Penalising the under insured

With thanks to co View Legal director Patrick Ellwood, this week’s post looks at a situation we had recently under an insurance funded buy sell arrangement where the parties were wanting to craft the agreement in order to penalise a business owner if they were under insured.

In particular there was a desire to ensure that the agreement discounted the purchase price that was otherwise payable under the agreement if the insurance payout was less than the market value of the interest in the business at the relevant date.

For a number of reasons we recommended against this approach, including:

1.   The overall aim of any business succession agreement is to achieve as smooth a transition of the business as possible.  If a party to the transaction believes that they are not getting fair value then the prospects of a smooth transmission are significantly decreased.

2.   The exiting owner (or their estate) will still be required to pay tax on the transfer of the interest at full market value (even though the price under the agreement would be less than market value) due to the way in which the market value substitution rules under the Tax Act operate.

3.   Practically, if the exiting party had sold their interest the day before the triggering event, they would have received market value.  It is arguably inequitable for an owner to be disadvantaged because of a sudden involuntary exit event, as opposed to a planned voluntary exit.

4.   Generally most agreements (ours included) cater for any shortfall in insurance funding by ensuring that the remaining owners are still required to pay the difference but have an extended period of time (for example, three years) to repay the difference.

Until next week.

Assets of a family trust not necessarily at risk on a matrimonial breakdown

With thanks to team member James Ford, the post this week focuses on another recent decision of the Family Court concerning trusts.

The case is Morton V Morton [2012] FamCA 30. If you would like a copy of the case please email me.

Essentially, the case confirms that, where appropriately structured, the assets of a family trust will not be considered matrimonial property on a relationship breakdown.

Until next week.

When will ‘master’ trusts be uncommercial?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘When will ‘master’ trusts be uncommercial ?’ at the following link - http://youtu.be/9JGjM-_h2Ac



As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The issue in relation to when the traditional master trust might not in fact be entirely commercial is probably very similar to many other issues in this area in so much as there's a myriad of reasons why it might not be entirely sensible.　

Three common themes that I would probably encourage people to keep an eye out for would be – firstly, that the overall value of the estate just doesn't justify any form of testamentary trust.　

In other words, the ongoing administrative cost and the actual costs to actually set the structure up just don’t make it economical, and part of it might be that because the will makers’ are ultimately wanting to spend the kids’ inheritance, so they're actually going to make sure that it's all gone in the first place.

That would be the first category.　

The second category would be what we would describe as an estate where there is ‘enough wealth to be dangerous’ – so in other words, not wanting to put any actual numbers around it, but if there are, say, ultimately 3 or 4 children that are going to take a benefit, but the overall portfolio of the estate makes it unwise to be trying to lock that into one particular structure, and it would be in fact better for everyone concerned that they each get their own piece of the pie as it were, then that can be another big reason to sort of trend away from master trusts.　

That can often be driven not just by the financial numbers involved, but also practically, if you've got children spread all around the world, it may not be the absolute smartest thing to be trying to lock them into one structure.　

The third big reason tends to be actually at the other end of the scale where you've got significant wealth involved, serious wealth involved, and you've got the will maker sitting there and saying look, at the end of the day, while we're very happy to have the master trust as a big part of what we're trying to achieve here, we need to be able to allocate some money off directly to the ultimate beneficiaries.　 So that they actually can have something they can touch and feel - I guess it's called the ‘beer money’ trust on the side.

In those cases, it's not so much that the master trust is uncommercial overall, it's more that if you only had a master trust, that would be an unwise way to go in a particular set of circumstances.

Until next week.

Insurance premiums & FBT

As many regular readers would be aware, one particular innovation in recent times in relation to insurance funded business succession arrangements is the so-called 'debt reduction' strategy.

One aspect of the arrangement that is often raised concerns the fringe benefits tax (FBT) implications of the premium payments.

Broadly, there are a number of reasons as to why FBT will normally not apply to the payment of insurance policy premiums.

Generally the accountant for the business will always be best placed to give the guidance, however some of the reasons FBT will not apply can include –

1.    the arrangements not having anything to do with employment;

2.    in some instances, the otherwise deductible rule; or

3.    while for administrative ease the premiums might be paid by the business, the actual tax position is that the amount is included as part of other payments made (for example, a dividend).

It is important to remember that aside from FBT, there are a number of other tax issues that may also be relevant (for example division 7A or capital gains tax) so it is also best to ensure the exact circumstances are considered by the accountant for the particular client.

Until next week.

Links to Advanced Health Directives in every state

As mentioned in last week’s post, each state offers the ability to prepare an Advanced Health Directive (AHD).

Set out below are the links to the relevant government websites that provide the standard statutory forms for AHDs.

Obviously, before relying on any link, you should satisfy yourself that the relevant document is up-to-date.

In summary then:

NSW http://www.health.nsw.gov.au/patients/acp/Publications/acd-form-info-book.pdf

VIC https://www.publicadvocate.vic.gov.au/your-rights/your-healthcare/making-an-advance-care-directive

QLD https://www.qld.gov.au/law/legal-mediation-and-justice-of-the-peace/power-of-attorney-and-making-decisions-for-others/advance-health-directive

SA https://advancecaredirectives.sa.gov.au/upload/home/Current_ACD_Guide.pdf

WA http://www.health.wa.gov.au/docreg/education/population/HP11536_advance_health_directive_form.pdf

NT https://nt.gov.au/law/rights/advance-personal-plan

TAS https://www.dhhs.tas.gov.au/palliativecare/advance_care_planning_for_healthy_dying

ACT http://www.health.act.gov.au/public-information/consumers/advance-care-planning or https://www.advancecareplanning.org.au/create-your-plan/create-your-plan-act


Until next week.

Difficulties with Advanced Health Directives

In last week’s post, an overview of Advanced Health Directives (AHDs) was provided.

As mentioned in that post, there are a number of significant practical difficulties with AHDs, and in summary, the main issues in this regard include:

1.       The person making the AHD tends to want to be able to have a ‘turn off the switch’ type provision (or perhaps even euthanasia).  No AHD allows this.  Unless the donor has specific religious or personal objectives, many of the questions are somewhat irrelevant.

2.       The attitude of a donor when signing the AHD is not necessarily any indication of their attitude in say, ten years time, when the issue arises.  Anecdotally many doctors are unwilling to rely on a document from years earlier in the heat of the moment (even if they find that document on an urgent basis).

3.       As the document needs to be completed with a GP it is unlikely that the GP is actually going to be involved in any sort of emergency situation in any event – again, another reason why the doctor actually performing the medical treatment etc, would be very unlikely to either try and find the AHD or even if it is found, look to rely on it.

4.       In contrast, doctors will generally place significant weight on whoever is appointed as the enduring power of attorney.  If that enduring power of attorney is also a next of kin and if there is no hint of any dispute in the immediate family group, then the wishes of the person seeking medical treatment will generally be respected.

In next week’s post, there will be links provided to the relevant government websites for AHDs in every Australian State.

Until next week.

What are Advanced Health Directives?

One issue that comes up relatively regularly in estate planning exercises relates to Advanced Health Directives (AHD).

In most jurisdictions, an AHD is essentially a document addressed to a person’s medical practitioner setting out the level of care that they would like to receive in a series of specific situations.  Normally, the document is crafted as a 'multiple choice' questionnaire listing out dozens of typical medical scenarios.  The document is normally completed in conjunction with a client’s GP.

As the document is a medical, not legal, one, most lawyers simply provide access to the standard document rather than providing advice on it.

One important issue to note is that in no Australian state does an AHD create the ability for euthanasia style directions to be articulated.

While a person has legal capacity they may revoke their AHD at any time. 

In an upcoming post, we will look at some of the practical difficulties of AHDs.

Until next week.