Tuesday, February 28, 2023

Why a willmaker’s domicile may trigger a step back in time**

Where a person is domiciled is one of the more difficult and potentially frustrating areas of the law.

A key reason the issue can be so problematic is due to the rules in relation to ‘conflict of laws’ – that is determining which rules apply when there are two or more potential jurisdictions in relation to a certain set of circumstances.

The conflict of laws regime is inherently problematic and one of the most highly specialised of all legal disciplines.

In very broad terms, a person is domiciled where 'their heart calls home'. This means that they need not necessarily be physically located there or indeed have any assets in that particular jurisdiction.

The issue of domicile can arise in a number of situations.

In an estate planning context however, most of the complex issues in relation to domicile only arise in situations where people die without a will (i.e. intestate).

One of the first steps therefore that should be looked at as part of an estate plan where the place of domicile may become an issue is to at least get in place temporary estate planning documents as a matter of urgency.

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 Kylie Minogue song 'Step back in time'.

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Tuesday, February 21, 2023

SMSF borrowing arrangements and business succession: a modern life** story

We recently had an adviser seeking guidance in relation to business succession arrangements where business property was to be purchased by two parties via their self-managed superannuation funds, with a limited recourse borrowing arrangement.

The three main approaches that we explained are as follows, noting that the preferable solution depends on the exact commercial circumstances:
  1. As the intention with the borrowing arrangements is normally that they are self-funded, some business owners choose to leave the structure in place and have an unfunded agreement (for example, a unit holder’s agreement) regulating how the parties will conduct themselves if one of the principals passes away.
  2. In other words, the deceased’s estate would treat the ownership interest in the building as an arm’s length investment and would effectively maintain that interest until the other owner had sufficient funds to acquire the interest, or alternatively, the entire property was sold to a third party.
  3. The above approach is predicated on the assumption that the super fund of the exiting principal otherwise has sufficient assets to pay the death benefit.
  4. A second alternative is for each principal to self-own insurance to pay out any debt referable to ‘their’ interest in the underlying property, noting that practically any such insurance must be held outside the superannuation funds. This is because if it is owned via the super fund, the insurance proceeds are simply added on receipt to the exiting member’s entitlements that must be paid as a lump sum or pension (and can therefore not be used to help reduce debt).
  5. If this approach is adopted, the succession arrangements can proceed essentially along the same lines as set out above, or the estate of the deceased principal can acquire an interest in the property using the insurance proceeds (and triggering the potential tax and stamp duty consequences on the sale).
  6. Finally, each principal can obtain sufficient insurance to clear the entire debt. The buy-sell arrangement would require that 50% of the proceeds are paid to each principal (or their estate). The underlying property can then be dealt with as set out above, or alternatively, steps can also be taken to ensure that the relevant share of the property is transferred to the surviving principal’s benefit.
  7. This last pathway is often used in business succession arrangements and is referred to as the ‘hybrid’ approach (see previous View posts explaining the model). This said, the involvement of superannuation funds does create additional, potentially significant, complications.
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 ‘Modern Life’.

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Tuesday, February 14, 2023

Love ya, love ya, love ya** - and my last will proves it … (AKA dogs are the best people**)

The general position under Australian law is that a willmaker has autonomy to distribute personally owned assets in their absolute discretion.

Previous posts have explored the broad exceptions to this position, each of which primarily revolve around either:
  1. The underlying incapacity of the willmaker to understand and act freely in preparing their will; or
  2. Due to the public policy reasons developed by the legal system that regulate how a responsible willmaker should distribute their wealth.
In this context there are many (in)famous examples often raised by advisers with us of willmakers perhaps taking their autonomy to interesting extremes.

Five examples include:
  1. An alleged will precedent provision used by some law firms, that the gift of an estate by a willmaker 100% to his 2nd wife is entirely dependent on a condition hardwired into the will that she remarries. Why the condition of remarriage? In the words of the willmaker: ‘So that at least one man (or woman as the case may be) mourns my death’ … a concept allegedly based on the precedent of the will made by German poet Heinrich ‘Henry’ Heine.
  2. The William Shakespeare model of giving to his wife of 34 years and mother of his children Anne Hathaway only one asset from his estate; being his ‘second best bed’. At least according to Wikipedia however, the gift may not appear as harsh as might otherwise be assumed. In particular, at the time beds were very expensive assets, sometimes equivalent in value to a small house. Furthermore, it was also custom that the best bed in the house was reserved for guests. Thus the bed that Shakespeare gifted Hathaway may have in fact been their marital bed, and thus not intended to insult her.
  3. Lang Hancock’s business partner Peter Wright had a son (Michael Wright) who created an estate plan to ‘manage’ his obligations to a ‘secret’ daughter from a brief relationship. While the daughter was given a gift of around $3M (challenged successfully to an increased amount of around $6M) much debate was caused by the housing of the gift. This was because the gift was placed into a restrictive trust that mandated rules such as spending limits and the permissible religious faith she adhered to, as well as prohibiting indulging in illegal drugs or committing drug related offences, including driving under the influence of alcohol. Following the challenge these restrictions were all removed.
  4. The ‘leaving it all to the cat home’ approach – perhaps most famously adopted by hotel magnate Leona Helmsley, who died in 2007 and left instructions that almost her entire estate of some $8B pass to a trust for dog welfare. The dog trust was the iterated version of the estate plan – the preceding approach prioritised providing for ‘poor people’ as well as dogs, with the dogs noted as a secondary priority. Three years before death however all references to poor people were removed by Helmsley, leaving dogs as the sole beneficiaries of her wealth. Reports at the time also confirmed that Helmsley's nine-year-old Maltese (‘Trouble’) received $12m. By comparison, two of her grandchildren were excluded from the will and two others had their combined $10m inheritance made contingent on their regular attendance at their father's grave. Trouble's inheritance was ultimately cut by the courts from $12m to $2m, with the balance gifted to Helmsley's charitable foundation.
  5. Robert Holmes a Court approach of ‘the will you have when you don’t have a will’. Australia’s first billionaire allegedly had completed an extensive estate planning exercise and then managed to carry his unexecuted will in his brief case for around 2 years before his sudden death of a heart attack, aged 53. Dying without a valid will meant that the estate was administered under the intestacy regime – however it was also bitterly litigated in a dispute that lasted years.
As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters a double hit this week - some extra love for Valentine’s Day 2023. First, the title of today's post is riffed from the Dave Graney and the Coral Snakes song ‘Night of the Wolverine’.

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And the second hit - The Fauves song ‘Dogs are the best people’.

Tuesday, February 7, 2023

Holistic Estate Planning for the New Year(‘s Day)** - Trustee duties and powers under discretionary trusts

The decision of Mantovani v Vanta Pty Ltd (No 2) related primarily to a lost trust deed, an issue explored in previous View posts.

Helpfully however, the decision also sets out a summary of the key duties owed by a trustee, noting that the office of trustee carries with it a number of strict obligations and duties, many of which are fiduciary in nature.

Fiduciary duties are generally seen as the most onerous of all legal duties and where they apply they require a person to act solely in another party's interests.

The case specifically confirms that the duties of a trustee include to:
  1. become thoroughly acquainted with the terms of the trust and all documents relating to or affecting the trust property;
  2. adhere rigidly to the terms of the trust and conform to and carry out the wishes of the settlor as expressed in the deed of trust; which is said to be ‘perhaps the most important duty’ of a trustee;
  3. keep and render proper accounts and report to beneficiaries or to a court regarding the administration of the trust;
  4. act fairly and impartially between beneficiaries;
  5. administer the trust property in a way so as to avoid benefiting one beneficiary or set of beneficiaries at the expense of another;
  6. make an application for judicial advice where the trustee requires advice or direction in relation to the management or administration of trust property or the interpretation of a trust instrument.
In relation to the last mentioned duty (ie to seek advice), it should be noted that a failure to seek advice has been held to be at the trustee’s 'own peril'. This is because any departure from the terms of the trust and any negligence in the performance of the duties of the trust will amount to a breach of trust.

Similarly, any acts in contravention of the duties imposed on the trustee by the trust or in excess of its powers will also be a breach of trust.

The ability of a court to review, and potentially unwind, a decision of a trustee, including for a breach of fiduciary duties, is in many respects predicated on the trust adviser's mantra profiled often in this journal, namely: 'read the deed'.

The issues in this regard can be particularly critical in relation to discretionary trusts where, at least in theory, there are few limitations placed on a trustee concerning most key aspects of the administration of the trust.

In a sentence, the rule the courts appear to apply is that a trustee's decision cannot be reviewed unless, on the material before the trustee, it is one that no reasonable trustee could have made.

What this rule means in any particular factual matrix can however be somewhat nuanced – reinforcing the value that advisers who adopt a holistic approach to estate planning can add in this space; pending ChatGPT taking over.

To learn more about holistic estate planning in 2023 – and specifically the following topics, join View’s next webinar (see: https://viewlegal.com.au/product/webinar-estate-planning-2023/):
  • the key estate planning related court decisions over the last 12 months
  • taxation and stamp duty changes impacting on estate planning
  • the impact of key legislation changes
  • latest examples of the attitude of the Australian Taxation Office towards various estate planning strategies
  • insights into the latest bespoke planning opportunities we have sourced from the last 12 months
** For the trainspotters, the go to song for new year references is riffed today, namely U2 and ‘New Year’s Day’.

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PPS – the image today is around the 12th year in a row of the image being taken with the same 4 kids in the exact same location.

PPS ... according to ChatGPT:

A trustee is a person or entity that holds and manages assets for the benefit of another party, known as the beneficiary.

Trustees have a legal duty to act in the best interest of the beneficiary and to manage the trust assets responsibly.

Some of the specific duties of a trustee include:
  • Investing and managing trust assets in a prudent manner
  • Keeping accurate records and accounting for trust transactions
  • Providing regular reports to the beneficiary
  • Following the terms of the trust document
  • Avoiding conflicts of interest
  • Acting honestly and in good faith
Trustees can be held liable for any losses to the trust assets resulting from their failure to fulfill their duties.