A question came up recently from a financial planning licensee about whether an adviser attending an estate planning meeting between a client and their lawyer inadvertently waives the client’s legal professional privilege over those estate planning discussions.
As mentioned in last week’s post, legal professional privilege protects communications between a client and their lawyer from third parties, if the communications are brought into existence for the dominant purpose of obtaining legal advice. However, legal professional privilege over communications between a lawyer and a client can be waived if the information is disclosed to a third party.
Broadly we confirmed that we do not believe legal professional privilege is particularly relevant in the context of most estate planning discussions with clients. In particular, the advice generally provided to the client in a meeting is unlikely to be of the nature that legal professional privilege would need to be claimed. Furthermore, the legal documents (i.e. the final wills and powers of attorney) themselves are not generally privileged.
Indeed, in an adviser facilitated estate planning scenario, the client will have, in most cases, already disclosed most (if not all) of the information that will be discussed in the online meeting to the adviser as part of the initial fact finding process before the lawyer commences the legal aspects of the estate planning exercise.
We therefore believe that the risk of any implied waiver of legal professional privilege by having a client’s adviser sitting through the online meeting with the client is low and it would be an unnecessary step looking to avoid having the adviser attend the online meeting.
As most readers will be aware, our strong preference is to have the adviser attend the meeting as, generally speaking, their insights about the appropriateness of the estate planning strategy for the client’s family and financial circumstances is highly valuable.
** For the trainspotters, last week I mentioned that ‘privilege on privilege’ is a line from one of my favourite privilege related songs, from the Church and their 1986 album Heyday, namely ‘Myrrh’. Based on further research, this song is not simply one of my favourite privilege related songs, it is the only decent song I can find, thus listen again hear (sic):
Often one of the most important aspects of advice provided by lawyers is the ability for that advice to remain private and confidential to the client on the basis of legal professional privilege.
Particularly in relation to tax planning and asset protection, the ability to maintain confidentiality can often be very important and the case of Nolan v Nolan [2013] QSC140 is an important example of this principle. As usual, if you would like a copy of the decision please contact me.
In summary, the situation in this case was as follows:
a wife and husband had been married for some years;
following a breakdown in their relationship, the wife claimed an interest in the farming property of the husband's parents;
because the husband's parents were still alive, the wife tried to gain access to their estate planning documentation; and
the parents of the husband sought to deny access to the documents on the basis of legal professional privilege.
In deciding the case, the court confirmed:
the dominant purpose for the creation of various estate planning documents including letters of advice and handwritten notes, both by the estate planning lawyer and the parents, was to obtain legal advice;
on this basis, legal professional privilege could apply to deny the wife the ability to access the documents;
unfortunately, because the lawyers for the parents did not raise the issue of privilege until after the relevant documents had been disclosed, the court held that notwithstanding the documents could have otherwise retained their confidentiality, the disclosure of them had waived the protection of privilege; and
importantly, it was also confirmed that it is not necessarily automatically the case that wills and related files are protected by legal professional privilege.
** For the trainspotters, ‘privilege on privilege’ is a line from one of my favourite privilege related songs, from the Church and their 1986 album Heyday, namely ‘Myrrh’ listen hear (sic):
The powers of the family court in relation to structures such as trusts are potentially extensive.
At a simplistic level, there is the specific power to force the change of a trustee of a trust.
Potentially, there is also the ability to bring forward the vesting date of a trust to require it to end immediately and thereby crystallise the interests of a party to the relationship.
One leading case in this regard is the decision in AC and ORS & VC and ANOR [2013] 93 FLC 540 FamCAFC 60. As usual, if you would like a copy of the decision please contact me.
Briefly in that case:
The husband’s mother was in control of the corporate trustee and the trust at the relevant times.
The husband and his former wife had a fixed entitlement to the capital of the trust on its vesting, which, at the time of the property settlement, was still 50 years in the future. That is, the trust was not a traditional discretionary trust where there are no fixed entitlements.
The court found that the entitlement was rightly considered property of the parties and therefore ordered the trustee to vest the trust.
The Attorney General intervened in the proceedings, given that the practical result of the decision was that the property entitlements of a third party were substantially altered.
Critically, it was held that the husband and wife did in fact have an interest in the trust property despite the fact that it was accepted that the control of the trust was with the husband’s mother.
In other words, the ability to alter the structure of trusts can be made even where a party to the marriage is not in control of the trust.
In a more traditional discretionary trust however there may not be the required nexus between the trust assets and the parties to the marriage.
For completeness however, in this particular case, the forced vesting of the trust ultimately failed due to the appeal court’s conclusion that procedural fairness had not been given to the husband’s mother, particularly given that the parties to the marriage had other assets that could have likely achieved financial closure between the parties without the need to impose orders on a third party
** For the trainspotters, ‘I’ve Got the Power’ is a song by Snap! from 1990 see hear (sic):
One ongoing area of contention (admittedly amongst many others) in family law is how post-separation inheritances are treated on a matrimonial property settlement.
In very broad terms, the Family Court is required to consider all relevant factors before distributing any share of one party’s inheritance to their former spouse.
Depending on the exact factual matrix, the Courts will, in broad terms, take one of the following approaches:
Completely ignore the inheritance for all purposes in relation to the division of matrimonial property.
Exclude the inheritance from the division of matrimonial property, however make an adjustment on the division of the matrimonial property to take into account the access to the inheritance that one spouse will have.
Include the inheritance as part of the pool of property to be distributed between the parties, while making some adjustment to acknowledge the ‘contribution' that one party made to bringing the asset to the matrimonial pool.
Simply including the inheritance as part of the matrimonial asset pool, with no specific adjustments.
However, based on the published cases to date, it is important to note that it is very rare for the recipient of an inheritance or similar ‘windfall' to have those assets completely quarantined, regardless of when they are received up until the final date of the property settlement.
** For the trainspotters, ‘Break into your heart’ is a song by Iggy Pop from his album with Josh Homme (QOTSA) in 2016 ‘Post Pop Depression’ see hear (sic):
Recent View posts have considered a number of aspects of the ASIC requirement that the beneficial ownership of shares in a private company be disclosed.
One potential difficulty in relation to ASIC’s requirements in this regard involves situations where the legal owner holds the share on an undisclosed trust for another party or entity.
In this type of situation reading of the relevant ASIC provisions suggests that the company report should disclose the fact that the legal owner holds the share non beneficially.
This said, in a true undisclosed trust situation most advisers will recommend that the ASIC records in fact are completed in a way that shows the legal owner is also the beneficial owner.
If this approach is adopted then full supporting documentation should be retained by the legal owner to rebut the presumption created by the way in which the ASIC records are completed.
** For the trainspotters, ‘presumption’ is a key word from Midnight Oil’s song from 1998, ‘Blot’ see here:
Recent View posts have looked at the various issues in relation to notifying the ASIC of the beneficial ownership of shareholdings in a private company.
One aspect of this style of situation that arises relatively regularly relates to companies that were incorporated prior to 1997. Before this date, every private company was required to have at least two shareholders.
In order to provide a practical solution where a person was wanting to be the sole shareholder a practice developed whereby a second party would be listed as a legal shareholder, however they would simply hold that share on a bare trust for the intended sole shareholder.
Where such a structure exists, assuming that the articles of association or constitution have now been updated, it is generally possible to vest (or bring to an end) the bare trust arrangement and have the ASIC records updated to simply list the sole shareholder.
** For the trainspotters, ‘stripped bare’ is a line from the U2 song from 1983 ‘October’ see hear (sic):
Last week’s post touched on some of the issues in relation to disclosure of beneficial ownership of shares on ASIC records.
In situations where the beneficial ownership is incorrectly recorded there are three broad alternatives available, namely:
Leaving the ASIC records unchanged. From a compliance perspective while this approach is possible, it is not recommended.
Simply lodging an annual return or ASIC form 484 that updates the ASIC records from that date. In many cases this approach will be pragmatically appropriate and is certainly the easiest and most cost effective approach. There is a risk however that there may be adverse revenue consequences or challenges from a third party (for example a trustee in bankruptcy).
The final approach involves effectively rectifying ASIC records from the date the error first occurred and then arranging for the annual returns for every subsequent year to also be amended. Obviously, this approach can be a significant exercise and is generally only adopted where there are concerns from a tax, stamp duty or asset protection perspective.
** For the trainspotters, the title today is riffed from INXS’ first ever single, from 1980, watch here:
Up until the early 2000’s, the ASIC required only very basic information in relation to the share ownership in companies.
From around 2002, the ASIC began requiring that all private companies disclose the basis on which shares were owned, in particular whether shares were owned beneficially or non beneficially.
Broadly the distinction is as follows:
If a share is owned beneficially this means that the legal owner listed in the ASIC records also has full beneficial ownership.
If a share is owned non beneficially then the legal owner holds the share subject to the terms of some form of trust arrangement (often this trust will be a standard discretionary trust).
Unfortunately the disclosure of beneficial ownership is an area of significant confusion and often the confusion does not arise until resolution of the issue is time sensitive (for example in lead up to a sale transaction or as part of an asset protection audit).
Some of the issues that arise in this regard include:
anecdotally, it appears that when ASIC was first imputing this data following the change of approach, many companies had their notifications reversed during the data entry process (that is shares that were owned beneficially were noted on ASIC records as being owned non beneficially);
similarly many companies were confused about the distinction and therefore provided incorrect notification to ASIC; and
in some instances a full search of all company records was not performed (for example all aspects of the company register) so the company provided incorrect information to ASIC.
Next week’s post will consider the three main alternatives for rectification where the beneficial ownership of shares is incorrectly recorded on ASIC records.
** For the trainspotters, ‘relationships of ownership’ is a line from the Bob Dylan song from ‘Gates of Eden’ listen hear (sic):
Following recent posts, the decision in Scott v Scott [2009] NSWSC 567 is a relevant case to be aware of in the context of the prospects of a former spouse seeking to challenge the deceased estate of their former spouse.
Relevantly the court held the following key principles are applicable, namely:
In most cases the achievement of a final property settlement in the Family Court would be seen by the parties, in current social circumstances, as terminating any moral claim of a former spouse to provision in the will of the other.
This said, public policy, must adapt itself to legislation that creates a specific entitlement for a former spouse to claim. These rules in essence contemplate there will be cases where such a claim will succeed, notwithstanding the public policy of finality of property settlement.
A former spouse who has been accorded all rights under a property settlement and does not have any continuing entitlement to maintenance, is not generally regarded as a natural object of testamentary recognition.
Even if the former spouses have not divorced or entered into a property settlement, there is the threshold question as to what might be adequate provision in all the circumstances. Those circumstances must take into account both the fact of separation from the deceased and the fact that, as between themselves, a division of their assets is likely to have already been effected.
Therefore as long as the deceased takes steps to effect an amicable and relatively fair division of all assets this will normally terminate any moral claim the deceased might have had to the former spouse.
One iteration on the above comments however is that even where an ex-spouse is not receiving maintenance (which may give them a right to challenge the deceased estate) they may be ‘entitled’ to be receiving maintenance.
If this is the case then the former spouse may fall within the category of persons entitled to challenge (under the extended definition of 'spouse').
In this regard, in the case of Ryan v Harrison [2020] QSC 267 it was confirmed:
'Entitlement' must be an entitlement enforceable either by contract or court order (see Re Lack [1981] Qd R 112).
The entitlement will ordinarily need to involve a rightful claim or title to it; that is an established claim as opposed merely to an asserted or alleged one (see Krause v Sinclair [1983] 1 VR 73 and Sarich v Erceg [1984] WAR 11).
Where there is no order of the family court requiring continuing maintenance at the time of death, a former spouse must prove there was a contract or agreement between them and the deceased that created an entitlement to be receiving maintenance.
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 the post today is riffed from the David Bowie song ’Blackstar’. View here:
The legal doctrine of The Vibe was originally argued in the movie The Castle.
Arguably however it essentially captures the concept of courts making decisions driven by 'public policy' or what they believe to be 'in the public interest'.
One aspect of estate planning and asset protection that brings these concepts into sharp focus is a willmaker imposing conditions on provisions under their will about the personal relationships of a beneficiary.
One of the leading cases in this area dates from the mid 1800s and confirms that a trust (such as a life interest) for a surviving spouse can be structured to end automatically if the surviving spouse ceases to be 'single ... and living a chaste life' (see - Lloyd v Lloyd (1852) 2 Sim (NS) 255).
Similarly in Ramsay v Trustee Executors and Agency Co Ltd (1949) 77 CLR 321, a will gifted proceeds in trust “... to pay the income ... to my son ... for such period ... as he shall remain married to his present wife ... and on the termination of such period in trust for my ... son absolutely provided however that should my ... son predecease his said wife during such period ... my estate shall go to my ... nephew ... and my sister ... in equal shares.”
The court confirmed that:
This provision contained nothing which offended against public policy as having, or tending to have, an adverse effect on the son’s marriage and it was wholly valid.
The will was drafted to secure an income to the son during the marriage, and to prevent his wife obtaining any interest, either directly under the will, or indirectly through her husband’s will, in the corpus assets and there is nothing illegal in such an intention—it is simply a case of a willmaker choosing their beneficiaries.
By way of an analogy, it would be contrary to all experience to say that a remainderman of a life interest under a will, under which a person is entitled to property on the death of the life tenant, is exposed to a temptation to hasten the death of the life tenant.
Most people in a civilised community respect the sanctity of marriage as well as of life, and would not be induced by pecuniary gain to destroy one or the other. It is not reasonable to suppose that the terms of the will here create any practical conflict between the son’s duty as a husband and his interest as a beneficiary – future illegal or immoral activity (that is deliberately ending the marriage) is not to be presumed.
More recently decisions have upheld partial restraints on marriage, such as preventing marriage to a person with particular characteristics (including race and religion). For example, in Seidler v Schallhofer [1982] 2 NSWLR 80, there was an agreement which contemplated the continuation of a de facto relationship for a specified period but then required that the parties either marry or end the relationship. It was held that the agreement simply formalised the financial aspects of the relationship and was appropriate given current public policy notions.
More recently again is the decision of Ellaway v Lawson & Anor [2006] QSC 170. This case involved a will where the entitlements of one daughter were conditional on her divorce from her then current husband, or his death (assumedly due to natural causes), whichever occurred first.
Arguably applying The Vibe it was held the reason for the approach was the mother's desire to protect the daughter's finances - and not a wish to see the daughter get divorced or the son in law die. On this basis the provisions in the will were held to be valid.
Similarly, the decision in Jones v Krawczyk [2011] NSWSC 139 also involved a will where a daughter was prohibited from being a potential beneficiary of a testamentary trust so long as she was married to, or living with, her husband (his death was not specifically mentioned). The decision based on public policy, was that the restriction was valid as a being motivated by a desire to protect the daughter, rather than trying to force the daughter to get a divorce.
In contrast however, there remain situations where the courts will strike down agreements that will offend the public interest, perhaps the highest profile example being the claim bought by a form of 'defacto spouse' against married businessman Richard Pratt (see Ashton v Pratt (No 2) [2012] NSWSC 3).
In this case, Ashton sought to enforce a contract for 'mistress services' in return for Pratt establishing a trust for her and her children with $5 million and an ongoing income stream.
In rejecting the claim the court held that the extent of the relationship was simply for ‘meretricious sexual services’. The court's view was that such arrangements were contrary to public policy and thus illegal and unenforceable.
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 Mark Ronson (featuring Miley Cyrus) song ‘Nothing breaks like a heart’.
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:
A son had borrowed (either directly or via related entities) a six-digit sum from his parents over an extended period.
The total amount lent was by way of instalments on a number of separate occasions.
On every occasion, there was a confirmation from the parents that they intended the amount to be a loan.
In saying this however, no formal agreement was ever entered into.
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 deemed 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’, see here:
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:
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.
Possibly implementing security arrangements in relation to the loan, for example, by way of mortgage or registering an interest under the PPSR.
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! on Countdown here:
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:
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).
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.
If a person has reached the age of majority, but does not have estate planning documents in place, an array of complications can arise.
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).
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.
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.
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.
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:
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.
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.
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:
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:
burial;
cremation;
burial at sea.
Some alternative approaches include the following, which can all be accessed via Dr Google:
Diamonds
Mummification
Cryogenically frozen
Coral reefs
Composting
Deluxe cardboard box
Vinyl records
Firecrackers
Snorting (ie the Keith Richards play; note - the mixing of ashes with illicit substances is generally regarded as optional)
Smoking – as a variation on the snorting idea, friends of rap singer Tupac allegedly mixed his ashes with marijuana and smoked them
An hour glass
Glass orb
Snow Globes
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)
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'.
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'.
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’.
In recent times, we have had a number of situations where, when acting for a family group, one member of the group is particularly concerned about asset protection issues.
All advisers providing guidance in this space should be aware that from a privilege perspective, much can turn on very practical issues such as:
Who the customer is defined as being?
In what name the file is opened up in?
Who the correspondence is directed to (including via email)?
Who is invoiced?
Who pays the invoice?
While each of these issues can on their face seem quite benign, if the worst turn of events occurs (and bankruptcy proceedings are commenced), each of the above points can become quite critical.
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 Hoodoo Gurus song 'Hoodoo you love'.
Previous View posts have explored aspects of the asset protection strategy often referred to as a 'gift and loan back' arrangement.
The arrangement (and various iterations of it) has arguably had a chequered history, and often seen branding developed to conveniently label the steps involved, for example:
Beta Strategy (which was the subject of a failed patent application in the case of Grant v Commissioner of Patents [2006] FCAFC 120);
Legacy Protection Strategy;
Secured loan arrangement;
Synthetic transfer;
Capital protection strategy using a lineal descendent or bloodline trust;
100% security strategy - to protect your assets from thieves such as the tax man (see Ed Burton and his 'Diamond Inner Circle Coaching and Mastermind Alliance' as part of the 'Vital Link Financial Education' Group circa 2004).
In late 2022, another productised version of the arrangement gained the attention of the Tax Office in their release labelled QC 71175 (22 December 2022).
Branded as the 'Vestey Trust' or the 'Master Wealth Control Package', the arrangement is promoted as part of a wider property and investment offering that promises advice on 'how to locate and invest in undervalued property, undertaking property developments, locating undervalued businesses, renovating for profit and how to secure and grow your wealth' by the 'DG Institute', founded by Dominique Grubisa.
As with all the various versions, or brands, of a gift and loan back arrangement, the key components appear to be driven by managing asset protection that would be otherwise problematic due to related tax and stamp duty asset transfer costs.
That is, in broad terms, the owner of an asset gifts an amount equal to their equity in the asset to a family trust (or low risk spouse). The family trust then lends an amount of money to the owner and takes a secured mortgage over the property or registers a security interest on the Personal Property Securities Register over the personal assets of the individual the protection is intended for.
Implemented correctly, the gift and loan back approach ensures there are no CGT or stamp duty consequences to achieving asset protection, subject to the claw back rules under the bankruptcy regime and various state based property or conveyancing acts.
The integrity of the particular strategy promoted by DG Institute has been subject to attention in mass media for some years, for example Richard Baker in The Sydney Morning Herald in 2020 identified that the promoters were claiming that "If you have superannuation, you want to protect that now. The current laws say that’s already protected. But in a grab for cash and a time of crisis like this where the government is supporting the whole nation for an indefinite period, that is a big pool of money that is up for grabs and they have the power to enact laws to take that. We want to protect it now".
The articles also pointed out that:
there was nothing to indicate superannuation laws would be changed to see assets exposed to financial misadventure;
the organisation instructed 'students' of the courses to buy property from people identified in Family Court proceedings as divorcing or financially struggling (ie to secure properties from distressed vendors);
Dominique Grubisa engaged her parents in property and financial deals even though both were struck off the NSW solicitor’s roll in 2013 for fraud.
Similarly, in December 2022, the ACCC commenced proceedings in the Federal Court against Master Wealth Control Pty Limited, trading as DG Institute, for allegedly making false or misleading representations, including in relation to the Master Wealth Control program DG Institute offered to consumers, in breach of the Australian Consumer Law.
The ACCC alleges DG Institute also made false or misleading representations in the delivery of the Master Wealth Control program and that by setting up a ‘Vestey Trust’, using a suite of documentation provided by DG Institute said to be legally binding, any assets in the trust would be completely protected from creditors. DG Institute said the Vestey Trust was “bulletproof”, “impenetrable” and would result in students being "unable to be effectively pinned down by creditors".
The ACCC alleges that this was misleading as the Vestey Trust did not provide that complete protection.
Further, the ACCC argues that DG Institute represented that the Vestey Trust structure had been tested and upheld as effective by the Full Federal Court of Australia. The ACCC alleges that this is misleading as the referenced court judgment, Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR 530 (a case explored in other View posts), did not concern a Vestey Trust and does not provide authoritative precedent or support for the legitimacy or effectiveness of the Vestey Trust structure in protecting assets from creditors.
Titled 'SMSFs and schemes involving asset protection' the Tax Office confirms that as a threshold issue the arrangement is unnecessary because the superannuation system already protects SMSF assets from creditors.
This fundamentally important observation is supported with a number of further comments focused on the likely superannuation related compliance risks, for example that the arrangement may:
result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee;
involve the ‘borrowing’ of money by the SMSF trustee;
expose fund assets to unnecessary risk if it is unclear who owns them;
cause the fund to be maintained in a way that doesn’t comply with the sole purpose test;
cause SMSF money to be used for costs related to asset protection arrangements entered into by members to protect their personal or business assets; which is prohibited because these expenses are not incurred in running the SMSF.
Based on publicly available information there is no doubt that each of the concerns set out by the Tax Office are correct and likely to be applicable to any gift and loan back arrangement involving an SMSF.
For arrangements not involving SMSFs, despite the case featured in the previous article (namely Re Permewan No 2 [2022] QSC 114), appropriately implemented gift and loan back arrangements appear to be a valid and revenue effective asset protection strategy. This said, there are a myriad of potential issues that always need to be considered, for example:
care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business).
while the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor.
the impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home should be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act (which will typically be the case).
to the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing that lending (to whatever level it may be from time to time) as a first priority before the trust's second mortgage.
the provisions of the Tax Act under subdivision EA need to be considered. While there has been some significant dilution of the circumstances where subdivision EA will apply given the Tax Office’s approach to UPEs, in some situations it remains potentially relevant. In particular, the second 'tranche' of the gift and loan back arrangement involving a loan out of a trust can be problematic if at the time the loan is made, there was an unpaid distribution to a corporate beneficiary.
As usual, please make contact if you would like access to any of the content mentioned in this post.
PS: the image today is of a random truck I happened to spy while working on the full article.
** For the trainspotters, the title today riffed from the Jimmy Barnes song 'Too much ain't enough love'.
Last week's post considered the ability of a trustee in bankruptcy to exercise the powers of an appointor or principal of a family trust who is bankrupt as their personal property.
A related issue that has been the subject of many years of debate is whether the holder of an appointor role can exercise it so as to appoint themselves.
For many years, the case of Re Skeats' Settlement (1889) 42 Ch D 522 has been seen as the leading decision, and it confirmed that an appointor could not appoint themselves as trustee. In particular the case held that '...the universal rule is that a man should not be judge in his own case; that he should not decide that he is the best possible person, and say that he ought to be the trustee'.
This blanket prohibition has however been iterated over the years and, subject always to the provisions of the relevant trust deed, the position now appears to be that the trustee appointment power is a species of special ‘fiduciary power’ that must be exercised for the benefit of objects of the trust.
This means that an appointor may appoint themselves (or a company they control) as trustee of a trust, as long as it is not for fraudulent purposes and permitted under the deed.
An appointor choosing to appoint themselves as trustee will however only by permitted in ‘exceptional circumstances’, where the court is assured that the trusts will be executed in the interests of the beneficiaries.
The decision in Australian Conservation Services v Liladel Holdings [2017] ACTSC 162, provides a concise summary of the rules in this area.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, 'Sisters are doin' it for themselves' is a song from 1985 by the band the Eurythmics, listen hear (sic) -
Last week's post considered the ability of an attorney to exercise the powers of the donor as an appointor or principal of a family trust.
A key related question is whether a trustee in bankruptcy can act on behalf of a bankrupt for any principal or appointor role held by a bankrupt under a family trust.
As with incapacity (as mentioned last week), generally a well crafted trust deed will expressly address the issue and include a clause along the following lines -
'If the principal suffers the loss of lawful capacity through the committing an ‘act of bankruptcy’, then the principal is the financial attorney of the principal under a valid enduring power of attorney.'
The property of a bankrupt which is available for distribution to creditors includes ‘the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit…’ (see section 116(1)(b) of the Bankruptcy Act).
However, it has been held that the right of a bankrupt to exercise a power of appointment under a discretionary trust is not property of the bankrupt (Re Burton; ex parte Wily v Burton (1994) 126 ALR 557 and Lewis v Condon; Condon v Lewis [2013] NSWCA 204).
Further, the decision in Dwyer v Ross (1992) 34 FCR 463 suggests that a trustee in bankruptcy cannot compel the trustee of a trust to exercise the trustee’s discretion in favour of a bankrupt beneficiary. To do so could be construed as a breach of the trustee’s duty to the solvent beneficiaries of the trust. It would be against the interests of the beneficiaries as a whole to exercise the power in that way.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** for the trainspotters, ‘Making Plans for Nigel’ is another song by the band XTC, from 1979, listen hear (sic) –
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