Shooting down** the difficulties with ‘fixed’ testamentary trust wills

As mentioned in last week’s post, it is possible to gain access to the excepted trust income provisions under the Tax Act where a will provides for the assets to be held on trust for infant children until they reach a certain age.

It is important to note however that, as compared a comprehensive testamentary discretionary trust, there can be a number of difficulties with the more basic approach including:

1. The assets of the trust will normally pass absolutely to the child beneficiaries on them attaining a certain age. Often this age will automatically be 18.
2. There is no real flexibility in terms of distributions of income or capital at any point during the structure. This can cause a number of difficulties particularly in relation to asset protection and tax planning.
3. The structure is very inflexible in terms of future estate and succession planning objectives and requires that the child beneficiaries implement comprehensive estate plans for themselves as soon as they gain entitlement to the assets.

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 Stone Roses song ‘Shoot you down’.

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This is the one** important case on language you need to know this week (the 'income and profits' decision)

Following on from last week’s post, another case that applied some aspects of the reasoning in the decision profiled last week is Wilson & Anor v Chapman & Anor [2012] QSC 395.

Broadly the background was as follows:

1. Under the terms of a will, a beneficiary who was essentially a life tenant of a trust under the will was entitled to the ‘income and profits’ of the assets of the trust;
2. On the basis that the use of the word ‘profits’ must have meant the willmaker wanted the beneficiary to receive more than simply income, the court considered whether both realised and unrealised capital gains fell within the concept;
3. Acknowledging that for tax purposes a realised capital gain is effectively treated as income, the court also held that at least under the terms of the trust in this will, ‘profits’ included the net income and the net realised capital gains, but not unrealised capital gains.

Practically, a key reason why ‘profits’ did not include unrealised capital gains was the fact that it would be impossible to determine at what points to make the calculation and the trustee had no ability to distribute the unrealised gains under the trust instrument. Similarly there was nothing that would allow the trustee to factor in unrealised losses.

Weight was also put on the fact that the will was drafted by a lawyer so the inclusion of the word ‘profits’ must have been due to the willmaker’s intention to provide something more than only income to the life tenant.

More generally the case is a reminder of the need to ensure care is taken in drafting any will, particularly in relation to the interplay between tax and trust law principles.

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 Stone Roses song ‘This is the one’.

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Estate Planning and Beneficiary Loan Accounts: Fools gold**

The decision in Clark v Inglis [2010] NSWCA 144 remains a key case in relation to the interplay between beneficiary loan accounts and estate planning.

Broadly the background was as follows:

1. Dr Inglis established a trust in 1982 (Trust) with himself, his four children from his first marriage, his one child from his second marriage and his second wife Helen Margaret Inglis (Helen) as potential beneficiaries;
2. A company named ‘Inglis Research Pty Ltd’ acted as the trustee;
3. The main asset class of the Trust was a listed share portfolio that for many years was generally carried in the accounts of the Trust at cost;
4. Many years after the establishment of the Trust, and a change in the method of preparing the trust accounts, ‘income’, although unrealised, from the increase in value of shares was distributed to various beneficiaries creating (in relation to Dr Inglis) a credit loan account of more than $1 million;
5. Under Dr Inglis’ estate plan his personal wealth was gifted under his will to Helen, while control of the Trust and its assets was given to the children of his first marriage.

Among other issues in contention following the death of Dr Inglis, the children from his first marriage challenged the legitimacy of the steps that created a credit loan to his benefit from the Trust.

The Court held that while the accounting approach was perhaps imprudent, it was permissible under the trust deed and there was nothing under the accounting standards that prevented the arrangements.

In this regard it was noted that the trustee had the specific right under the trust deed to re-categorise income and capital and distribute unrealised income in its discretion.

This meant that there had been no breach of trust by the trustee and the debt owing by the Trust to the estate was enforceable and effectively an at call loan, repayable on demand to Helen.

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 Stone Roses song ‘Fools Gold’.

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Challenging a deceased estate - do not assume that love spreads** equally

One mantra in estate planning is the concept that beneficiaries should be treated fairly - however this does not automatically mean equally.

The decision in Firth v Reeves [2019] VSC 357 provides a stark example in this regard.

Briefly the factual matrix involved the following:

1. A mother with 2 daughters gifted one third of her estate to one daughter and two thirds to the other;
2. The daughter who received one third challenged the estate seeking a one half share;
3. At the date of the mother's death the estate was worth around $5M, by the date of the hearing the estate was valued at over $8M (meaning that the one third share was in dollar terms worth more by the hearing than a one half share at the date of death).

In rejecting the daughter's challenge and leaving her entitlement at one third the court confirmed:

1. Taking into consideration all relevant factors and surrounding circumstances, including the size and nature of the estate and the contingencies an estate of that size may warrant being provided for, there was nothing to suggest that the deceased failed to make adequate provision for the challenging daughter's proper maintenance and support.
2. While the challenging daughter may have had an understandable sense of grievance or hurt as a result of her mother’s unequal disposition of the estate, she did not establish any need or other consideration that would warrant further provision, even where (as here) the estate was relatively large.
3. On the contrary, it appeared that the existing one third provision would be more than sufficient to meet all needs that the challenging daughter identified.
4. A challenge against an estate based solely on breach of moral duty, without demonstrating need, will fail.
5. Furthermore, a willmaker is not obliged to treat their children equally, nor is the provision given to one child a measure of how another child who seeks provision should be treated.

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 Stone Roses song 'Love Spreads'.

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