To cut a long story short** In conclusion - 1 related issue

Subject to the terms of the relevant trust deed, a change to the appointor or principal provisions should have no adverse revenue consequences. Any change should, even if not expressly required by the deed, be done with the consent of the incumbent appointor. This is because of the significant ultimate powers retained by the appointor.

This conclusion about the extent of an appointor's powers however does not mean that where an appointor or principal is declared bankrupt, their power of appointment is considered 'property' which vests in and can be exercised by the trustee in bankruptcy.

Historically, there has been some confusion around this issue, given that the property of a bankrupt under the Bankruptcy Act 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…".

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 (see Re Burton; ex parte Wily v Burton (1994) 126 ALR 557).

In that case, the argument of the trustee in bankruptcy centred on the fact that Mr Burton was the appointor and a discretionary beneficiary of a family trust. He could in theory therefore appoint himself (or an entity that he controlled) as trustee.

In rejecting the argument, it was held that the powers of an appointor are fiduciary powers that must be exercised accordingly, in the interest of the beneficiaries.

In other words, the powers of an appointor must be exercised solely in furtherance of the purpose for which they were conferred.

This means that the powers of an appointor do not amount to 'property' that passes to a trustee in bankruptcy.

The powers are also not something that can be exercised by the bankrupt for their own benefit.

By analogy, the power to remove an appointor is also considered to be a fiduciary power (see Ash v Ash [2016] VSC 577).

This means that equitable relief may be imposed upon a third party who knowingly receives some benefit from the fiduciary's wrongful conduct or is knowingly involved in that wrongful conduct (see Barnes v Addy (1874) LR 9 Ch App 244).

An attorney may be able to exercise the powers of an appointor, if this is anticipated by the trust deed or attorney document (and indeed, ideally, both documents in a complementary and considered manner).

An attorney may also be able to exercise an appointor's powers where there is informed consent. Such consent must however involve more than inference from an alleged plan of the principal, particularly where that plan is vaguely defined and based on inference itself. That is, there must be clear evidence of the salient details of the transactions affecting the principal's interests being provided to them before their incapacity (again see Ash v Ash [2016] VSC 577).

Like last week, the above post is again based on an article that we originally contributed to the Weekly Tax Bulletin.

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 Spandau Ballet song ‘Cut a long story short’.

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Thinking you will let the tax tail wag the dog; plan to play a slow hand**

Last week's post explored the case of Wheatley v Lakshmanan [2022] NSWSC 583, with a focus on the (possible) exception to the rule that a willmaker can only regulate the transfer of assets they personally own under a will.

Another key aspect of the decision related to the tax consequences of the various proposals considered by the court. The potential tax liability was said to be in the region of $1M.

Relying on advice of a specialist tax adviser the court made the following observations (in the context of the implications of a company owned by the willmaker distributing one of its assets to a beneficiary under the will):

1. the estate, for tax purposes, would be deemed to be a trust under section 6(1) of the Tax Act;
2. any payment of any amount by the company to the executor of the estate would be a dividend assessable under section 44 or under Division 7A of the Tax Act - and, if the moneys were paid to the executor who then used them to pay the purported gift under the will, the recipient of the gift would be subject to income tax on a flow through basis;
3. if instead the company distributed to the estate and no particular beneficiary was eligible to receive those moneys, then the trustee would be taxed (at the highest marginal rate) under section 99A of the Tax Act;
4. an argument that the payment by the company to the beneficiary as a form of notional estate order would not constitute a deemed dividend had been rejected by the Tax Office in a private ruling issued before the trial - the Tax Office instead determining that the payment would in fact be treated as a deemed dividend under Division 7A;
5. although not expressly stated in the decision, it seems likely that the relevant private binding ruling in this regard is Authorisation Number 1051799201069. This ruling references Taxation ruling TR 2014/5 (Income Tax: matrimonial property proceedings and payments of money or transfers of property by a private company to a shareholder (or their associate)) in concluding that the reasoning from a family law perspective also applies in the succession law setting, and as such, the requirement in section 109J(b) of the Tax Act to access an exemption from the deemed dividend regime is not satisfied;
6. the use of the word in the gift provision of the will 'unencumbered' was held to be intended to be in its common parlance - that is referring to mortgages or charges secured on the property – not the embedded tax liability. Thus, any income tax liability should be largely ignored by the court in determining the appropriate provision to be made for the aggrieved beneficiary. This conclusion was reinforced by the fact that the tax liability only arose subsequent to the sale of the property, on the distribution of the proceeds of sale - and furthermore the purported gift was held to be invalid in any event.

The court also observed that it seemed likely that tax issues 'overtook' common sense during the litigation and contributed to the high level of legal and accounting costs, which the court stated it was inclined to place a significant cap on in terms of what the estate would be liable to pay for.

The exact cap in this regard was confirmed in Wheatley v Lakshmanan (No 2) [2022] NSWSC 851. In this subsequent decision, the court held that in relation to costs that were over $620,000 for the plaintiff and more than $450,000 for the estate, the estate was ultimately effectively required to pay its own costs and a net amount of $160,000 of the plaintiff's costs.

This outcome was after a careful analysis by the court balancing between depriving the plaintiff of a substantial portion of the legacy ordered in her favour and the estate being further burdened by costs. Given the plaintiff received an award of $820,000 as further provision under the initial judgment, her final net position was likely in the region of $350,000.

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 Pointer Sisters song ‘Slow hand’.

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Don't give up** (& no it ain’t an April Fool’s post) on receiving an asset under a will - even if it is not owned by the willmaker

Previous View posts have explored cases that support an, arguably unusual (indeed arguably bordering on a joke, or at least April Fool’s Day-esk, exception to the rule that a willmaker can only regulate the transfer of assets they personally own under a will.

In particular, in certain situations the standard position that assets of a company are not something individual shareholders have the authority to regulate under their will has been overruled.

The decision in Wheatley v Lakshmanan [2022] NSWSC 583 provides a detailed analysis of the key rules in this area.

At the heart of the factual matrix in this case was a clause in a will that purported to gift to a child of the willmaker, unencumbered, a commercial property - with a further direction that the property 'be placed into a trust or superannuation fund of (the child's) choice'.

The relevant property however was owned by a company that the willmaker was at all material times (i.e. both at the date of the making the will and at the date of death) the sole shareholder.

In confirming that the purported gift of the property was ineffective the court stated:

1. the general position is that a willmaker can not bequeathe something that they do not own;
2. it may be that where a willmaker conveys to the executor a direction to reduce into possession an asset not owned by the willmaker, and the executor is armed by the willmaker with the power to get the asset (eg by directing that all relevant assets are to be held on trust under the estate) they will be bound to do so - and then deal with the asset as directed by the will (see Re O’Callaghan [1972] VR 248);
3. that is, if there is the conferral of power upon executors to deal with shares in a company that owns the assets in question as if they were beneficial owners, coupled with express gifts under the will, this can give rise to an implication that the trustee was required to use the shares of the company to ensure the assets of the company are transferred as set out in the will;
4. this said, the court commented that it may also be that the earlier cases were in fact decided incorrectly - a point the court did not need to resolve on the basis that in the will here, the requisite power was not granted to the executor of the will in any event;
5. the key reason for suggesting that the previous cases may be wrong at law is that they are vague in clarifying how exactly an executor exercising rights as a shareholder can cause the relevant company to divest itself of the assets purportedly bequeathed. That is, the shareholders do not manage the company’s affairs; rather the directors do and a court should not construe a will in a manner that would or might place the directors in a position where their statutory duties as directors are in conflict with the willmaker's intentions, based on a conflation of ownership with management (or day-to-day conduct) of a company;
6. the further suggestion that there should be a rectification of the will was also rejected due to a lack of evidence that the willmaker intended to create the power for the executor to achieve the gift of the property owned by the company;
7. nor was there any evidence supporting the ability for the court to correct a 'clerical error' - rather it seemed that either the willmaker did not make clear, or the lawyer drafting the will did not understand, that the property in question was owned via a company.

Ultimately, while the aggrieved beneficiary was granted a cash settlement pursuant to a court order as part of a family provision application, this amount was significantly less than the value of the property in question; and was also arguably partially reduced by a tax bill that the estate had to bear. The tax issues will be explored in next week's post.

** For the trainspotters, the title of today's post is riffed from the Peter Gabriel (featuring Kate Bush) song ‘Don’t give up’.

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Full names in wills – do the right thing**

Over the last few days, we have had some difficulties in progressing with the administration of an estate for a client where the deceased will did not set out his full name.

Although it sounds like a very pedantic issue, the courts are reluctant to allow wills to be granted probate unless there is complete certainty around a person’s name.

Some of the issues that need to be considered in this regard include:

1) If there is a nickname that someone uses all the time, this should ideally be mentioned in the will.

2) Ideally, the name in the will should exactly match government records (for example, on the birth certificate or marriage certificate for the will maker, and thus in turn, what the death certificate will state).

3) To the extent there is any inconsistency between government records, this should ideally be explained or clarified in the will itself.

4) If the government records do not match the will and this is known at the time of lodging probate, look to explain the inconsistencies proactively with the court when making the application.

** for the trainspotters the title of the post today is riffed from the late 1980’s and ‘Redhead Kingpin’

Guardianship appointment under wills – another application of The Vibe **

Last week, an adviser (on behalf of a client) questioned how binding the nomination of a guardian under a will for infant children is likely to be.

The simple answer is that in a practical sense our experience is that the nomination of a guardian is almost always followed. Arguably however this experience is nothing more than reliance on the well known legal principle ‘The Vibe’.

The strict legal answer is that the courts retain the final and absolute authority to determine who the guardian of an infant child should be with their only responsibility to determine what is in the best interest of the child.

Obviously, in a situation where both parents have died and there is a nomination of a guardian under their wills, the courts will normally put a significant amount of weight on this nomination. Despite the court’s inherent power, it is somewhat unusual to have a situation where the nomination under the will is not followed.

** for the trainspotters Dennis Denuto and his vibe legal principle need no introduction

Ensuring loans are loans and people are people

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:

1) A son had borrowed (either directly or via related entities) a six-digit sum from his parents over an extended period.

2) The total amount lent was by way of instalments on a number of separate occasions.

3) On every occasion, there was a confirmation from the parents that they intended the amount to be a loan.

4) In saying this however, no formal agreement was ever entered into.

5) 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 deeded 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’

Ensuring a loan is a loan (or alone with you**) – part 1

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:

1) 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.

2) Possibly implementing security arrangements in relation to the loan, for example, by way of mortgage or registering an interest under the PPSR.

3) 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!

Trust creation – the 4 key elements

As set out in earlier posts, and 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 for those that cannot (or choose not) to view it is below –

On the basis that a picture tells a thousand words, we find the best way to explain a trust is via diagrams. Generally, we use triangles to represent a trust, rectangles for companies to keep things simple.

If pictures, symbols and diagrams are used then when you explore some of the technical issues with trusts it invariably makes it a lot easier. This is particularly the case when you then get into the detail of a trust document that run to dozens of pages.

If we, therefore, explore the creation of a trust arguably there are really only ultimately 4 key principles that need to be in place in order for there to be a trust relationship.

Many readers would probably argue very quickly, “Hang on, there’s a whole range of additional things that need to be satisfied.” On many levels that feedback is fair. However arguably the response is that, “Any other idea that you can come up with would be, I would argue, falls under one of the 4 headings.”

The first one is that you need to have legal ownership. Invariably, that’s the trustee. Invariably with a discretionary trust, that trustee will be a company. Its sole role is having the legal ownership of the underlying asset.

Where is that underlying asset? It's held within the trust, which is point two.

Without an asset, there is no trust relationship. It might again sound abundantly simple but it is a really key point.

Point three is that there are some rules. Invariably those rules will be set out in a trust deed, or a trust instrument. Generally this will be a written document.

Finally, the fourth point, is that there must be at least one beneficiary to receive entitlements, whether they be income distributions on the way through the life of the trust or capital distributions either interim or on the final vesting of the trust.

Within those 4 parameters, there are essentially no restrictions in terms of what can or can’t be done in relation to a trust structure.