Buy-sell deeds: pricing to pay** the premium?

One issue that comes up regularly in the context of insurance funded buy-sell arrangements is who should be responsible for the payment of insurance policy premiums.

Depending on the policy ownership approach adopted and the underlying business structures, there are a range of alternatives, including:

1. Each principal pays a premium on their own policy.
2. All principals contribute a proportion of the total premiums for all policies, equal to their respective equity interests in the business.
3. Each principal pays an exactly equal proportion of the total premiums based on the number of principals (regardless of their underlying equity interest).
4. If there are only two principals, sometimes the approach will be that each principal pays premium for the other.

As previous posts have touched on, there are a myriad of tax consequences that can arise from each of the various alternatives.

Assuming that these tax consequences can be managed, generally the pragmatic approach is to apportion the total premiums payable for all policies in accordance with the equity interest of each principal.

While this will not necessarily be seen as fair by each principal in all scenarios, it does keep things relatively simple and also helps the principal's focus on what should be the overriding objective of any insurance funded buy-sell arrangement. That being, to facilitate a smooth transition of a business in a factual scenario where the prospects of a smooth transition otherwise occurring are unlikely.

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 Janes Addiction song ‘Price I Pay’.

View hear (sic):

 

Three days** before wedding: ‘’Hey! Let’s sign a prenup!’’

There have been a number of high profile cases in relation to the enforceability of binding financial agreements or ‘prenups’.

Anecdotally, a number of specialist family law firms now refuse to advise on these types of agreements and the case of Parkes [2014] FCCA 102 provides another example of a situation where a binding financial agreement was held to be invalid.

The key factors in the case here were as follows:

1. The couple had been in a relationship for around six years, and engaged to be married for almost a year.
2. The husband raised the idea of a prenup three days before the wedding and provided the spouse with a full agreement and the warning that if she did not sign it ‘the wedding was off’.
3. The wife claimed that she signed it within 24 hours on the basis that she felt she had no other choice, given the investment that had been made by the two of them and the significant number of guests invited to the wedding.
4. The court analysed the relationship between the parties and said that the husband had a special duty because of the unequal bargaining position and influence that he had over his wife.
5. Due to this aspect of their relationship, the husband owed a greater duty to the wife to give her sufficient time and space to consider her position. As this had not been done, the agreement was held to be invalid.

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 Janes Addiction song ‘Three days’. View here:

Three (days) – Trust Naming Conventions – Part III

Continuing on from recent posts about the types of trust deeds that can be created, this week's post summarises another five types of trusts:

SPV Trust – an SPV trust will traditionally be a discretionary trust, however will be created so as to perform only one discrete activity. Examples include a particular property development project, a certain investment activity or to conduct a discrete part of a wider business, for example, employing staff, owning plant and equipment or undertaking borrowings with third parties.

Unit Trust – often seen as an ideal vehicle for investment activities between unrelated third parties in capital appreciating assets, unit trusts provide unitholders with fixed entitlements to income and capital, however are generally subject to CGT event E4.

Fixed Trust – the definition of a fixed trust for taxation purposes remains uncertain following the Colonial decision in 2011, which concluded that the meaning of a fixed trust is narrower than commonly thought by taxpayers and their advisers. However, generally, the test for qualifying as a fixed trust turns on whether the beneficiaries have a vested and indefeasible interest in the trust property.

Hybrid Trust – a hybrid trust effectively blends particular characteristics of other forms of trusts into one arrangement. Most commonly, a unit trust is combined with a discretionary trust so as to give the ultimate owners a fixed entitlement to capital, and a discretionary entitlement to income. This structure is generally only used in tightly held groups or family investment activity.

Corporate Trust – there are a range of trusts that can be referred to as a corporate trust. In particular, there are specific provisions under the tax legislation that treat particular forms of trusts (for example, public trading trusts) as companies for tax purposes. Subject to satisfying certain rules, it is also possible for trusts to form part of a tax consolidated group, and again, effectively be treated as if they are companies for tax purposes.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘Three days’ is a song by legendary/notorious band Janes Addiction from 1991.

1% **

Last week we were assisting with an asset protection and structuring re-arrangement & the referring adviser asked - why would an at-risk spouse retain a 1% interest in a property? As explained by an earlier post, the reasons can include: 

1. Protection against spouse or relationship difficulties. 
2. Protection against the majority owner seeking to encumber the property - no mortgage may be taken out over the property without the consent of the 1% spouse 
3. For ease of security arrangements – a financier may prefer to see the at-risk spouse’s name on title documentation. 
4. Stamp duty savings. It should be noted that in most states there are concessional provisions which apply where one spouse who owns 100% of a family home and transfers 50% (but no more or less) to their spouse. Indeed, some states, such as Victoria, allow the transfer of more than 50% of a home without any duty costs. 

** for the trainspotters, the title of this week’s post may remind some of legendary/notorious early nineties band Jane’s Addiction – see - https://vimeo.com/3867179

*** the visual this week is designed to remind - there are other ways to learn life lessons than destroying entire ecosystems