(Quick) Succession** with super fund trusteeship on death

Recent posts have considered the various issues that can arise in relation to the payment of superannuation entitlements following death.

The case of Ioppolo & Hesford v Conti & Anor [2013] WASC 389 provides another example of how unintended consequences can arise where the control of a self managed superannuation fund (SMSF) is not carefully considered as part of a comprehensive estate plan.

The background of the case was as follows:

1) the husband and wife originally established an SMSF and were the individual trustees;

2) following the wife’s death, the husband appointed a corporate trustee (not the legal personal representative of his wife’s estate) of which he was the sole director and shareholder in order to comply with the relevant superannuation legislation;

3) the corporate trustee (with the husband as sole director), then resolved to pay the entirety of the wife’s superannuation entitlements to the husband, as opposed to her legal personal representative pursuant to her will;

4) the executors of the will sought to unwind the distribution, partly because of a direction in the will that related to the superannuation entitlements;

5) in particular, the executors argued that the husband failed to act in a bona fide manner because of the provision in the will.
In dismissing the executor’s claim and allowing the husband to retain all of the wife’s superannuation entitlements, the court confirmed that there is no obligation under the superannuation legislation for a surviving trustee to automatically appoint the executors of a former co-trustee as replacement trustees of an SMSF.

In many ways, the decision simply reinforces the principle from the Katz v Grossman case some years earlier.

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 Elliott Smith song ‘Bled White’. View hear (sic): 

What you need** with super death benefit planning

Last week’s post considered the case of Katz v Grossman.

Earlier posts have considered the various types of superannuation death benefit nominations that can be made.

Clearly if the father in Katz v Grossman had utilised a binding death benefit nomination, then there would likely have not been any successful challenge to the ultimate payment of the superannuation entitlements

Some of the other planning strategies that can be utilised to regulate how superannuation benefits are distributed on death include:

1) incorporating automatic adjustment clauses under the terms of a will, to take into account benefits that are received directly from a superannuation fund;

2) mandating the succession of trusteeship of the superannuation fund; and

3) entrenching approval mechanisms for death benefit payments, for example, by prohibiting a payment until trustee receives consent from a trusted third party.

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 INXS song ‘What you need’. View hear (sic):

  

The Original (Sin)** and super death benefits - the Katz decision

Superannuation entitlements are regularly one of the most significant assets in any estate planning exercise.

Critically however, superannuation benefits need to be regulated in a way that complements a wider estate planning exercise. Arguably, one of the leading cases in relation to superannuation death benefit planning remains, after more than 15 years, the decision in Katz v Grossman [2005] NSWSC 934.

The case involved Katz bringing an action against his sister Grossman (and her husband), claiming an interest in their father’s self managed superannuation fund (SMSF).

A summary of the facts is as follows:

1. originally, the father and mother were the individual trustees of the SMSF;
2. the mother died some years before the father, and subsequently Grossman was appointed as a co-trustee with the father (this was to ensure that the SMSF continued to comply with the relevant superannuation legislation);
3. when the father later died, Grossman appointed her husband as a co-trustee with her;
4. during his lifetime the father had made a non-binding nomination indicating that he wanted his superannuation entitlements divided equally between Katz and Grossman; and
5. Grossman and her husband ignored the nomination and paid the entirety of the superannuation entitlements for the benefit to herself.

The Court held that all the trustees of the SMSF had been validly appointed at the relevant times, and that as a result, the challenge by Katz was unsuccessful and Grossman was entitled to keep the superannuation entitlements.

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 INXS song ‘Original Sin’. View hear (sic):

Trust renunciations and disclaimers – the changed (tax) position** for the beneficiary

Previous posts have looked at some of the key issues to be aware of in relation to renunciations and disclaimers by beneficiaries of a trust. 

The stamp duty aspects of any such renunciation or disclaimer must be considered carefully on a state-by-state basis. As with many aspects of stamp duty law, frustratingly, there is little consistency across the various jurisdictions.

Fortunately, in relation to the capital gains tax consequences, the position is somewhat clearer.

In particular, the Tax Office has set out their view is in Tax Determinations 2001/26 (in relation to renunciations) and TR 2006/14 (in relation to disclaimers).

Broadly, the Tax Office confirms its view that from a tax perspective outcome of disclaimers (which operate retrospectively from the commencement of the trust) and renunciations (that operate from the date the renunciation is made – ie prospectively) in relation to discretionary entitlements are the same.

The Tax Office has confirmed that a renunciation or disclaimer of a trust interest will not normally have any capital gains tax (CGT) consequences for the trustee of the trust.

In particular the Tax Office confirms that:

1. an interest in a trust is a CGT asset; and
2. a renunciation by a beneficiary of an interest in a trust will give rise to CGT event C2 (the abandonment, surrender or forfeiture of an interest).

However, whether the CGT event has any practical consequence depends on whether:

1. the CGT asset has any value at the time of the CGT event; and
2. if there is any exemption that may be available.

The Tax Office considers that if a beneficiary who renounces their interest is a purely discretionary beneficiary of the trust (that is, the beneficiary has no interest in either the assets or income of the trust before the exercise of any trustee discretion as to the allocation of such income or assets), then there is likely to be no CGT (as the market value of the beneficiary’s interest will be nil).

If however the beneficiary who renounces their interest is a default beneficiary (that is, the beneficiary will receive a distribution of either income or capital in default of the exercise of a discretion by the trustee), then this kind of trust interest may in fact have some value. This means that CGT is more likely to be triggered by that beneficiary as a result of their renunciation.

Similarly, where a beneficiary disclaims (as opposed to renounces) their trust interest, the disclaimer is effective retrospectively and has the effect that the beneficiary is deemed to have never held the interest or entitlement which has been disclaimed. Consequently, there is no asset to which a CGT event could apply.

Whether CGT is payable will be determined on a case by case basis, depending on issues such as:

1) the terms of the particular trust deed and its purpose; and

2) the past history of distributions made by the trustee in favour of the default beneficiary; and

3) all other circumstances of the particular case.

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 one of the coolest song titles ever, namely the Kaiser Chief’s song ‘Na na na na naa’. View hear (sic): 

I like your old stuff better than your new stuff** - Tax Office shows its (previous) caring approach towards family trusts distributing to testamentary trusts

New (financial) year.

More lock downs.

And a reminder some things never change - for example, the Tax Office don’t like trusts.

Previous posts have considered the Tax Office’s views about distributing from a testamentary trust to a family trust, that (at least in part) offered an (arguably) unnecessarily narrow interpretation of the tax rules.

In the context of the 2018 budget changes to the excepted trust income regime, it is timely to revisit PBR 1051238902389 that considers the situation where an inter vivos family discretionary trust was distributing to a testamentary trust.

In contrast to the approach of the changes, the ruling sees the Tax Office adopt a more collaborative approach.

Briefly, to the extent relevant, the factual matrix was as follows:

1. a willmaker was the ultimate controller of a family trust;
2. the willmaker's estate plan attempted to mandate that the assets of the family trust be sold and the cash distributed directly (and equally) to four testamentary trusts established under the will;
3. it was acknowledged by the parties that the directions of the willmaker were an attempted fettering of the trustee's discretion. Therefore, while they could be taken into account, they were not be binding;
4. this said, the assets of the family trust were sold and the intention was to then have the cash distributed to the testamentary trusts – who were potential beneficiaries of the family trust (an approach adopted by default by all View trust documents).

In determining that income of a prescribed person (eg including a minor) as a beneficiary of a testamentary trust, even if sourced from a distribution made by a family trust, is excepted trust income (ie minor's are taxed at adult rates) of the beneficiary, the Tax Office confirmed:

1. Following the decision in Furse (another case regularly explored in View posts), all that is necessary for the assessable income of a trust estate to be excepted trust income is that the assessable income be the assessable income of the trust estate and that the trust estate be as a result of a will.
2. Thus, any amounts representing a distribution from a family trust to a testamentary trust are 'assessable income of a trust estate that resulted from a will’, and therefore will be 'excepted trust income’, unless otherwise excluded.
3. Again largely following the analysis in the Furse decision, the main exclusions (namely either that the parties are not dealing at arm's length or the arrangement is one predominately driven by achieving the tax benefit) were held not to be applicable and thus access to the excepted trust income provisions was confirmed.
4. While the outcome in this private ruling is a positive one, distributions by family trusts to testamentary trusts are clearly denied access to the excepted trust income regime under the new legislation, regardless of how they are made.
5. Practically, the capital gains tax consequences of the distribution from the family trust would also need to be considered, given none of the rollover concessions otherwise available on death under division 128 of the Tax Act would be available on either the sale of the assets by the inter vivos trust, nor a straight distribution of the assets in specie. Similarly, to the extent the distributions were of dutiable property, the exemptions available for deceased estates would also not apply.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Regurgitator song ‘I like your old stuff better than your new stuff’.

View here:

PS and the image the quintessential lock down WFH set up.