in, the bankruptcy court, the family court, etc., before they come in, the deed self-executes and makes sure that the appointor is automatically removed.
The next point is just thinking about who you actually want as your appointor. Maybe it isn't the smartest thing to have the at-risk individual. Not because of itself is going to cause the trust assets to be exposed, but why even raise a question when you can actually avoid the issue.
The one thing I would flag on that is that having a non-at-risk person as appointor can be a lot easier said than done. The appointor has the ability to hire and fire the trustee in its complete discretion.
The person needs to be someone you can completely trust in order to deliver that role in a way that actually is going to align with what the people behind the trust are actually striving for.
As always thanks to the Television Education Network for the video content here.
** for the trainspotters, the title here is riffed from the Edie Brickell song ‘What I am’.
The issue of whether the existence of a trust relationship should be disclosed to third parties, including banks and Titles Offices is one that comes up regularly.
The strict position from a trust law perspective is that the existence of a trust relationship does not need to be disclosed.
This said, there are a number of other factors that often need to be taken into account, including the following:
the Tax Office, in relation to superannuation funds, is of the view that the existence of a trust relationship should always be disclosed;
in some jurisdictions (New South Wales is a classic example), it is in fact not possible to disclose the existence of a trust on Titles Office records;
from an evidentiary perspective (for example, if the Tax Office is querying the way in which assets are held), it is often of significant benefit to have the trust arrangements supported by third party documentation;
where the trust instrument is lost, disclosing the trust and lodging a copy of it with a third party can often prevent significant costs and administrative difficulties that otherwise arise when a trust instrument cannot otherwise be located; and
finally, however, the non-disclosure of a trust relationship can be commercially important from a privacy perspective.
** for the trainspotters, the title here is riffed from the Katy Perry song ‘This is how we do’.
Over the last couple of weeks, the posts have focused on the various issues that arise in relation to having the one company act as trustee for multiple trusts.
One area of the law where the ability to have the same company act as trustee for multiple trust relationships is prohibited is in relation to the limited recourse borrowing arrangements that self-managed superannuation funds can enter into.
Briefly, we confirmed to an adviser recently that in relation to these types of borrowing arrangements:
(a) the need to have a separate bare trust is driven by the requirement under section 67A of the Superannuation (Supervision) Industry Act that the borrowing arrangement relates to a ‘single acquirable asset’, meaning a separate trust must be established for each acquisition; and
(b) the bare trust needs to have a different trustee to the super fund because under trust law, if the sole trustee is also the sole beneficiary, the trust ‘merges’ and ceases to exist.
** for the trainspotters, the title here is riffed from the Portishead song ‘All Mine’.
As mentioned in last week's post, it is possible for the same company to act as trustee for a number of trusts.
Such an arrangement should not change the indemnity position if a liability is incurred, however there are a number of commercial reasons that need to be considered before having the same company act as trustee for multiple trusts.
Some of the issues in this regard include:
While the current legal position is that the assets of each trust will be segregated if a liability was to arise, this position in theory could be changed by future cases or legislation. For obvious reasons, most clients do not want their arrangements to become a test case.
If litigation was to arise in relation to one trust, this would force the parties involved to change the trustee of the other trusts not otherwise subject to the litigation. This can be practically an unnecessarily difficult process that in some instances is actually challenged by the relevant creditors.
The costs for maintaining separate trustee companies are relatively nominal.
From an ease of administration perspective, having separate trustee companies for each separate trust can minimise the risk of confusion.
From a land tax grouping perspective, separate trustee companies can, in some jurisdictions, provide a planning opportunity to reduce the overall tax rates that apply.
If the company is acting as a trustee of a SMSF concessional ASIC annual fees are only available if the company performs this role solely.
** for the trainspotters, the title here is riffed from the Eurythmics song ‘Right by your side’.
