The Blues Brothers** Trust case

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’.

Over (it)** insurance and buy sell arrangements

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:

1. It reduces the need to uplift the quantum of insurance cover as circumstances change.
2. It reduces the risk that in the future appropriate levels of cover may not be able to be accessed (due to health reasons).
3. It guards against the risk that the underlying assets involved increases more rapidly than insurance protection is able to be updated.
4. 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’.

Why contracts beat (it) ** wills

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:

1.  a partner changing their will;
2. the will of an exiting partner being challenged; and
3. 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’.

Happy New Year’s Day**! & some further reasons for the rise and rise of share sales

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’.