Another (one bites the dust**) & permutation on reading the deed - regulating family trust assets via wills

The View post last week considered aspects of the probation on a trustee fettering its discretion.

One related issue that we see arise from time to time is an attempt to regulate the distribution of the assets of a trust via a will direction. Generally this approach is adopted on the basis that some argue that a will can have legal force over a trust.

The idea that a willmaker can mandate that a company take certain steps in relation to its assets is clearly untenable (even if the will maker is the sole director and shareholder of the company). The analogous argument that a will maker can somehow force a trust to take certain steps seems (at least conservatively) similarly without basis.

In any event, if the outcome of mandating certain trust distributions is required, a simple deed of variation, with an effective date of the willmaker’s death arguably achieves the same outcome, without any of the esoteric debate about whether a willmaker can regulate trust distributions.

While we do from time to time adopt the ‘delayed commencement’ deed of variation approach we generally recommend against it as it goes against virtually all the benefits of having a discretionary trust in the first place (quite aside from the significant tax and duty risks of such a variation).

Instead, our strong preference is to use one or more of strategies such as memorandums of directions, crafting control roles (such as appointor or principal powers), family councils, bespoke constitutions, trust splitting, trust cloning, independent trustees or gift & loan back arrangements to achieve the required objectives.

As usual, please make contact 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 Queen song ‘Another one bites the dust’.

View here:

When a fettering of trustee discretion is obscured by a 90-Mile water wall**

A recent View post mentioned the principle in relation to the probation on a trustee fettering its discretion. Arguably the leading case explaining when the probation on fettering of discretion will essentially be ignored is Dagenmont Pty Ltd v Lugton [2007] QSC 272. As usual, if you would like a copy of the decision please contact me.

The background in this case was as follows -

1. an agreement was entered into by the original appointor of a discretionary trust and other family members in control of the corporate trustee, whereby the appointor would resign from various roles in the trust, in return for guaranteed distributions from the trust;
2. the distributions were set at an amount of $150,000 each year, indexed for inflation;
3. the agreement by the trustee to make these future distributions was effectively a fetter on its future discretion;
4. each party received independent legal advice at the time of the agreement, however some years later the trustee attempted to cease the distributions due to the, argued, invalid fettering of its discretion.

The court specifically acknowledged the general prohibition on a trustee fettering its discretion, confirming -

'trustees cannot fetter the future exercise of powers vested in trustees … any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.'

In rejecting however the trustee's attempt to avoid the agreement the court confirmed -

1. a provision in a document authorising a trustee to release powers which they would otherwise have a duty to exercise is valid;
2. here the document confirming the agreement between the parties was in essence a release by the trustee of the power conferred on to exercise an unfettered discretion to distribute amongst all potential beneficiaries;
3. alternatively, the agreement effectively amounted to a variation of the terms of the original trust deed;
4. this meant that what would otherwise have been an unfettered trustee discretion became reduced in scope, simultaneously with an obligation being imposed on the trustee (created by the agreement with the original appointor) to distribute the annual amount of $150,000 (indexed);
5. arguably particularly where parties receive independent advice at the time, the court should uphold bargains where it can, rather than destroy them.

As usual, please make contact 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 National song ’90-Mile Water Wall’.

View here:

Thinking you will let the tax tail wag the dog; plan to play a slow hand**

Last week's post explored the case of Wheatley v Lakshmanan [2022] NSWSC 583, with a focus on the (possible) exception to the rule that a willmaker can only regulate the transfer of assets they personally own under a will.

Another key aspect of the decision related to the tax consequences of the various proposals considered by the court. The potential tax liability was said to be in the region of $1M.

Relying on advice of a specialist tax adviser the court made the following observations (in the context of the implications of a company owned by the willmaker distributing one of its assets to a beneficiary under the will):

1. the estate, for tax purposes, would be deemed to be a trust under section 6(1) of the Tax Act;
2. any payment of any amount by the company to the executor of the estate would be a dividend assessable under section 44 or under Division 7A of the Tax Act - and, if the moneys were paid to the executor who then used them to pay the purported gift under the will, the recipient of the gift would be subject to income tax on a flow through basis;
3. if instead the company distributed to the estate and no particular beneficiary was eligible to receive those moneys, then the trustee would be taxed (at the highest marginal rate) under section 99A of the Tax Act;
4. an argument that the payment by the company to the beneficiary as a form of notional estate order would not constitute a deemed dividend had been rejected by the Tax Office in a private ruling issued before the trial - the Tax Office instead determining that the payment would in fact be treated as a deemed dividend under Division 7A;
5. although not expressly stated in the decision, it seems likely that the relevant private binding ruling in this regard is Authorisation Number 1051799201069. This ruling references Taxation ruling TR 2014/5 (Income Tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate)) in concluding that the reasoning from a family law perspective also applies in the succession law setting, and as such, the requirement in section 109J(b) of the Tax Act to access an exemption from the deemed dividend regime is not satisfied;
6. the use of the word in the gift provision of the will 'unencumbered' was held to be intended to be in its common parlance - that is referring to mortgages or charges secured on the property – not the embedded tax liability. Thus, any income tax liability should be largely ignored by the court in determining the appropriate provision to be made for the aggrieved beneficiary. This conclusion was reinforced by the fact that the tax liability only arose subsequent to the sale of the property, on the distribution of the proceeds of sale - and furthermore the purported gift was held to be invalid in any event.

The court also observed that it seemed likely that tax issues 'overtook' common sense during the litigation and contributed to the high level of legal and accounting costs, which the court stated it was inclined to place a significant cap on in terms of what the estate would be liable to pay for.

The exact cap in this regard was confirmed in Wheatley v Lakshmanan (No 2) [2022] NSWSC 851. In this subsequent decision, the court held that in relation to costs that were over $620,000 for the plaintiff and more than $450,000 for the estate, the estate was ultimately effectively required to pay its own costs and a net amount of $160,000 of the plaintiff's costs.

This outcome was after a careful analysis by the court balancing between depriving the plaintiff of a substantial portion of the legacy ordered in her favour and the estate being further burdened by costs. Given the plaintiff received an award of $820,000 as further provision under the initial judgment, her final net position was likely in the region of $350,000.

As usual, please make contact 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 Pointer Sisters song ‘Slow hand’.

View here: 

Don't give up** (& no it ain’t an April Fool’s post) on receiving an asset under a will - even if it is not owned by the willmaker

Previous View posts have explored cases that support an, arguably unusual (indeed arguably bordering on a joke, or at least April Fool’s Day-esk, exception to the rule that a willmaker can only regulate the transfer of assets they personally own under a will.

In particular, in certain situations the standard position that assets of a company are not something individual shareholders have the authority to regulate under their will has been overruled.

The decision in Wheatley v Lakshmanan [2022] NSWSC 583 provides a detailed analysis of the key rules in this area.

At the heart of the factual matrix in this case was a clause in a will that purported to gift to a child of the willmaker, unencumbered, a commercial property - with a further direction that the property 'be placed into a trust or superannuation fund of (the child's) choice'.

The relevant property however was owned by a company that the willmaker was at all material times (i.e. both at the date of the making the will and at the date of death) the sole shareholder.

In confirming that the purported gift of the property was ineffective the court stated:

1. the general position is that a willmaker can not bequeathe something that they do not own;
2. it may be that where a willmaker conveys to the executor a direction to reduce into possession an asset not owned by the willmaker, and the executor is armed by the willmaker with the power to get the asset (eg by directing that all relevant assets are to be held on trust under the estate) they will be bound to do so - and then deal with the asset as directed by the will (see Re O’Callaghan [1972] VR 248);
3. that is, if there is the conferral of power upon executors to deal with shares in a company that owns the assets in question as if they were beneficial owners, coupled with express gifts under the will, this can give rise to an implication that the trustee was required to use the shares of the company to ensure the assets of the company are transferred as set out in the will;
4. this said, the court commented that it may also be that the earlier cases were in fact decided incorrectly - a point the court did not need to resolve on the basis that in the will here, the requisite power was not granted to the executor of the will in any event;
5. the key reason for suggesting that the previous cases may be wrong at law is that they are vague in clarifying how exactly an executor exercising rights as a shareholder can cause the relevant company to divest itself of the assets purportedly bequeathed. That is, the shareholders do not manage the company’s affairs; rather the directors do and a court should not construe a will in a manner that would or might place the directors in a position where their statutory duties as directors are in conflict with the willmaker's intentions, based on a conflation of ownership with management (or day-to-day conduct) of a company;
6. the further suggestion that there should be a rectification of the will was also rejected due to a lack of evidence that the willmaker intended to create the power for the executor to achieve the gift of the property owned by the company;
7. nor was there any evidence supporting the ability for the court to correct a 'clerical error' - rather it seemed that either the willmaker did not make clear, or the lawyer drafting the will did not understand, that the property in question was owned via a company.

Ultimately, while the aggrieved beneficiary was granted a cash settlement pursuant to a court order as part of a family provision application, this amount was significantly less than the value of the property in question; and was also arguably partially reduced by a tax bill that the estate had to bear. The tax issues will be explored in next week's post.

** For the trainspotters, the title of today's post is riffed from the Peter Gabriel (featuring Kate Bush) song ‘Don’t give up’.

View here: