With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.
As usual, an edited transcript of the presentation is below:
It’s surprising how often we are provided with an original trust deed for a trust that’s been around for 10 or 15 years and are asked to give advice on the terms of the trust, only to have it turn out later that there were subsequent deeds of variation or resolutions which amended the terms of the trust, which everyone had lost or forgotten about.
As a practical tip, clients who are establishing a trust should have some form of trust register or trust folder in which they store copies of all of the trust deeds, trust variations, trust resolutions and any other documents which may impact on understanding what rights and responsibilities attach to that trust.
We also need to understand that beneficiaries can make unilateral decisions, such as deciding to renounce an interest as a beneficiary of a trust.
If an individual who is a beneficiary issues a disclaimer or a renunciation, which says that notwithstanding the terms of the trust deed they have chosen not to be a beneficiary of the trust anymore, that will impact on their standing from a family law perspective, bankruptcy perspective and a tax perspective.
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
The 328-G rules allow taxpayers to basically roll-over any otherwise taxable asset as part of the concessions. In other words, it is not just capital gains tax assets, it can be trading stock, depreciating assets, and assets on revenue account.
Any tax that would otherwise be triggered in these areas is ignored as part of the 328-G rules. However, the concessions only operate at a federal revenue level, and even then, not across the board.
For example, if you've got GST applicable, which invariably you will, because you'll be a small business turning over less than $2 million, you need to have a strategy to deal with that as GST is not exempted under 328-G.
Stamp duty, as it is state based, is not dealt with at all under 328-G, thus you will need to have a strategy to deal with that.
Land tax is not addressed.
Similarly, payroll tax and any other state taxes are not dealt with at all under the 328-G provisions.
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
The case study here is a relatively famous case, or at least a case about a relatively famous person, being Solomon Lew, the high profile retailer.
The factual scenario involved a relatively standard family trust.
The initial catalyst for the difficulties was the so-called ‘entity taxation regime'. Under these rules, the idea was to effectively tax trusts as if they were companies.
Mr Lew received some strategic tax advice.
The strategic advice was to do this.
The first step was that the trust entered into an arrangement where an asset revaluation was done.
This basically uplifted the carrying value of all of the assets of the trust to market value and created a big gap, a dollar gap between the carrying cost and the actual market value. That ‘notional gain' was distributed as a capital distribution, down to relevantly one of the sons and one of the daughters of Mr and Mrs Lew, and their respective spouses.
Fast forward about 5 or 6 years, the relationships of both of the kids with their respective spouses ended at about the same point in time.
The former spouses and their lawyers looked at the documentation and argued based on the accounts, the amounts were at call loans made to the trust.
The Lews’ argued that the amounts were in fact gifted back into the trust.
If it was a loan, then that would have to be immediately repaid down into each couple’s hands and then those would immediately form part of the matrimonial pool.
Unfortunately, what the ‘correct' answer was is unknown because the matter settled out of court. In some respects however, it doesn’t even matter what the answer was.
The key point is that no one actually thought about the documentation with a lot of clarity.
The title of this post is a play on Murphy’s Law, which is an adage or epigram that is generally quoted as 'anything that can go wrong, will go wrong'.
Murphy’s Law is profiled together with over 100 other adages in my recently released business book 'Laws for Life'.
A link to your (free!) copy of this book is below -
Separately, many of the themes in this post will be featured in our upcoming half and full day Estate Planning Roadshow being held in Brisbane, Sydney, Melbourne, Adelaide and Perth.
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
The case of Morton & Morton (email me if you want a copy of the decision) is one we often refer to as the Blues Brothers’ case.
The structure was a corporate trustee where there were two shareholders. Those two shareholders were brother 1 and brother 2.
The percentage share that they each had was 50%. The two brothers were the two directors. There were two primary beneficiaries, being the two brothers. You might start to see a pattern with this one.
There were two appointors – again, brother 1 and brother 2. The one point of distinction was there was one bucket company, so one corporate beneficiary. That bucket company was owned by the family trust itself.
Brother 1 was busting up with his wife. Her argument was ‘everything is 50-50 here. Clearly, my husband is entitled to 50% of the trust assets because he’s got 50% of the control, got 50% of the appointorship, got 50% of the shareholding, got 50% of the distributions.’
‘My husband is entitled to 50% of everything and therefore I'm entitled to a percentage share of his 50%.’
The court said no. The court said because all relevant aspects are 50-50 for each brother, then this is in fact analogous to each brother effectively having 0%, because it was the same as nothing. Thus, the assets of the trust were protected.
Ultimately, the Blues Brothers case is a really important decision. It is a decision that should give everybody confidence that structured properly, trusts can be a very powerful instrument in the context of matrimonial breakdowns.
As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to gift and loan back arrangements in a ‘vidcast’ at the following link - https://youtu.be/hJy0OyOuLfE
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
Having done the trust split, what you might look at doing is a gift and loan back. That is to say the trustee that sits over a split trust will arrange for assets that are equal to the underlying interest in the asset to be gifted into a brand new trust.
The new trust will generally be a stock standard family trust that's controlled by the relevant beneficiary.
If the split trust makes a capital gift of the underlying capital value, not the interest in the asset itself, then what is being gifted is the dollar value of the asset as a cash gift. It can be a promissory note, round robin of cheques or whatever it needs to be.
The funds are gifted into a trust that’s controlled by the relevant beneficiary. What the beneficiary then does is lends that money back into the split trust.
That is step 1 is the gift.
Step 2 is the loan.
But at the same time as that new trust is making that loan, it will also take a mortgage out over the underlying assets in the split trust.
Thus you have effectively synthetically moved all of the equity out of the split trust into a brand new trust, which is absolutely controlled by the relevant beneficiary.
Furthermore, there's no mortgage duty on a gift and loan back arrangement. In other words, you can do all of the gift and loan back arrangement without any transaction costs.
The beauty of the strategy is that it still maintains the integrity of the initial trust split, but gives each of the ultimate family members, no matter what might go wrong between the family at that split trust level, the ultimate ability to call in that debt. While they might actually have to sell the underlying asset at that point, they will still ultimately have the underlying equity where it needs to be (that is in their sole control).
As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://youtu.be/kUQ9F-Fwow8
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
The case of Montevento Holdings was an estate planning exercise.
As seems to be the case quite regularly, dad died first. Under the estate plan for dad, he gave all of his shares in the trustee company to mum.
Then there was separately a principal power. The principal power being that whoever was the principal had the ability to hire and fire the trustee.
The principal power had two particularly key things in relation to it.
Firstly, the dad had amended the documentation to mandate how the succession of the principal role was to operate.
Namely, the succession was that it went to mum and then it went to mum’s legal personal representative (LPR).
The second point was that the principal could not be the trustee.
Dad’s approach was that he saw the trust as a ‘whole of family’ family trust. He apparently wanted it to be jointly controlled by the two sons.
So mum and dad had decided that under their wills they would give their shares in the trustee company to the two sons. However, mum under her will only put son #1 as her LPR.
Again, we go back to this mantra of reading the deed. Arguably here, no one had actually read the trust instrument.
So turn of events was this. Mum passes away. Yes, the shares go to the 2 brothers.
Son #1 reads the trust instrument, or probably his lawyer reads the trust instrument and says ‘you know what, you are the legal personal representative under your mum’s will, you are the principal of the trust, you may unilaterally decide who that trustee company is’.
‘The only thing you cannot do is you cannot appoint yourself as the trustee’.
Son #1 says ‘well, you know what, I'd like full control of this trust. I'd like to be able to take all the assets of the trust and do what I wish with them without having to refer to my brother who I don’t get on with’.
‘What I will not do is appoint myself as the trustee. What I will do is I'll set up a new trustee company with 100% of the shares in that company owned by me and I will be the sole director’.
‘Once I've taken those steps, and there's specific tax and stamp duty roll-overs available to let me do that, once I've taken those steps, I'll get all those assets out of the trust and give them to me. My brother can make his own arrangements’.
Brother #2 (son # 2) got word of this approach and tried to challenge the arrangement and said there's effectively a fiduciary duty.
That is, even though the trust deed said the principal couldn't be the trustee, surely that also included that the principal couldn't set up a sole director, sole shareholder company and just sidestep the prohibition.
The Supreme Court said yes, you're right son # 2, that’s not fair, you win.
The Court of Appeal said yes, you're right son # 2, that’s not fair, you win.
The High Court said you know what, this wasn’t a very complex trust instrument.
Mum could have quite easily got someone to read that for her, tell her that all of her objectives would be unwound if she only appointed son # 1 as her LPR. We think that what son # 1 has done is entirely in accordance with the trust instrument. Son # 1 wins; not son # 2. So the whole arrangement was held to be valid and son # 1 took the full control of the trust and son # 2 was left to make his own arrangements.
As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://youtu.be/pk9xWWtLPgE
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
The Richstar case is out of Western Australia from 2006.
It was a decision that appeared to potentially open up the floodgates in terms of how trusts would be considered from a bankruptcy perspective, and potentially see the assets inside a trust would be treated in the same way as they are under the family law regime and therefore, potentially be exposed on bankruptcy.
The Richstar decision was driven by an ASIC court case, effectively seeking a freezing order across all of the assets of the trust.
The argument being that there was such a high level of control available to the person that had gone bankrupt because they were the appointor or principal of the trust, they owned all the shares in the trustee company, they were director of the trustee company and they historically received distributions to themselves personally. The combination of all these things was enough for the court to hold that the trust was just a shell.
In other words the court held the trust was actually just a brilliant disguise for what was actually going on.
There's been at least another three or four cases after Richstar that say the conclusion in Richstar is not good law. That is – the court can't take the family law principles and put them into the Bankruptcy Act. They're completely different regimes and it's not appropriate.
So what is the reason we're still speaking about Richstar when it was a decision of a sole judge in Western Australia in 2006?
The reason is that the sole judge is now the Chief Justice of the High Court. Therefore as much as there are a number of the cases, particularly in New South Wales, that say Richstar is bad law and something to ignore, there's still that heritage or residual issue that the Chief Justice of the High Court made that decision. There is thus a risk that the courts might revisit that in another context at some point in the future.
As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case in a ‘vidcast’ at the following link - https://youtu.be/xO0rrLqGSkU
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
A further very interesting aspect in the case of Harris, is that over many years, there'd been distributions made to a bucket company by the relevant family trust.
The 100% shareholder in that bucket company was the husband. So the wife had a legitimate expectation in relation to that company that she would be absolutely entitled to at least 50% of that under the property settlement.
There was over $1 million worth of distributions that had been made to that bucket company over time out of the family trust that owned the business.
What the court did was that they actually read the trust instrument.
The trust instrument was quite particular on who the beneficiaries were, including saying that any bucket company must be expressly listed as a beneficiary. Here the relevant company wasn’t listed as a beneficiary.
This meant there had about eight or nine years’ worth of distributions that had been purportedly made to the bucket company which were in fact all void.
The family court said we don’t need to get our hands dirty on what the Tax Office might think about that, but we suspect they will be interested. For the purposes of the family law case, the husband was ‘fine’ because the bucket company was in fact valued at nothing.
As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to this case and trust splitting in a ‘vidcast’ at the following link - https://vimeo.com/154687783/
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
Harris is an example of the interplay between using a bespoke constitution, but not doing a trust splitting exercise.
In this situation, under an estate planning arrangement, the dad was the original shareholder and director of the corporate trustee. He died and under his estate plan, he gave shares in the company to the adviser, he gave shares to the husband (his son) and then mum (the wife) retained her shares in the trustee company.
These shareholders also acted as the board of the trustee company.
Inside that family trust was a family business that had been running for many years. The husband was, on all the evidence, important to that business and had a really key role. At no stage did the family attempt to split the trust though.
The husband had siblings, it was clearly still the ‘family’s trust’ and there were still all of the normal rules and obligations you'd expect. The husband had not otherwise been given any significant control. Thus, on his argument, the trust was not an asset of his in the family court scenario.
The wife said the opposite. The wife said even though the family hadn't gone through a trust splitting exercise in a formal sense, there were significant assets that were the husband’s, and therefore, they're things she was entitled to 50% of.
The court held that family law cases will turn on the facts.
Here, they were satisfied that the husband has no control.
There was no de facto splitting.
The terms of the corporate trustee constitution meant that the trustee directors must act jointly and in concert.
There was no evidence to allow the court to assume that the mum was somehow under the manipulation or control or acting as the mere puppet of the husband.
This meant the court essentially ignored the trust.
The reality however is that if the family had gone down the trust splitting path, you can almost guarantee that the earlier family law case of Pittman (email me if you would like a copy of that decision) would have been followed. In that case the court held that assets of a family trust, being a business, were exposed to a family law settlement.
As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers some related practical issues in relation to corporate trustee duty and trust splitting in Western Australia and Queensland in a ‘vidcast’ at the following link - https://vimeo.com/143839535
As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –
If, for example, you've got your mum and dad as the shareholders in a trustee company, and as part of the trust splitting arrangement, you're wanting to actually transfer the shares in that company, because you're wanting to transfer the ultimate control, what the stamp duty offices may do is notionally deem the value of that company to be exactly equal to the value of the assets inside the trust.
Effectively this creates a situation where, even though that’s invariably only a $2 company, for stamp duty purposes, the shares in the trustee company will be notionally deemed to be the same value as the family trust, and the shareholders will pay stamp duty on that value.
There are exemptions to that outcome, but the starting point is that it is dutiable.
If you're not aware of this risk and you've had clients enter into one of those transactions, you need to become very aware of it, because there's now data matching between the Australian Securities Commission and the revenue authorities in both WA and Queensland. Therefore if you do your share transfer and process it through ASIC and haven't lodged that with the Stamps Office, you'll likely get a letter from the Stamps Office saying ‘please explain’.
