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:

I want it all** - Duties of SMSF trustees and yet another case concerning death benefit payments

In recent years the number of reported decisions in relation to death benefit payments by SMSFs have increased significantly. This is particularly so given that for many years the only substantive decision was from 2005, namely the case of Katz v Grossman [2005] NSWSC 934.

The decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65 provides another example of the types of issues that need to be considered in this area, and is particularly interesting given that there were some aspects analogous with the Katz decision, and yet the court reached the opposite conclusion.

Briefly in the Marsella case:

1. the deceased was the sole member and a co-trustee with her daughter of an SMSF (similar to Katz);
2. while historically a binding nomination had been signed, it had lapsed; and in any event was invalid as it nominated the member's grandchildren (who were not dependants as defined under the superannuation laws);
3. the daughter appointed her husband as the co trustee following her mother's death (similar to Katz);
4. the deceased's will provided certain benefits to her second husband. All remaining assets under the estate then passed equally to her daughter and her son (similar to Katz);
5. the daughter and her husband resolved to distribute 100% of the death benefit to herself ignoring her brother (again similar to Katz) and her step father.

Unlike Katz, where the daughter was entitled to retain the entirety of the death benefit, in Marsella the payment was held to be invalid and the daughter and her husband were removed as trustees of the SMSF.

The court listed a number of reasons for reaching this conclusion, including:

1. the daughter acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties and the way in which the superannuation laws are structured in this area;
2. the daughter acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict;
3. as a result she was not in a position to give real and genuine consideration to the interests of the dependants;
4. the above conclusion was supported by the outcome of the exercise of discretion, which itself was contrary to one of the daughter's key arguments - that being that her mother wanted the daughter and the brother (and the grandchildren) to benefit from the death benefit; and yet she paid 100% of the benefit to herself;
5. ultimately, the court believed that the outcome of the daughter's decision was ‘grotesquely unreasonable’ which helped support the conclusion that the discretion was never properly exercised, or was exercised in bad faith;
6. thus, the fact that the daughter was within the class of potential objects did not negate her duty to exercise the power in good faith, upon real and genuine consideration, and for proper purposes.

The above conclusions were upheld on appeal, and that decision will be explored in next week’s post.

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

** for the trainspotters, an obvious choice, with Queen and 'I want it all'. 

 View here:

Read the deed … another one (bites the dust)**

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.

The following case study falls under the mantra ‘Read the Deed’.

Here, the factual scenario centred on a standard family trust.

However, when I say ‘standard’, I should put an asterisk. This is because we thought it was standard and the accountants that had sent the job in to us had been operating for about 10 years on the basis that it was a ‘standard’ family trust.

Under the trust deed, there was a principal (often also referred to as an appointor). In other words, there was a person who had the right to hire and fire the trustee.

As is well understood, in some trust instruments where there is a principal or an appointor, there is then under the power to vary a requirement that that principal or appointor consent to any purported variation before the trustee is permitted to proceed with the proposed variation.

Here, arguably, re-enforcing the assumption that the deed did seem to be a standard family trust, pursuant to the variation power, the principal was not required to consent to any variation.

Importantly, there was a variation that had been done about 12 years ago, which was two years before the current accountant became involved. Under the variation, there was the nomination of a bucket company. In other words, the nomination of a corporate beneficiary to help cap the tax rate at 30 cents – a standard strategy.

As part of a review and updating of the trust deed, we, in conjunction with the accountant, actually sat down and read the entire trust instrument.

What we discovered was that the second to last clause in the deed, buried with the general powers (for example, powers about the power to lend, the power to invest), was a clause that had a nebulous title of ‘Further Provision’.

The Further Provision clause was said to apply in relation to any exercise of the power to vary that resulted in the nomination of a new beneficiary.

The clause mandated that the trustee must obtain the principal’s consent before relying on the variation power.

The relevant deed of variation however did not have the principal’s consent. There was therefore 12 years of distributions to the bucket company, and every single one of those was void for the failure to comply with the trust instrument.

The only real solution, with the aid of hindsight, is to ensure in the future, always - read the deed, read the deed, read the deed, read the deed.

As always thanks to the Television Education Network for the video content here.

** for the trainspotters, the title here is riffed from the Queen song ‘Another one bites the dust’.