One of the estate planning war stories we have shared regularly over the years involves how we assisted a man who was wanting to be cryogenically preserved for 350 years and the complex estate planning issues that arose.
One example of the type of issue to be considered - how do testamentary trusts assist when they can generally only last 80 years from the date of death (Answer: use an inter-vivos trust established under South Australian law, as there is no perpetuity period there).
One of the few reported decisions in this area is the UK case of Re JS (Disposal of Body) [2016] EWHC 2859 (Fam). As usual, if you would like a copy of the case please contact me - although please note the factual matrix is a particularly sad one involving a terminally ill young lady aged 14.
In granting the child's wish to undergo cryonic preservation, the court made a number of relevant comments in relation to body disposal, including:
A dead body is not property and therefore cannot be disposed of by will.
The legal personal representative of the deceased has the right to possession of (but no property in) the body and the duty to arrange for its proper disposal.
While the concept of 'proper disposal' is not defined, it is clear that customs change over time.
Under English law, there is no right to dictate the treatment of one's body after death - regardless of testamentary capacity or religion.
While the wishes of the deceased are relevant (and perhaps highly so), they are not determinative and cannot bind third parties nor the court.
Ultimately, the role of the court is not to give directions for the disposal of the body but to resolve disagreement about who may make the arrangements.
** for the trainspotters, the title here is riffed from a John Cale song, first recorded by Nico, namely ‘Frozen Warnings’.
Today’s post considers the above-mentioned topic in a ‘vidcast’
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below.
Asset protection can be described as a 3-legged stool for want of a better phrase. At the top of that stool, the absolute best layer of protection, and often you will hear specialists in the asset protection space talk about building firewalls.
The very best one is actually best practice. The easiest way to ensure that a person is not going to be exposed from an asset protection perspective is to make sure they don’t ever do anything wrong. Now I know that’s a really easy thing to say and really easy to write up on the whiteboard.
A lot more difficult to deal with in today’s environment particularly where if you look at the per capita numbers, the three most litigious areas in the world are California in the US, which is probably not too surprising, New South Wales and Queensland in that order. But it means that even if we are trying our level best to deliver on that best practice principle, there is every chance that something will go wrong at some point in time.
What are the other two components of this three-legged stool? The next one obviously is making sure you’ve got appropriate insurance in place.
If you’ve got a situation where you haven’t delivered on best practice for whatever reason, it might be a team member or employee, it could be in a moment of time where you weren’t quite across the issues you need to be across. The insurance doesn’t deliver.
The insurance I put an asterisk against, because the reality is that the insurance companies that are around still today aren't there because they pay out. They are around because they specialise in not paying out.
The third leg of the stool then is this: it all comes down to your structure.
As always thanks to the Television Education Network for the video content here.
** for the trainspotters, the title here is riffed from a Paul McCartney tune ‘House of Wax’.
Over the last few days, we have had some difficulties in progressing with the administration of an estate for a client where the deceased will did not set out his full name.
Although it sounds like a very pedantic issue, the courts are reluctant to allow wills to be granted probate unless there is complete certainty around a person’s name.
Some of the issues that need to be considered in this regard include:
1) If there is a nickname that someone uses all the time, this should ideally be mentioned in the will.
2) Ideally, the name in the will should exactly match government records (for example, on the birth certificate or marriage certificate for the will maker, and thus in turn, what the death certificate will state).
3) To the extent there is any inconsistency between government records, this should ideally be explained or clarified in the will itself.
4) If the government records do not match the will and this is known at the time of lodging probate, look to explain the inconsistencies proactively with the court when making the application.
** for the trainspotters the title of the post today is riffed from the late 1980’s and ‘Redhead Kingpin’
Last week, an adviser (on behalf of a client) questioned how binding the nomination of a guardian under a will for infant children is likely to be.
The simple answer is that in a practical sense our experience is that the nomination of a guardian is almost always followed. Arguably however this experience is nothing more than reliance on the well known legal principle ‘The Vibe’.
The strict legal answer is that the courts retain the final and absolute authority to determine who the guardian of an infant child should be with their only responsibility to determine what is in the best interest of the child.
Obviously, in a situation where both parents have died and there is a nomination of a guardian under their wills, the courts will normally put a significant amount of weight on this nomination. Despite the court’s inherent power, it is somewhat unusual to have a situation where the nomination under the will is not followed.
** for the trainspotters Dennis Denuto and his vibe legal principle need no introduction
Following last week’s post, the case of Berghan & Anor v Berghan [2017] QCA 236 is a stark reminder. As usual, if you would like a copy of the decision please contact me.
Broadly, the factual matrix was as follows:
1) A son had borrowed (either directly or via related entities) a six-digit sum from his parents over an extended period.
2) The total amount lent was by way of instalments on a number of separate occasions.
3) On every occasion, there was a confirmation from the parents that they intended the amount to be a loan.
4) In saying this however, no formal agreement was ever entered into.
5) There was also an extended delay between the point in time at which the loans were made and when the parents ultimately sought recovery of the loans.
In the initial court decision, it was held that despite the reference to the loans, the conduct of the parents was more analogous to a gift, and on this basis, there was no obligation at law (ignoring any moral argument) that the son had to repay the amounts.
While on appeal, the parents were successful in having the court confirm that the amounts were actually loans repayable on demand, the fact that there was a protracted legal case to achieve this outcome is a stark reminder to ensure that comprehensive legal agreements are implemented.
The court focused on the factual matrix to determine whether the transactions had objectively demonstrated that the payments were made by way of an oral loan agreement and were not gifts. Once it was determined that the advances were loans, it was confirmed that at law, in the absence of anything to the contrary, such loans are deeded to be at call and repayable on demand.
Finally, independent legal advice should be obtained by each party to ensure that the prospects of, particularly the borrower, arguing that the arrangements were in fact a gift is unsustainable.
** for the trainspotters the title of the post today is riffed from 1984 and Depeche Mode’s ‘People are People’
Arguably, in relation to any form of loan arrangement, it is fundamentally important that there are documents confirming the exact terms that apply.
Purely from an asset protection perspective, ignoring wider issues such as the commercial arrangements, estate planning and tax, the importance of documenting loan arrangements in writing cannot be underemphasised.
Similarly, it is critical to consider:
1) Regular repayments, even if only nominal, to ensure that the terms of the agreement remain on foot and acknowledged by the parties. In this regard, as profiled elsewhere in these posts, government legislation can automatically cause loans to become unrecoverable and statute barred.
2) Possibly implementing security arrangements in relation to the loan, for example, by way of mortgage or registering an interest under the PPSR.
3) Ensuring that each party to the loan receives independent legal advice. Particularly in relation to arrangements between family members, the failure to ensure each party receives independent legal advice can cause a loan to become unrecoverable on the basis that a court decides that the loan was in fact a gift.
The requirement for independent advice is arguably the most important aspect in family situations, such as parents lending funds to a child and their spouse.
If the child and spouse have a relationship breakdown it is likely that the funds advanced will be argued to be a gift by the estranged spouse, even if a loan agreement has been signed.
If the amount is treated as a gift it will be an asset of the relationship (not the parents as lenders) and thus unrecoverable by the parents.
** for the trainspotters the title of the post today is riffed from the early 1980’s and The Sunnyboys ‘Alone With You’, see them perform live!
As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a 'vidcast'.
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
On the basis that a picture tells a thousand words, we find the best way to explain a trust is via diagrams. Generally, we use triangles to represent a trust, rectangles for companies to keep things simple.
If pictures, symbols and diagrams are used then when you explore some of the technical issues with trusts it invariably makes it a lot easier. This is particularly the case when you then get into the detail of a trust document that run to dozens of pages.
If we, therefore, explore the creation of a trust arguably there are really only ultimately 4 key principles that need to be in place in order for there to be a trust relationship.
Many readers would probably argue very quickly, “Hang on, there’s a whole range of additional things that need to be satisfied.” On many levels that feedback is fair. However arguably the response is that, “Any other idea that you can come up with would be, I would argue, falls under one of the 4 headings.”
The first one is that you need to have legal ownership. Invariably, that’s the trustee. Invariably with a discretionary trust, that trustee will be a company. Its sole role is having the legal ownership of the underlying asset.
Where is that underlying asset? It's held within the trust, which is point two.
Without an asset, there is no trust relationship. It might again sound abundantly simple but it is a really key point.
Point three is that there are some rules. Invariably those rules will be set out in a trust deed, or a trust instrument. Generally this will be a written document.
Finally, the fourth point, is that there must be at least one beneficiary to receive entitlements, whether they be income distributions on the way through the life of the trust or capital distributions either interim or on the final vesting of the trust.
Within those 4 parameters, there are essentially no restrictions in terms of what can or can’t be done in relation to a trust structure.
The announcement in the 2018-19 Federal Budget that “the concessional tax rates available for minors receiving income from testamentary trusts will be limited to income derived from assets that are transferred from deceased estates or the proceeds of the disposal or investment of those assets” was for many a surprise.
As is usually the case with Budget announcements attacking perceived arbitrage revenue opportunities, the exact impact of the changes will revolve almost entirely around how the legislation is crafted - the 2017 Budget changes to the small business CGT concessions being a recent a high-profile example of what appeared at announcement to be a narrowly focused change that in fact has proven to be significantly wider.
Thus, advisers in the estate planning industry should likely be concerned as to what the Government means by suggesting that the mischief to be addressed is “that some taxpayers are able to inappropriately obtain the benefit of (a) lower tax rate by injecting assets unrelated to the deceased estate into testamentary trusts.’’
In turn, the Budget statement that the “measure will clarify that minors will be taxed at adult marginal tax rates only in relation to income of a testamentary trust that is generated from assets of a deceased estate (or the proceeds of the disposal or investment of these assets)” also has the distinct prospect of having much wider consequences than might otherwise be expected.
Excepted trust income rules currently
Previous posts have explained that pursuant to Div 6AA of the ITAA 1936 and, in particular, subs 102AG(2)(a)(i), excepted trust income is the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil.
Where income is excepted trust income and it is distributed to minors, those minors are taxed as adults, instead of the normal penal rates that otherwise apply to unearned income.
Currently, subss 102AG(2)(a)(i) and 102AG(2)(d)(i) of Div 6AA make it clear that the provisions are not limited to income derived from estate assets.
Importantly, the subsections only prescribe how the trust estate is deemed to have arisen and do not place any limitations on the management of the trust estate, or on the assets which the trust may hold.
The fact that estate assets forming part of the trust estate may be realised and others may be acquired has no implications on the validity of a testamentary trust, nor the ability of the trustee of a testamentary trust to treat the income as excepted.
Similarly, if the trustee decides on behalf of the testamentary trust to borrow money and acquire assets which earn income, then it has generally been accepted that Div 6AA applies to that income.
Current limitations
Section 102AG(3) currently contains an exception for non-arm’s length arrangements. In particular, it provides that if any 2 or more parties to:
the derivation of the excepted trust income mentioned in subsection (2); or
any act or transaction directly or indirectly connected with the derivation of that excepted trust income, were not dealing with each other at arm’s length in relation to the derivation of income, or in relation to the act or transaction, the excepted trust income is only so much (if any) of that income as would have been derived if they had been dealing with each other at arm’s length in relation to the derivation, or in relation to the act or transaction.
Furthermore, s 102AG(4) provides that an amount will not be treated as excepted trust income if it was derived by a trustee as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income.
Furse’s case
The Trustee for the Estate of the late AW Furse No 5 Will Trust v FCT (1990) 21 ATR 1123 (“Furse”) is one of the few reported decisions dealing with Div 6AA.
In this case, a will made in July 1974 established multiple testamentary trusts, each with capital of $1 after the testator passed away shortly after making the will.
A trustee was then appointed over one of the testamentary trusts and proceeded to borrow small amounts of money and acquire a unit in a unit trust.
The ATO did not consider the income from the unit as excepted income and argued that the income derived by the trustee was not assessable income of a trust estate that “resulted from a will.”
Justice Hill rejected the ATO’s argument and held that it was only necessary that the parties be dealing on an arm’s length basis, and that it was not necessary that they also be arm’s length parties.
The Court noted that provided the trust estate was created by a will and the arm’s length test was satisfied, then any income of a testamentary trust would be considered as excepted trust income.
What might new rules attack?
Taken at face value, the new rules will simply create an obligation on trustees to track the source of assets in a testamentary trust and ensure the income to be treated as excepted trust income is sourced from assets passing directly to the trust from the willmaker.
In theory, this type of probation would be similar to what is currently the case with post death testamentary trusts (often referred to as estate proceeds trusts) set up to comply with s 102AG. Indeed, this style of tracking mechanism is analogous to that which trustees are meant to undertake in relation to ensuring trust assets vest within the perpetuity period.
Thus, any further assets gifted or settled on a testamentary trust, other than by the willmaker, would be segregated from excepted trust income purposes.
Depending on the drafting approach adopted, however, some areas that may be impacted (potentially unintentionally) by the new rules include:
Assets that form part of a testamentary trust that are not owned outright by the willmaker (that is, are subject to existing borrowings) – what happens as the level of debt changes?
Even if assets that initially form part of the testamentary trust are debt free - what are the consequences if further assets are acquired using the initially contributed assets as security?
If an asset class at the date of death of the willmaker is cash at bank – does the tracing of the assets acquired continue indefinitely?
If assets acquired using borrowings no longer generate access to excepted trust income – is it appropriate that tax laws essentially directly impact the investment decisions of trustees?
If an asset acquired is itself tax advantaged (one obvious example in that regard being insurance bonds) - how will the proceeds from the investment be treated?
In relation to shares - how will dividend reinvestment arrangements be treated?
How will assets that are acquired by the testamentary trust as a consequence of the willmaker’s death, however, are not directly from the willmaker, be treated – for example will superannuation death benefit payments and insurance policy payouts to an estate be considered to be legitimate capital from which to source excepted trust income?
Particularly for those in life spouse relationships, it is common for testamentary trusts to be established under each person’s will and for there to be a subsequent merger of the trusts some years later – what will be the approach in relation to wealth that passes to a testamentary trust sourced from another testamentary trust?
In conclusion: some further questions
Testamentary trusts (and, in turn, access to excepted trust income) only arise because someone has died.
Traditionally, in Australia, death has not been seen as a tax planning strategy.
The 2018 Budget announcement arguably changes the position in this regard.
If there is, in fact, widespread abuse of the existing rules in this area, it must be asked why there is essentially only one reported case in the area that is now over 25 years old and remains unchallenged, and in turn what aspects of the offensive arrangements are not already addressed by s 102AG itself or, in the alternative, Part IVA.
The above post is based on an article originally published in the Weekly Tax Bulletin.
** For the trainspotters, ‘Not dead yet’ is a quote from the ‘Bring Out Your Dead’ scene in Monty Python’s ‘The Holy Grail’.
As has been circulated in a number of forums, we are very excited to confirm View’s strategic partnership with NowInfinity.
Thank you for the positive feedback received already.
View has been on a mission to revolutionise access to quality legal advice in a range of highly specialised areas - namely estate planning, structuring, tax, trusts, asset protection, superannuation and succession planning.
Amongst an array of innovations our platform was one of the first to provide 100% upfront fixed pricing with a service guarantee. We have passionately strived to develop products that provide collaborative pathways with other professionals, in the process creating over 90 online and automated legal solutions.
Leveraging technology has been the enabler in us creating a seamless ecosystem in these specialisations.
Indeed, it has allowed us to create an ‘and’, not ‘or’ platform. That is, we have been able to continue to deliver bespoke tailored solutions for high net worth individuals and business owners, while simultaneously using the knowledge we have gained to build a disruptive solution for the majority of the market.
The centrepiece of our success to date has been the support of the adviser network across the country, given that our entire model is founded on advisers facilitating each solution, only involving View where it is clear that we can add value on a wholesale or business to business basis.
Similarly, NowInfinity has been on a mission to profoundly change the way businesses are functioning, workflows are implemented and documents are created, stored, updated and managed across the entire financial services and related industries.
Founded at around the same time as View, NowInfinity already has an impressive track record of launching numerous cutting-edge products.
The opportunity to combine the two businesses and deliver holistic and integrated estate planning solutions we believe is compelling on a range of levels, particularly as it offers accountants, financial advisers and other lawyers a truly differentiated facilitated model.
More context about the combined platform will be provided in our upcoming half and full day Estate Planning Roadshow being held in Sydney, Melbourne, Adelaide and Perth (the Brisbane event was last week).
Finally, for those who had not otherwise seen the press release confirming details of the combined group, under the heading ‘Powerhouse disruptors join forces: NowInfinity and View Legal’ it is set out in full below.
Two powerhouse disruptors – cloud-based document and entity management platform NowInfinity, headed up by fintech entrepreneur Amreeta Abbott, and groundbreaking law firm View Legal, headed up by innovator and recognised expert in estate planning and tax law, Matthew Burgess, have joined forces, merging the digital business units of each firm and forming a strategic partnership on legal services.
“The partnership and merger provide accountants and bookkeepers, financial advisers, SMSF specialists and adminstrators and legal firms with a whole new level of solutions,” said NowInfinity CEO, Amreeta Abbott. “It enhances the NowInfinity platform, enabling members to efficiently create, collaborate and manage specific governance and life events for their clients.”
Ms Abbott said View Legal is a well-recognised legal firm that truly understands what matters to end clients. “View Legal’s team of lawyers, their processes and their non-traditional approach will also make legal advice more accessible to NowInfinity members and inspire them with the confidence to offer cradle-to-grave advice.”
Over the past four years, NowInfinity has delivered huge cost efficiencies via data automation and systems integration. “This has been magnified by the recent release of the NowInfinity Entity Management Suite, which provides corporate compliance, including ASIC lodgements; trust management and SMSF Compliance.”
Similarly, View Legal has created a disruptive and innovative way to offer legal services, with a particular focus on tax and estate planning by, amongst other things, introducing a fixed pricing model, actively collaborating with other professionals and creating an array of online and automated solutions.
Ms Abbott said that together, NowInfinity and View Legal will continue to innovate with the objective of delivering technology and services that underpin the rapid and required change within the accounting, financial advice and legal industries.
“First cab off the rank will be a new estate planning solution designed to eliminate the traditional barriers that have previously limited end-to-end client advice between accountants, financial advisers and lawyers,” she said.
Director of View Legal, Matthew Burgess said, “Leveraging technology to allow advisers to facilitate client solutions is the centrepiece of the View platform. Our partnership and merger with NowInfinity, the leading provider in this space, is exceptionally exciting and exemplifies the true meaning of synergy.”
About NowInfinity
NowInfinity is a technology company with a progressive and dynamic cloud based documentation and entity management platform solution with features enabling rapid company formation with ASIC, compliance tools and legal document templates for entity establishment and management. The solution is used by accounting, bookkeeping, financial advice, SMSF specialist, super administration and legal firms. It provides users with legal templates, entity registers, corporate compliance administration and fee management, SMSF compliance, trust management, document collaboration and data integrity via its integrations with but not limited to, ASIC, XERO, Microsoft Dynamics, salesforce.com, Class and electronic signatures – DocuSign. About View Legal
View Legal is built around the disruptive mantra of being a law firm that friends would choose. To achieve this vision, View Legal has fundamentally and radically revolutionised access to quality legal advice, in the highly specialised areas of structuring, tax, trusts, asset protection, business sales, estate and succession planning.
Using technology as an enabler, View Legal has taken each of the tenets of the traditional delivery model – and turned them on their heads, with guaranteed up front fixed pricing replacing timesheets, entirely virtual office space replacing fancy city premises and active collaboration with advisers nationwide replacing the incumbent silo mentality.
