Importance of minimising loan accounts to at risk beneficiaries

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Importance of minimising loan accounts to at risk beneficiaries’.  If you would like a copy of the video link please email me.

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The reality in relation to beneficiary loan accounts is that sometimes they're unavoidable.

If distributions are being made by the trustee down to an at risk beneficiary and those amounts aren't physically paid, then they’ll sit on the balance sheet either as a credit loan or an unpaid present entitlement.

In either scenario, that’s clearly an asset of the at risk beneficiary. So it’s really important that on a regular basis those potential assets are reviewed and steps are taken to ideally quarantine them away into a protected environment.

The simplest approach, assuming that you can't avoid the distributions coming down to that person, will be to forgive that debt, or as an alternative, making sure that the outstanding amount is gifted across to a protected environment whether that be a spouse, some other family member or perhaps some other related structure.

The critical thing in all of that, quite aside from the pure bankruptcy issues is however that there must be a particular effort applied to the related issues. That is, things like the commercial debt forgiveness rules, wider tax planning issues and the stamp duty rules, that are unfortunately different in every jurisdiction around the country, are all potentially relevant before any step can be taken to quarantine the loan account wealth. 

Until next week.

What roles do ‘quasi-ownership’ arrangements play in succession planning

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What roles do ‘quasi-ownership’ arrangements play in succession planning ?’ at the following link - http://youtu.be/oUcuYyRXZ_U



As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

This is probably a really developing area in terms of what we've seen in recent times, because out of the GFC, the changes to trust law that many of us have experienced first hand in terms of the impact of relationship breakdowns and/or the intergenerational transfer that goes wrong; you find in many family scenarios they are effectively wanting to, if not fully rule from the grave, at least do a very good impersonation of it.

In that scenario, as much as we've spoken earlier today about secured loan arrangements and actually transferring assets down and securing those under a loan arrangement; a more ‘bespoke’ version of that is never having the asset leave the master trust in the first place and using tools such as letters of wishes or the way in which the trustee company constitution is crafted to allow the underlying beneficiaries to have indirect access to the assets, whether they be business assets or investment assets.

Beneficiaries will probably still have to meet KPIs in relation to their performance and running of those assets, but they never actually get the physical ownership or the legal control of them.

It may be overtime that beneficiaries do ultimately receive legal ownership or legal control, but for an interim period, which may last for many years, what this final form of structure does is effectively keep the assets within the initial master trust structure and really only have a synthetic or notional allocation of assets made, at a trustee level, for the underlying beneficiaries.

Until next week.

Family court case on the distinction between a loan and a gift

We are increasingly seeing advisers and clients alike, focussing (very deliberately) on the way in which they advance monies to their children to assist with, for example, the purchase of a family home.

Today’s post looks at a recent case, which was decided last year, and provides a useful example of the distinction between gifting and lending monies from a family law perspective, particularly in the event of a relationship breakdown.

The case of Pelly & Nolan [2011] involved a situation where the husband’s father advanced approximately $520,000 to ‘help his son out’. The initial advance was $320,000 to assist the son and his young family purchase a property. Additional advances were also made to assist with general living expenses totalling approximately $200,000.

The evidence in the case suggested that the father sought repayment for only the $320,000 advanced relating to the property acquisition and not the monies advanced for general living expenses.

As the initial advance was facilitated by a loan agreement and for the purpose of assisting with the property purchase, the court held that such advance was enforceable, even though no interest on the loan had been demanded nor paid.

In relation to the additional $200,000 advanced, there was no evidence to suggest that a repayment would be enforced by the father.

In the circumstances therefore, the court held that the $320,000 advance was indeed a loan and thus a liability that needed to be deducted from the matrimonial assets; whereas the $200,000 advance would be included as property for distribution to the wife (although the fact that it had been contributed by the husband’s father would be taken into account).

A link to the full decision is as follows –

http://www.fmc.gov.au/judge/docs/Pelly%20&%20Nolan%20[2011]%20FMCAfam530.rtf

Until next week.

Unpaid present entitlement warning

As those of you who sat through our webinars over the last few months in relation to unpaid present entitlements (UPEs) would know, there can be a number of traps in relation to the provisions of a trust deed in the context of the Tax Office’s approach in this area.

Arguably, the most concerning trust deed provision that we have seen in recent times is a clause in the deed of a relatively high profile provider that on a plain reading of the deed automatically causes any UPE to become a loan at call.

Obviously, this provision can have significantly adverse consequences, particularly for those clients wishing to 'quarantine' UPEs that existed as at 16 December 2009.

Until next week.

In times of peace - prepare for war

Two weeks ago, I explained the importance of reviewing all loan accounts and unpaid present entitlements in the context of asset protection issues.

As flagged, that particular client situation was also problematic for a further two reasons. Those reasons were:

1. Both the husband and wife were directors of the trading company, even though the wife had no active involvement in the business.
2. Both the husband and wife were shareholders in the trading company.

Aside from the fact that the trading company had a large asset on its balance sheet (being the loan or UPE), the wife was also personally liable (automatically) due to her directorship. This issue could have been avoided by simply resigning her as a director. There is a further related practical tip in this regard that all advisers should be aware of and I will explore this further within the next couple of weeks.

The second issue was that the husband (who had to be a director because of the level of involvement he had in the day-to-day operations of the business) personally owned shares in the trading company.

As a director, the husband carried personal liability and this means that his personal assets (including his shares in the trading company) were exposed.

Unlike the loan account issue, the strategies available in relation to the share ownership were ones that could only really be implemented subject to the bankruptcy clawback rules which (at a minimum) would delay any protection in relation to the shares until four years after divestment.

As usual, until next week.

Matthew Burgess

UPEs and an Asset Protection Trap

This last week I had a timely reminder that while those tax driven issues are critical, they are in fact not as important as the underlying loan or UPE itself.

In particular, I was helping an accountant who had a client whose trading company had been served with litigation proceedings. My role was to help review all structures in the group from an asset protection perspective, although as the litigation lawyer here politely reminded us (I do not get involved in any actual court work if I can avoid it), it was probably not the most opportune time to be doing the asset protection audit - hence Friday's Twitter posting 'in times of peace - prepare for war' www.twitter.com/mwb_mcr

In any event, while the overall structure of the group was fairly sensible, there was one, very large asset on the trading company’s balance sheet. That asset was a UPE (or if the ATO chooses to ignore industry feedback and finalises its draft ruling – a loan) owed to the trading company by a passive investment trust.

Despite bankruptcy clawback rules, there may be a solution for this client that we are currently exploring. The situation they have to address, now urgently, is of course less than ideal and was a timely reminder that all clients should be encouraged to undertake an asset protection 'audit' regularly.

For those interested, the particular solution potentially available to the client here was somewhat unique and fairly complex and I have added it to the list of ideas for presentation topics at a future Intensive or a Master Class by our firm.

Next week (or if another more relevant topic arises, within the next few weeks), I will relay one other difficulty with this client’s structure that is likely to not be able to be addressed – but could have been with some forward planning.
Matthew Burgess