Divorce and 'jointly' owned assets

Image credit: Stefano Corso

In a recent post, the impact of separation following a relationship breakdown on estate planning arrangements was considered. 

One particular aspect that arose recently in this regard involved an adviser who identified that many assets owned by a couple who had recently separated were owned as joint tenants. 

While the adviser was quick to ensure updated will and power of attorney documentation was put in place, at the same time, for the benefit of both spouses, steps were also taken to sever the joint tenancy ownership and convert it to tenants in common. 

An earlier post summarises the distinction in this regard, and it is critical that joint ownership structures be considered as part of an estate planning review following a relationship breakdown. 

The other aspect in this regard is the often forgotten requirement that before a married couple can in fact divorce, there must be evidence of an irretrievable breakdown in the relationship that has lasted more than 12 months. 

As touched on in last week's post, while divorce will often partially revoke a will to the extent that it benefits a former spouse, given the 12-month 'waiting period', the conservative approach is to always update estate planning documentation as soon as it is clear that there is no real prospect of a reconciliation following the initial separation. 

Until next week.

Divorce and Estate Planning

Image credit: Public Domain Pictures

The impact of a relationship breakdown on any estate plan must be considered carefully.

While in many jurisdictions, a formal divorce leads to a partial revocation of an existing will, if the couple has only separated, or alternatively, if they have only had a property settlement, neither of these events impact on pre-existing wills.

Generally speaking, before a divorce takes place, there must be complete separation for 12 months following a breakdown of the relationship.  On that basis, the conservative recommendation would be to always update wills and related documentation as soon as permanent separation takes place.

In most instances, particularly where the estate planning documents have been implemented in recent years, this process need not be time consuming nor expensive.

In an upcoming post, we will look at a client situation that arose for an adviser recently in this area.

Until next week.

What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are the main advantages and disadvantages of using a partnership of discretionary trusts for a professional practice?’ at the following link - http://youtu.be/AzNQv_QLMd4

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

I'll start with the advantages and there are many.  Probably the biggest one is the access to the small business concessions moving forward.  Again as we've touched on in other parts of today’s program, the ability for a partnership of trusts for each individual partner to gain access to the small business concessions is one that just simply cannot be ignored. 

Obviously, discretionary trusts are the vehicle of choice by and large for most small to medium sized businesses these days.  So the ability to combine both the small business concession access with individual autonomy and flexibility on income tax planning is very attractive. 

The other issue I guess with a partnership of discretionary trusts is that it's relatively simple to explain and understand.  This point is often in the eye of the beholder and we'll talk in a moment about some of the disadvantages and how this same advantage can in fact be a disadvantage, particularly in larger practices.  This issue can often be managed by making sure that the one company is trustee for all trusts in the group, and also perhaps acting as a nominee to the outside world, so that as far as clients are concerned, they are in fact only dealing with one entity, being the corporate trustee of a number of different trusts. 

I guess the final point to make however in relation to the advantages is that the ability to limit liability to the actual interest in the practice is solely dependent on the actual trust making sure that it only owns one asset, being it’s interest in the partnership.  So in other words, the attraction of perhaps having different assets inside that one structure very much diminishes the ability to limit liability in relation to issues that might arise. 

The disadvantages are probably not dissimilar to the advantages, just looking at things from the other side of the fence obviously.  I touched on in the advantages that the ability to have a number of partners in partnership via the trust structure can be an advantage.  Obviously, it can be a disadvantage as well, and particularly as partnerships get bigger, the concept of having countless discretionary trusts involved can administratively be quite prohibitive.  Now   argument would be that as long as you have the same corporate trustee across the group, that can be attractive. 

This of itself creates further issues, particularly from a control perspective, because you then need to have the individual trusts looking very carefully at issues such as the appointorship, to make sure that if there is disharmony within the partnership that there's an exit mechanism, via the trusts, for each of the individual partners. 

Conceptually also, while the attraction of the small business concessions is very strong, you are not getting away from the stamp duty costs.  So in other words, if an individual trust decides to dispose of its partnership interest, it will still very much be exposed to all of the normal stamp duty costs at an ad valorem rate, on the full unencumbered value of interest in the partnership. 

The last point, and this is in direct contrast to what the situation is for companies, is that you do not really have a corporate model.  So all of the normal advantages that you associate with incorporation, such as employee share arrangements, become very difficult indeed to achieve, because you've got this disparate structure of a number of different trusts involved in relation to the partnership.

Until next week.

Deferral of abolition of duty (again)

Image Credit: Brian Gurrola

The NSW Government has confirmed the indefinite deferral on the abolition of duty on unlisted marketable securities, mortgage duty on commercial properties and duty on transfers of business assets other than land to fund the Gonski education reforms.

These duties were, most recently due to be abolished on 1 July 2013.  Before then, the duties were due to be abolished on the introduction of GST in 2000 and on a number of occasions since then.  On each earlier occasion the proposed abolitions were deferred ‘temporarily’.

WA has also announced it will defer the abolition of duty on non land business assets (e.g. goodwill and statutory licences) indefinitely.

As with all other Australian states, other than NSW, WA abolished marketable securities duty and mortgage duty some time ago.

Until next week.

Directors' duties

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Shareholders have pooled their funds for a common purpose - to conduct an enterprise that they presumably could not afford to conduct on their own. The role of a company director is to guide and grow the business, observing the duties described below.

© 3ddock | Dreamstime.com

Chairman have a particular role to lead the board and to establish an environment in which executive management can successfully execute the strategy set for the company by the board.

As those ultimately responsible for the company's actions and the shareholders' funds invested in the company, directors are subject to a strict set of duties, reflecting the position of trust they hold.

An ability to fulfil these duties while successfully growing the business is the mark of a good company director; a clear understanding of risk versus reward is essential.

In summary, directors have the following duties:

1. act in good faith in the best interests of the company
2. act for a proper purpose
3. act with care and diligence
4. not misuse information they receive in their role, or misuse their position, for their own or someone else's personal gain
5. avoid conflicts of interest, and
6. prevent insolvent trading.

Directors' duties have evolved over time. The above duties are now set out in statutes (primarily the Corporations Act), however, a body of case law expands upon the underlying legal and equitable principles. A company's constitution generally also sets out additional duties and obligations of the directors of the company.

As a general rule, directors owe their duties to the company, not the shareholders or creditors of the company. However, there are provisions in the Corporations Act under which a director can be liable to these stakeholders (e.g. liability for insolvent trading).

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

Things to consider in relation to indemnities

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

© Stuart Key | Dreamstime.com

The courts have recently applied a restricted view on the use of indemnities and in some cases, have failed to acknowledge the validity of broad, all-encompassing indemnities.  Notwithstanding this, claims under clearly expressed indemnities are generally upheld.

The following issues should be considered by anyone providing an indemnity -

1. the limitation of the loss (i.e. direct loss only and not consequential loss);
2. the scope of the indemnity (e.g. 'loss in connection with' compared to 'loss caused solely by');
3. excluding liability under the indemnity where the liability arises as a result of the indemnified party's default or negligence, or limiting it to the extent it has been contributed to by the party;
4. making the indemnity subject to any exclusions or limitations of liability within the agreement;
5. requiring the indemnified party to mitigate its loss; and
6. including a right for the indemnifying party to defend any claim for which it will be liable as a result of the indemnity.

It is common practice for a buyer to request a separate tax indemnity in share sale agreements.  This is primarily so that the respective obligations of the parties in relation to tax, including as to timing, are clearly and specifically identified. 

It is also common for 'gross up' provisions to be included in these indemnities which account for the tax payable in respect of warranty payments.  Consideration should be given to whether it is appropriate for the parties to agree contractually that any warranty payments are to be treated as a reduction of the purchase consideration.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

Indemnities

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

© Stuart Key | Dreamstime.com

An indemnity is an undertaking to meet a specific potential liability, or to hold someone 'harmless', on the happening of a particular event, similar to the obligations of an insurer on the happening of an insurable event.  Indemnities provide a clear allocation of risk in respect of an event.

The scope of the indemnity provided under an agreement should be carefully considered by the indemnifying party and the trigger for the indemnity clearly understood.  Depending on the wording of the indemnity, the amount that is claimable under an indemnity may not be limited by the usual common law requirement of remoteness, or any requirement of the indemnified party to mitigate loss. 

Similarly, the indemnity may be open ended and not subject to any limitation or exclusion under the agreement, and in some cases the event need not have been caused by any wrong of the indemnifying party.

Next week’s post will look at some of the issues to consider in relation to indemnities.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.