(Don’t ask me) why do trusts have vesting dates? **

Arguably trust vesting as a concept is an area of the law where you can ask 4 different lawyers for a view and you will get 5 different answers as to where it actually came from.

The theory I enjoy the most and the one that probably resonates most closely to what is possibly the truth is that, historically, trusts or as known in early English law, 'uses' could last forever.

In other words, trusts were the same as the modern-day company. There was no ending date; a trust was a structure that could last in perpetuity.

The story goes that there were forms of death duties back in the early English law. What was happening was that wealthy families would arrange for an initial transfer of assets into a trust on death.

While, there would be tax payable on that initial transfer of assets into the trust (that is, the death duty) once the asset was inside the trust, it was effectively protected from tax forever.

In other words, from a tax perspective, it was sheltered because there would be no further transfer of the asset on later deaths and therefore no further revenue to the monarchy.

The allegation was that King Henry VIII (after it took the revenue authorities about a hundred years to work it out) eventually was unimpressed that the revenue was drying up.

The reason that tax collections were drying up was because all the wealthy families were putting their assets into trusts and then effectively just skipping the death tax and making it an elective tax for later generations.

The solution, as is often the case in the structuring area, was to create the revenue outcome by imposing a limit on the life span of trusts.

Hence, you’ll see in many trust instruments, particularly earlier trust instruments, this idea of the 'life in being' of King Henry VIII or some other member of the royal family.

This is because the rule imposing the limit was set as the life in being as at the date of establishment of the trust plus 21 years. In most states (other than South Australia, which effectively has no statutory limit) the life in being approach has been replaced with a maximum period of 80 years.

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

** For trainspotters, ‘Why’ is song by Annie Lennox.

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Seven dwarves, pizzas for the homeless and pre-chopped broccoli florets** – taking the detail to a whole new level

Following last week’s post, where I mentioned that, particularly in New South Wales, it is often the case that trustees are expressly prohibited from being beneficiaries of discretionary trusts there were a number of questions relayed to me. Thank you also for the suggestions as to what hair product Van Halen would have likely demanded at the height of their fame in the mid 1980s.

The key reason the ‘trustee can’t be a beneficiary’ prohibition is so prevalent in New South Wales is that under the stamp duty laws there, in order for a trustee to be permitted to be appointed (particularly where there is a change of trustee of a pre-existing trust), that trustee must not be a potential beneficiary of the trust.

Obviously, there are a range of asset protection related issues in this regard as well. At the centre of these issues is the fact that a trustee is directly liable for misadventures of the trust. As a general rule, the maximum value of a trustee company from time to time should never be more than a nominal amount – ie $2. A trustee company receiving distributions as a corporate beneficiary will breach this rule immediately.

Importantly however, many trust deed providers that offer deeds nationally, will incorporate the prohibition on a trustee being a potential beneficiary, even for trusts that do not otherwise have any connection with New South Wales.

This prohibition will often be weaved into a trust instrument in a less than obvious manner. Unless there is a pedantic approach to reviewing the terms of a trust deed the prohibition will be missed.

In summary – yet another example of the importance of the mantra ‘read the deed’.

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

** for the trainspotters, the singer of the theme song of ‘Trainspotting’, being ‘Lust for Life’ Iggy Pop allegedly had a contract rider requiring seven dwarves, pizzas to give to the homeless, and pre-chopped broccoli florets (to make them easier to throw away).

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They're 18, they’re beautiful and they're no longer ‘yours’

One regularly asked question in estate planning is ‘do my kids need estate planning documents?’.

The one word answer is – absolutely.

The more detailed answer to provide some context is as follows:

1. Assuming a person otherwise has mental capacity, they are entitled to implement estate planning documents on reaching the age of majority (i.e. 18 years).
2. The main exception to this rule is that a married person may implement estate planning documents, even if they have not reached the age of majority.
3. If a person has reached the age of majority, but does not have estate planning documents in place, an array of complications can arise.
4. If the person dies, then their estate will be administered in accordance with the intestacy rules (previous posts have looked at various aspects of these rules, please contact me if you would like access to these and can not easily locate them).
5. Invariably, the intestacy rules trigger a ‘triple whammy’ – significantly more costs, significant time delays and often a distribution that does not reflect the wishes of the deceased.
6. Where a young adult loses capacity, the adverse consequences for the family can in some cases be even more traumatic than a person dying intestate.
7. In particular, without an enduring power of attorney, it is essentially a government department that has the default right to make the decisions on behalf of the incapacitated person.
8. While there is a statutory process that allows interested parties (for example, parents of the young adult) to have themselves appointed, this again invariably causes a ‘triple whammy’ of increased costs, increased delays and the risk that the preferred people are not in fact appointed.

Unfortunately, we have seen a myriad of horror stories involving young adults without any estate planning arrangements in place, for example:

1. A 21-year-old who died with over $1 million in assets. These assets were as a result of being a member of multiple superannuation funds that she had joined working in a range of casual positions during university. Each fund had automatic insurance, regardless of the member balance, that totalled over $1 million. 50% of these entitlements went to the lady’s estranged father whom she had not even spoken to for over 15 years.
2. A 19-year-old man who had been gifted over $300,000 by his parents to help acquire his own unit. On his death the unit passed to a lady who claimed to be his de facto, but whom the parents had never in fact met.
3. An 18-year-old man who was left stranded in an incapacitated state in Spain following an accident at the ‘running of the bulls’. As his parents were not appointed as his enduring attorney, they had no legal authority recognised by the Spanish authorities.

As a separate comment - the popularity of recent posts leveraging pop references has been used again, with a song, the most popular version arguably recorded by Beatle’s drummer Ringo Starr.

** For the trainspotters, the title of today's post is riffed from the song ‘You’re sixteen, you’re beautiful and you’re mine’.

View arguably the most popular version recorded by Beatle’s drummer Ringo Starr here:

Keith Richards, estate planning, body disposal and keeping it Respectable**

Last week’s post mentioned Keith Richards and it reminded me of one death-related story that Keith Richards is famous (or perhaps more accurately infamous) for. In particular, the way that Keith Richards (allegedly) disposed of his father’s ashes, as profiled in more detail below.

Certainly, one aspect of estate planning that often receives less attention than many other areas is body disposal.

Ideally, a will maker’s wishes in relation to body disposal should be communicated to immediate family members or the executor of the estate.

A memorandum of directions, letter of wishes or similar style document is often the best mechanism in this regard.

At least in western culture, the three most traditional body disposal approaches are:

1. burial;
2. cremation;
3. burial at sea.

Some alternative approaches include the following, which can all be accessed via Dr Google:

1. Diamonds
2. Mummification
3. Cryogenically frozen
4. Coral reefs
5. Composting
6. Deluxe cardboard box
7. Vinyl records
8. Firecrackers
9. Snorting (ie the Keith Richards play; note - the mixing of ashes with illicit substances is generally regarded as optional)
10. Smoking – as a variation on the snorting idea, friends of rap singer Tupac allegedly mixed his ashes with marijuana and smoked them
11. An hour glass
12. Glass orb
13. Snow Globes
14. Space flight (as made famous by James Doohan, the actor who played Scotty in Star Trek, whose ashes were sent into space on a Elon Musk SpaceX rocket launch)
15. Shot out of a cannon – Hunter S. Thompson style, perhaps helping deliver on his famous comment that:

‘Life should not be a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside in a cloud of smoke, thoroughly used up, totally worn out, and loudly proclaiming "Wow! What a Ride!”’

** For the trainspotters, the title of today's post is riffed from the Rolling Stones song 'Respectable'.

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Pre-nups, (cosmic) pole dancers** and PI insurance

The saga involving swimmer Grant Hackett suing two law firms for negligence is a high profile reminder of the difficulties in relation to 'pre-nups'.

Broadly the Hackett matter centred on allegations that the relevant law firms failed to properly advise him to create a binding financial agreement.

In particular, Hackett argued that the original agreement entered into before marriage failed to comply with the strict legal requirements under the Family Law Act. When the agreement was later updated after the birth of the couple's twin children the alleged difficulties with the agreement were not remedied.

In many respects the issues here are analogous to the relatively well known 'pole dancer' case of Wallace v Stelzer [2014] HCATrans 135 - so named because the husband met the wife at what was described as 'an adult entertainment venue' where the wife was working as a dancer. As usual, if you would like copies of the relevant decisions please email me.

At the heart of the pole dancer case was the husband's desire to avoid the terms of the binding financial agreement that saw him liable to pay $3million dollars to his former wife when their marriage ended after only 18 months.

Some of the arguments raised included that the lawyers failed to discharge their duty to properly explain the terms of the agreement - an allegation that would have seen the lawyers potentially liable in negligence if it had been held to be correct.

It was also argued that the agreement was void in relation to some technical aspects required to be complied with under the Family Law Act and that attempted legislative fixes to the rules were also invalid, in part because the changes purported to be retrospective.

While it was ultimately held that the agreement was effective and the legislative changes were valid the extent of the litigation has seen many law firms, even those that specialise solely in family law, choose to no longer prepare binding financial agreements.

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 T-Rex song 'Cosmic Dancer'.

View a version by Nick Cave here: 

Refinancing rules: ensure you & your client feel good**

One issue that arises regularly in relation to the taxation of trusts is the incurring of interest expenses by a trustee for external borrowings used to discharge an obligation to pay a monetary distribution to a beneficiary such as a credit loan or unpaid present entitlement (UPE).

The Tax Office has confirmed that the interest expense incurred in this style of situation will not be automatically deductible, even if the borrowed funds allows the trust to retain income producing assets.

Instead, in order for the interest to be deductible, the borrowings must be shown to be ‘sufficiently connected’ with the assessable income earning activity.

The leading case in this area is that of FC of T v. JD Roberts & Smith 92 ATC 4380 (Roberts & Smith). The principles in that decision were further expanded on in the Tax Office Ruling TR 2005/12.

Based on the principles outlined in the Ruling and Roberts & Smith, it is clear that whenever a trust is refinancing any existing loans or UPEs care should be taken to ensure there is the requisite connection to income producing activities; as opposed to, for example, making distributions to beneficiaries.

The key criteria is whether it can be shown that the objective purpose of the trustee in borrowing the funds is to refinance the outstanding amount, however the Tax Office’s position is that each situation will depend on the particular facts of the case.

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 Gorillaz song ‘Feel Good Inc’.

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Letting little fury things ** like the tax tail wag the dog

Given the theme of ‘famous tax cases’ in recent posts, it seemed appropriate to revisit the tax aspects of the case involving the family of famous retailer Solomon Lew (Lew), in Solomon Lew & Ors v Adam Priester & Ors [2012] VSC 57.

Broadly the situation was as follows:

1. Based on tax advice about an impending tax change (which was ultimately never implemented), certain distributions were made by a trust ultimately controlled by Lew to each of his children
2. The potential change was proposed in the late 1990’s and was known as the ‘profits first rule’ which would have seen a mandatory requirement that any distribution from a trust would presumed to be of profits and therefore taxable.
3. 2 of Lew’s children some years later were caught up in (separate) property settlements following the breakdown of their respective marriages.
4. The former spouses claimed the outstanding loans were assets of Lew’s children and therefore able to be subject to orders of the Family Court.
5. Lew argued that his children did not have any beneficial interest in the loan accounts due to agreements entered which resulted in the amounts in fact being held by the children on a trust for Lew and his wife Rose.

While the exact outcome as to whether the loans were in fact assets of the children appears to be unknown (it is assumed the cases must have settled out of court or the decisions de-identified), the fact that the former spouses were able to mount the arguments is a reminder that the wider commercial implications of any tax planning strategy should always be considered carefully.

Similarly, in the high profile case of Cardaci v Filippo Primo Cardaci as executor of the estate of Marco Antonio Cardaci [No 5] [2021] WASC 331, in a situation where historically payments to a beneficiary were categorised as distributions of capital or income, a subsequent unilateral attempt by the trustee to commence treating the amounts as loans was rejected by the court.

This was ultimately on the basis that the trustee had not adequately or sufficiently explained how or why the change in characterisation occurred, nor was there any express or implied loan agreement in relation to the payments.

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 Dinosaur Jnr song ‘Little fury things’.

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Yeah right** - because before Rinehart, there was Murdoch

While the Rinehart decision received significant attention in relation to many issues, including the tax consequences of ending a trust, the tax principles of another famous case are worth remembering, namely the decision in Murdoch v Commissioner of Taxation [2008] FCAFC 86.

Broadly the situation was as follows –

1. Dame Elisabeth Murdoch (Dame) had a life interest in the income of several family trusts settled by her husband in the 1930s.
2. The remainder interest was held by one or more of the Dame’s children or grandchildren.
3. For many years, the trustee of the relevant trusts was effectively the Dame, her son Rupert Murdoch and a third party.
4. It was however noted that the Dame was likely influenced in her role to accept the investment decisions due to the very strong personality of her son Rupert.
5. A Reorganisation Agreement under which Dame surrendered her life interests under each of the Trusts were entered into, with the consideration a lump sum payment of more than $85m.
6. The payment was couched as releasing the trustees from potential claims for breaches of trustee duties.
7. In particular, the investment policy that had been adopted (apparently at Rupert’s strong recommendation) was overwhelming weighted to shares in Murdoch family companies that produced capital growth, but comparatively small dividend income. This investment approach essentially benefited the remainder beneficiaries, at the expense of the Dame as life tenant.
8. The payment was said to be to help avoid the need for litigation amongst the family.
9. Around 65% of the $85m was then gifted by the Dame to Rupert and charities she was associated with.
10. The payment was funded by the sale of pre capital gains tax shares and was essentially received tax free by the Dame.

In confirming the extremely onerous fiduciary duties of a trustee (see the post from last week) the court confirmed that Rupert had breached his obligations, even though there was no lack of good faith or particular damage to the Dame.

The court relied particularly on the principles of the case Phipps v Boardman [1967] 2 AC 26, which held that this style of claim was not for a reimbursement of the income shortfall.

The payment was therefore on capital, not income, account as a claim against the profit made by Rupert and in essence a constructive trust over assets of the trust.

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 Dinosaur Jnr song ‘Yeah, right’.

Listen here:

SMSFs and non-arm’s length income: right here; right now**

One issue to remember with SMSFs is that any income derived by an SMSF as a beneficiary of a trust can be subject to penalty tax.

In particular, income earned other than through holding a fixed entitlement, is non-arm’s length income, and will be taxed according to the non-arm’s length income provisions of the Tax Act at a flat rate of 47%.

Income derived by a superannuation fund as a beneficiary of a fixed trust will also be non-arm’s length income if:

1. the fund acquired the entitlement under a scheme, or the income was derived under a scheme, the parties to which were not dealing with each other at arm’s length; and
2. the amount of the income is more than the amount that the fund might have been expected to derive if those parties had been dealing at arm’s length.

To avoid the impact of the non-arm’s length income rules, it is therefore vital for SMSFs to ensure that:

1. no distributions are made to a SMSF from a discretionary trust; and
2. where a SMSF owns units in a unit trust, the unit trust is a fixed trust for tax purposes.

From a planning perspective, given the Medicare and other surcharges, there may in fact be a saving on overall tax payable by triggering the non-arm’s length income rules by (for example) distributing from a family trust to a SMSF and capping the tax rate at 47%.

It is also relevant to note that the non-arm’s length income rules may apply where a SMSF allows its fixed entitlement to remain as an unpaid present entitlement, as this generally does not reflect an arm’s length arrangement.

When allowing unpaid present trust entitlements in favour of a SMSF, it is therefore necessary to ensure that interest on those unpaid distributions is paid by the trust at market rates as would be the case if the SMSF and trust were dealing with each other at arm’s length.

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 Fatboy Slim song 'right here, right now’.

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(out of) ‘Control’** of family trusts

Under the capital gains tax small business concessions, what amounts to ‘control’ of a discretionary trust is an important issue. 

In this regard, a key aspect relates to the concept of whether the trustee of a trust ‘acts, or could reasonably be expected to act, in accordance with the directions or wishes of another person or entity’.

Arguably, the leading analysis of these rules is in the case of Gutteridge v Commissioner of Taxation [2013] AATA 947.

Briefly, the case involved sale of assets by the corporate trustee of a traditional family trust (Trust).

The sole director and shareholder of the corporate trustee was Ms McKenzie, who also controlled another company (Company).

The principal of the Trust was as third party professional adviser to the family (Mr Coffey), who provided evidence that he would always follow any directions from Ms McKenzie’s father (Mr Gutteridge) including, if necessary, removing a trustee from that role. In turn Mr Coffey confirmed he would disregard any instructions from Ms McKenzie that were contrary to those provided by Mr Gutteridge.

The Tax Office denied access to the small business concessions on the basis that Ms McKenzie controlled both the Trust and Company.

The court held however that the Trust ultimately acted in accordance with the directions of Mr Gutteridge and therefore Ms McKenzie did not control it.

The Trust was therefore able to access the small business concessions.

The case ultimately reinforces that the rules are highly dependent upon the factual matrix of each case.

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 Chemical Brothers song 'Out of control’.

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Does a scribble** amount to the acknowledgment of a debt?

Following on from last week’s post, a further issue that often arises in the context of division 7A is whether the accounts of a debtor company can be enough to create an acknowledgement by a debtor.

In the case mentioned in last week’s post (VL Finance Pty Ltd v Legudi [2003] VSC 57), an argument that the annual company return of the creditor company was sufficient to create the relevant acknowledgment was rejected even though the returns were signed by the directors who were debtors and when read with the accounts identified the debts.

A key issue in this regard was the fact that the annual return was not a statement 'made' by the directors in their capacity as debtors 'to' the company in its capacity as the creditor.

Instead, the annual return was simply a statement 'by' the company.

In contrast however, the case of Lonsdale Sand & Metal v FCT 38 ATR 384, a statement in the accounts of a debtor company was accepted as being sufficient to amount to an acknowledgement by a debtor.

Despite the decision in Lonsdale, the better argument appears to be that the financial statements of a creditor company cannot, without more, create a valid acknowledgement by a debtor company via its directors, even if those directors sign the financial statements.

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 Underworld song 'Scribble’.

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Statute of limitations** and division 7A

Under legislation in each Australian state, there is a prohibition on bringing a claim on certain actions, generally once 6 years have elapsed from the date from which the cause of action arose.

Generally, loans that are the subject of division 7A under the Tax Act will be at call loans.

As the Tax Act deems loans that become unrecoverable due to the expiration of a limitation period to be automatically forgiven, it is important to determine the date on which a loan is deemed to begin.

Historically, there was at least some support for the argument that the start date for limitation period purposes was the date that a demand was made for repayment of the debt or the last date a formal acknowledgement (including by way of part payment) was made.

This position was at least partially due to the fact that under the relevant limitation legislation in each state, an acknowledgement must generally be made in writing by the debtor to the creditor, and be signed by the debtor

The decision in VL Finance Pty Ltd v Legudi [2003] VSC 57, which has been accepted by the Tax Office, confirms however that the limitation period for the purposes of division 7A begins to run immediately on the date that an at call loan is made, not from the time when the first call for repayment is made.

Furthermore, while at law a loan can be 're-established' by an acknowledgement or part payment even after the expiry of the limitation period, for tax purposes, under division 7A, if the limitation period expires the debt is immediately forgiven permanently at that point in time.

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 Pearl Jam song 'Big wave’.

Listen here:

 

Rooms for the memory** - she said v he said evidence in court proceedings

Last week's post explored the case of Callus v KB Investments - [2020] VCC 135.

The decision also provides a useful summary of the approach a court must take when considering the evidence from opposing litigants.

In summary it was stated:

1. Human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the process of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience (see: Watson v Foxman (1995) 49 NSWLR 315 at 319).
2. The best approach for a judge to adopt in the trial of a commercial case is to place little if any reliance on witnesses’ recollection of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts (see: Blue v Ashley (No 2) [2017] EWHC 1928).
3. Where there is conflicting evidence, the court will place ‘primary emphasis on the objective factual surrounding material and the inherent commercial probabilities’ together with documentation tendered in evidence' (see: Bullhead Pty Ltd v Brickmakers Place & Ors [2017] VSC 206).

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 Michael Hutchence/Ollie Olsen song 'Rooms for the Memory’.

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Do beneficiaries need to believe in love** when concerned about trustee distributions?

Many previous posts have considered the overriding duty of trustees of trusts - and the fact that a trustee must exercise its discretion in good faith, upon real and genuine consideration and for a proper purpose.

Again with 30 June rapidly approaching, the decision in Callus v KB Investments - [2020] VCC 135 provides a useful example of the approach the courts will take in this area.

Relevantly the factual matrix involved:

1. A family trust set up by the parents of the family (on apparently standard terms);
2. Over time, all adult children benefited in various ways from the assets of the trust;
3. Some years after the trust was established, a new trustee company was appointed, with one of the adult sons the sole director of the company;
4. Around 3 years later the trust distributed one of the properties of the trust to the sole director in his personal name;
5. On discovering the transfer some years later, a sister brought proceedings to unwind the transaction and have the trustee replaced.

In letting the transfer stand, however also removing the trustee, the court confirmed:

1. While the trustee did not give any reasons for its decision to transfer the asset, it was not required to under the trust deed.
2. In any event, no record was provided of the decision – and even if there had been a document disclosing the reasons produced, the trust deed provided that the trustee was not bound to disclose any document setting out any reasons for any particular exercise of the trustee’s power.
3. The trustee was entitled to transfer the property to the son under the terms of the trust deed, which provided that the trustee may in its absolute discretion transfer any property ‘to any beneficiary for his own use and benefit in such manner as it shall think fit’ - with specific provision also confirming the trustee did not have any obligation ‘to consider competing claims of beneficiaries’.
4. The trustee also had no obligation to tell other potential beneficiaries of the trust of the transfer.
5. In contrast, due to the clear hostility between the son and one of his sisters (their relationship had deteriorated significantly following the transfer) the court was of the view that the trustee should be replaced, applying the rules explored in many previous posts centred on the test that 'the only guide is the welfare of the beneficiaries, and a trustee may be removed if the court is satisfied that its continuance in office would be detrimental to their interests'.

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 Human League song 'Love Action (I believe in love)'.

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The Mirror (man)** test - trustee powers of investment

Previous posts have considered various aspects of a trustee's powers.

Given another 30 June is on the horizon, it is timely to remember that the scope of a trustee's powers is often limited when relying on the provisions of the state based legislation in the area - reinforcing the preference to have comprehensive powers set out under the trust deed wherever possible.

The decision in G v G (No. 2) - [2020] NSWSC 818 is a useful point of reference in this regard.

The case involved the powers of a trustee of a protected estate (where the underlying sole beneficiary had lost capacity to manage their own affairs). As there was no trust deed regulating the trust, the relevant trusts act applied.

The key question in contention was whether the trustee had the power to invest assets of the trust in a retail superannuation fund (as opposed to a self managed superannuation fund).

The reason for the proceedings being the view that a payment by a trustee (which it was argued that by analogy, included a protected estate manager) into a superannuation fund is not an 'investment' of trust property by the trustee.

This was said to be because, by the payment into the fund, the trustee divests itself of trust property, loses control of that property and puts the property beyond the protective control of the court, albeit that, as a member of the fund, but without a property interest in the fund, the beneficiary (not the trustee) obtains a right to future benefits.

Furthermore, the trustee had arranged a binding death benefit nomination in favour of the legal personal representative of the estate of the beneficiary.

The court confirmed:

1. The trustee had the power under the relevant legislation to invest, or to authorise a private manager to invest, a protected estate into membership of a Regulated Superannuation Fund (although perhaps not a self managed superannuation fund, without deciding that issue).
2. This was at least in part because a protected estate manager stands in the shoes of the protected person and is the substitute decision maker. A protected estate manager does not hold property for the benefit of the protected person. Rather the protected estate manager controls the property which always remains in the name of the protected person.
3. There was however no power under the legislation for the making of a binding, or indeed any other form of nomination, for the payment of a death benefit payable by the trustee of a superannuation fund.
4. This was despite the fact that the court acknowledged that the prevailing view in Australia is that a binding death benefit nomination is not a testamentary act either because it is merely the exercise of a contractual right or the rules of the fund pursuant to which the nomination is given to the trustee confer a discretion on the trustee as to the identity of the person, or persons, to whom the benefit is to be paid.
5. Rather it was held that the management of an estate terminates on the death of the protected person and therefore the manager's power to make a decision about what happens to the protected person's funds after their death cannot be valid.
6. Thus, here, the proper course of action in relation to the nomination was there to be a separate court application authorising the effective making of a gift out of the estate of a protected person, and (perhaps) also an application for a statutory will (another topic considered regularly in View posts).

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 Human League song 'Mirror Man'.

View here:

(Platinum) pension** planning

In the lead up to (another) 30 June, it is worth remembering that up until the early 2000s, there were a number of planning opportunities available in relation to maximising accessibility to pension payments.

Due to perceived abuses of the system, the government and Tax Office developed extremely comprehensive anti-avoidance provisions.

While some felt that the extent of the crack down was an over reaction, by and large, all of the historical strategies were permanently removed.

While there are some, comparatively minor, planning opportunities still available, none of these can be implemented within any narrow timeframes.

In other words, for example, there is the ability to gift assets to family members or structures such as trusts, however these transfers must take place many years before access to the pension is intended.

There are specialist advisers that continue to assist in the area.

Perhaps, counter intuitively, department and government advisers are however often the best starting point to get a full understanding of the rules as they apply in any particular set of circumstances.

** for the trainspotters, the title today is riffed from the Beck song ‘Broken Train’.

Listen hear (sic):

How many calls must be made?** - Insurance funded buy sell arrangement: 5 key questions

Previous posts have explored various aspects of insurance funded buy sell arrangements

Based on adviser feedback, 5 of the most often asked questions during the planning process for implementing an insurance funded buy sell arrangement – with View’s short form answer – are set out below.

In no particular order, View generally asks for access to the following information before providing recommendations on the optimal way to structure the buy sell legal documentation:

1. the insurance policies for each principal – why: to ensure the agreements align with the ownership structure of the insurance;
2. copies of the most recent financial statements for each business entity (including any notes to the statements) – why: there is a material risk that loan accounts are not properly considered as part of the business succession arrangements. Certainly at a minimum, we would recommend that the legal documents specifically regulate how loans are to be treated on the various triggering events;
3. copies of the trust deeds for each of the trusts involved in the structure – why: many trusts do not permit the entering of buy sell arrangements (due to the rules against fettering of trustee discretion – concept explored in previous View posts);
4. the most recent ASIC statement (showing all shareholders and directors) for each business entity – why: to ensure the documentation is binding there should be an audit of the structure of shareholdings and directorships as against the records of the statutory authority; and
5. any existing legal agreements – why: if the existing documents are appropriate our preference is to leave them as is, as opposed to amending simply to ensure they align with View’s approach.

View’s initial review of the material provided is at no cost or obligation and is so that we can ensure we have a proper understanding of the circumstances before suggesting the best way to progress.

All information provided is only retained with authority and is otherwise treated in strict confidence.

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 Spandau Ballet song 'Only when you leave’.

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Should trustees have the power to gift on their dashboard**

One question that comes up from time to time is whether the trustees of a trust should have the power to gift assets of the trust – a standard power in most discretionary trusts (including testamentary trusts) drafted by View.

The power to gift (including to a non-beneficiary), like all the powers, is included based on our extensive experience in this area, often as a result of a difficulty faced by customers due to the absence of the particular power.

Each power is designed to minimise the risk of difficulties arising in the future, particularly as tax legislation, stamp duty rules and trust laws continue to evolve.

While we can amend any powers that there are concerns about, our recommendation always instead is to ensure the right trustees are appointed and trust them to decide how best to administer the trust, with reference to any wishes set out in a memorandum of directions.

The power to gift is one we see used mainly for tax planning reasons, for example:

1. to possibly help avoid restrictions any family trust election may impose
2. where a gift to a charity is to be made
3. to make transfers to other trusts, not as a distribution

Where there are concerns about allowing a trustee the power to gift, some issues to consider include:

1. There is however a significant difference between being a beneficiary and merely a potential recipient of a gift.
2. A hypothetical potential recipient of a gift has no rights at all under the trust.
3. In contrast, a potential beneficiary can (for example) force the trustee to correctly administer the trust – such a right would include preventing a proposed gift or holding the trustee accountable for a breach of trust in making an inappropriate gift.
4. While we generally recommend the gifting provision be retained, particularly if there is any chance that philanthropic activities may occur in the future, our experience is that any potential issues are resolved by ensuring appropriate trustees are selected who understand and take their role seriously.
5. Practically, if the trustee is not appropriate, our experience is that the terms of the deed become largely irrelevant (ie they are ignored anyway). In part (as a high profile example) this is what various children of Gina Rinehart were arguing about her conduct as trustee of a trust set up under her father’s estate plan.

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 Modest Mouse song 'Dashboard'.

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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Thinking that on a marriage breakdown the wife 'automatically' gets 50%? - wise up sucker**

Previous posts have considered an array of issues that arise at the intersection of the rules surrounding asset protection and family law.

The decision in Hsiao v Fazarri [2020] HCA 35 provides another interesting perspective in this regard.

Briefly the factual matrix involved a relationship between spouses, who while they had been in a de facto relationship for around 4 years, were only married for 23 days.

The total wealth of the husband was around $12M. The husband was required to pay the wife around $100,000, as well as contributing $80,000 to her legal fees, bringing her asset pool to around $430,000.

The court relevantly confirmed:

1. The relationship as a whole was of a modest length (ie even including the 4 year de factor relationship), with the wife's non-financial contribution to the acquisition, conservation or improvement of their property also modest, if not nominal.
2. There was nothing to suggest that the marriage had had any effect on the earning capacity of the wife.
3. Furthermore, there were no children whose interests stood to be affected by any alteration of the parties' interests in property.
4. Despite some arguments to the contrary, it was open to the trial judge to decide that the wife did not make any substantive financial contribution to the asset pool, and therefore had no particular claim to it.
5. The right a party has on appeal is to have a review of whether the primary judge's discretion to make a property settlement order had miscarried (see House v The King (1936) 55 CLR 499) - an appeal can not be used to try to make a case that a party chose not to make at the trial.
6. For clarity, the court also confirmed that the Family Law Act permits property settlement proceedings to be continued by or against the legal personal representative of a deceased party to a marriage (noting that this issue was not directly relevant in this case).

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 Pop Will Eat Itself song 'Wise up sucker'.

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