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’.
