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’.

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(I will follow**) the leading case about fettering of a trustee’s discretion

Previous View posts have considered the issues of a trustee fettering its discretion in the context of an insurance funded buy sell arrangement.

The principle in relation to the probation on a trustee fettering its discretion is arguably best captured in the decision of Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628.

In this case the key concepts concerning fettering were summarised as follows –

‘… a trustee is not entitled to fetter the exercise of a discretionary power (for example a power to sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In re Vestey’s Settlement [1951] Ch D 209.

If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 Ch D 447), though the trustee may be liable in damages for breach of contract …’

Thus in the case mentioned above of In re Vestey’s Settlement, a binding decision to indefinitely make set annual distributions to a particular beneficiary was held to generally be seen as invalid due to the rule against fettering.

The decision in Lambert and Commissioner of Taxation [2013] AATA 442, another case featured in other View posts, further reinforces the above points.

In this case the court confirmed that a trustee is under a fiduciary duty to exercise its powers and discretions upon real and genuine consideration in accordance with the purposes for which the discretion was conferred.

In particular, as confirmed in Karger v Paul [1984] VR 161, it as an inherent requirement of the exercise of any discretion that it be given real and genuine consideration, or as set out in Partridge v The Equity Trustees Executors and Agency Company Limited [1947] HCA 42, there must be the 'exercise of an active discretion'.

Other examples in this regard include:

1. the granting of a call option under a lease for the lessee to buy the property was an invalid fetter on the ability for the trustee to sell the property (see: Re Stephenson's Settled Estates (1906) 6 SR (NSW) 420). This outcome should be contrasted to the conclusion in last week's post, where the trust deed expressly allows a trustee to grant options.
2. an attempt by a willmaker to mandate via a letter of wishes about how distributions from a testamentary trust set up under the will should made, was an invalid fetter on the trustee's wide discretionary powers for the trustee under the will (see: Burns v Burns & Anor [2008] QSC 173). Specifically it was confirmed that trustees (and third parties) cannot fetter the future exercise of the trustee’s powers. 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.
3. as an example in contrast, it has been held that more general statements about the preferred manner of a trustee exercising its discretion - that do not in fact create a binding obligation on the trustee - are not an invalid fetter. Simply because a trustee consistently, and every year for many years in a row, follows an identical approach in determining how to exercise its discretion, this will not automatically mean the trustee has forgone having any real choice (see: Entrust Pension Ltd v Prospect Hospice Ltd [2013] PLR 73, [37]).

Next week's post will consider one of the leading cases where an arrangement that would have been under the above principles amounted to a breach of the rule against fettering of a trustee’s discretion was in fact enforced.

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 U2 song 'I will follow’.

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Seven dwarves, pizzas for the homeless and pre-chopped broccoli florets** – taking the detail to a whole new level

Following last week’s post, where I mentioned that, particularly in New South Wales, it is often the case that trustees are expressly prohibited from being beneficiaries of discretionary trusts there were a number of questions relayed to me. Thank you also for the suggestions as to what hair product Van Halen would have likely demanded at the height of their fame in the mid 1980s.

The key reason the ‘trustee can’t be a beneficiary’ prohibition is so prevalent in New South Wales is that under the stamp duty laws there, in order for a trustee to be permitted to be appointed (particularly where there is a change of trustee of a pre-existing trust), that trustee must not be a potential beneficiary of the trust.

Obviously, there are a range of asset protection related issues in this regard as well. At the centre of these issues is the fact that a trustee is directly liable for misadventures of the trust. As a general rule, the maximum value of a trustee company from time to time should never be more than a nominal amount – ie $2. A trustee company receiving distributions as a corporate beneficiary will breach this rule immediately.

Importantly however, many trust deed providers that offer deeds nationally, will incorporate the prohibition on a trustee being a potential beneficiary, even for trusts that do not otherwise have any connection with New South Wales.

This prohibition will often be weaved into a trust instrument in a less than obvious manner. Unless there is a pedantic approach to reviewing the terms of a trust deed the prohibition will be missed.

In summary – yet another example of the importance of the mantra ‘read the deed’.

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

** for the trainspotters, the singer of the theme song of ‘Trainspotting’, being ‘Lust for Life’ Iggy Pop allegedly had a contract rider requiring seven dwarves, pizzas to give to the homeless, and pre-chopped broccoli florets (to make them easier to throw away).

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Brown M&Ms, go jump**invasion by aliens and when trust beneficiaries aren’t beneficiaries

In preparing for the View webinar ‘Trust Horror Stories’ we had a timely reminder of the mantra to ‘read the deed’.

The read the deed mantra is analogous to the famous contract rider of rock band Van Halen requiring M&Ms in their dressing room; with all the brown ones removed.

Originally thought to be the very definition of an outlandish group of prima donnas, the truth was all about the detail – if Van Halen ever saw brown M&Ms on arrival at a venue they were on notice that the venue operator did not sweat the detail.

On more than one occasion they used the existence of a brown M&M as cause for cancelling a gig; or perhaps more bluntly, telling the venue to go ‘Jump’.

Contract lawyers have long been renowned for a similar technique when crafting ‘force majeure’ provisions and randomly including events such as inability to complete a contract due to invasion by aliens or abduction by unicorns to flush out those who are not checking every line.

In the trust deed example we had this week, a trustee company had been distributing income from a trust to itself as a corporate beneficiary (ie to cap the tax rate at 30%).

Aside from the asset protection issues that can arise from using a corporate trustee as a corporate beneficiary, the other main issue to consider was whether the company could in fact be a beneficiary of the trust – in other words did the deed include the trustee as a beneficiary.

As is quite often the case with trusts established in New South Wales (in particular), in this instance, the trustee was in fact expressly excluded as a potential beneficiary of the trust. A previous post has a more detailed analysis of this aspect of many trust deeds (please contact me if you would like access to this and can not easily locate it).

The invalid distribution, which unfortunately had been made over a number of years, meant that a range of quite complex issues arose in relation to the trust, with a multitude of tax, trust law and accounting issues needing to be addressed. The solutions available for each issue were, at best, problematic.

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

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They're 18, they’re beautiful and they're no longer ‘yours’

One regularly asked question in estate planning is ‘do my kids need estate planning documents?’.

The one word answer is – absolutely.

The more detailed answer to provide some context is as follows:

1. Assuming a person otherwise has mental capacity, they are entitled to implement estate planning documents on reaching the age of majority (i.e. 18 years).
2. The main exception to this rule is that a married person may implement estate planning documents, even if they have not reached the age of majority.
3. If a person has reached the age of majority, but does not have estate planning documents in place, an array of complications can arise.
4. If the person dies, then their estate will be administered in accordance with the intestacy rules (previous posts have looked at various aspects of these rules, please contact me if you would like access to these and can not easily locate them).
5. Invariably, the intestacy rules trigger a ‘triple whammy’ – significantly more costs, significant time delays and often a distribution that does not reflect the wishes of the deceased.
6. Where a young adult loses capacity, the adverse consequences for the family can in some cases be even more traumatic than a person dying intestate.
7. In particular, without an enduring power of attorney, it is essentially a government department that has the default right to make the decisions on behalf of the incapacitated person.
8. While there is a statutory process that allows interested parties (for example, parents of the young adult) to have themselves appointed, this again invariably causes a ‘triple whammy’ of increased costs, increased delays and the risk that the preferred people are not in fact appointed.

Unfortunately, we have seen a myriad of horror stories involving young adults without any estate planning arrangements in place, for example:

1. A 21-year-old who died with over $1 million in assets. These assets were as a result of being a member of multiple superannuation funds that she had joined working in a range of casual positions during university. Each fund had automatic insurance, regardless of the member balance, that totalled over $1 million. 50% of these entitlements went to the lady’s estranged father whom she had not even spoken to for over 15 years.
2. A 19-year-old man who had been gifted over $300,000 by his parents to help acquire his own unit. On his death the unit passed to a lady who claimed to be his de facto, but whom the parents had never in fact met.
3. An 18-year-old man who was left stranded in an incapacitated state in Spain following an accident at the ‘running of the bulls’. As his parents were not appointed as his enduring attorney, they had no legal authority recognised by the Spanish authorities.

As a separate comment - the popularity of recent posts leveraging pop references has been used again, with a song, the most popular version arguably recorded by Beatle’s drummer Ringo Starr.

** For the trainspotters, the title of today's post is riffed from the song ‘You’re sixteen, you’re beautiful and you’re mine’.

View arguably the most popular version recorded by Beatle’s drummer Ringo Starr here:

Estate planning and organ donation**

Last week’s post considered a number of different alternatives in relation to body disposal following death.

As is well known, it is possible to donate organs for medical purposes, which in Australia is via an opt in process and requires registration on the Australians Organ Donor Register.

Renowned behavioural economist Dan Ariely (among others) has commented on the level of organ donation in jurisdictions where there is an opt out approach adopted – in these jurisdictions, the level of uptake is astronomically higher.

It is important to note that generally if a person wishes to make their organs or body available for medical research, there are specific additional steps that must be taken, prior to death, to ensure that the necessary consents are provided.

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 Wonder Stuff song ‘Donation’.

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Keith Richards, estate planning, body disposal and keeping it Respectable**

Last week’s post mentioned Keith Richards and it reminded me of one death-related story that Keith Richards is famous (or perhaps more accurately infamous) for. In particular, the way that Keith Richards (allegedly) disposed of his father’s ashes, as profiled in more detail below.

Certainly, one aspect of estate planning that often receives less attention than many other areas is body disposal.

Ideally, a will maker’s wishes in relation to body disposal should be communicated to immediate family members or the executor of the estate.

A memorandum of directions, letter of wishes or similar style document is often the best mechanism in this regard.

At least in western culture, the three most traditional body disposal approaches are:

1. burial;
2. cremation;
3. burial at sea.

Some alternative approaches include the following, which can all be accessed via Dr Google:

1. Diamonds
2. Mummification
3. Cryogenically frozen
4. Coral reefs
5. Composting
6. Deluxe cardboard box
7. Vinyl records
8. Firecrackers
9. Snorting (ie the Keith Richards play; note - the mixing of ashes with illicit substances is generally regarded as optional)
10. Smoking – as a variation on the snorting idea, friends of rap singer Tupac allegedly mixed his ashes with marijuana and smoked them
11. An hour glass
12. Glass orb
13. Snow Globes
14. Space flight (as made famous by James Doohan, the actor who played Scotty in Star Trek, whose ashes were sent into space on a Elon Musk SpaceX rocket launch)
15. Shot out of a cannon – Hunter S. Thompson style, perhaps helping deliver on his famous comment that:

‘Life should not be a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside in a cloud of smoke, thoroughly used up, totally worn out, and loudly proclaiming "Wow! What a Ride!”’

** For the trainspotters, the title of today's post is riffed from the Rolling Stones song 'Respectable'.

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