Estate planning costs paid through superannuation

It is well understood that, in order to obtain the concessional taxation available for superannuation savings, a superannuation fund must have its sole purpose as being the provision of benefits to members on retirement, or their dependants or legal personal representative (LPR) on death.

In this context, one issue that is often raised is whether a superannuation fund can pay the costs of ensuring its members have their estate planning affairs in order.

In the absence of any specific guidance from the Tax Office in this area, there are a range of views about the legitimacy of this approach.

Some advisers believe that any estate planning related expense is clearly incurred in order to help provide for the dependants or LPR of a member and therefore properly payable by a superannuation fund.

The conservative position is that either all estate planning costs should be incurred by members personally, or alternatively where they may be paid by the superannuation fund, there must be a direct and clear nexus between the expense incurred and the ultimate provision of benefits to dependants or LPR on the death of a member.

Next week's post will consider some specific examples of the types of costs that may be legitimately incurred by a superannuation fund on behalf of a member.

Until next week.

Final Post and Season's Greetings

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2014.

Similarly, my Twitter and LinkedIn postings will also take a hiatus until the New Year as from today.

Thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to, the various posts.

Additional thanks also to those who have purchased (via donation) the various versions of ‘Inside Stories’ – the consolidated book of posts.  An updated version of this book, containing all posts over the last four years should be available in the new year.

Very best wishes for Christmas and the New Year period.

Testamentary capacity

Recent posts have considered various aspects of assessing a will maker's testamentary capacity. 

One issue that has come up recently is the ability for the lawyers to make the relevant assessment, where all client meetings are web-based.

Perhaps somewhat counter-intuitively, the ability to assess testamentary capacity via web platform is often superior to the traditional, face-to-face, delivery of legal services. The reasons for this include:

1. generally lawyers conducting a meeting should have the general rules for assessing the testamentary capacity of a will maker top of mind at the time of conducting the web based meeting, and asks probing questions crafted to test the criteria; 
2. at View Legal, the estate planning platform via the web is a strictly wholesale platform, each client can only access the solution if their financial adviser or accountant facilitates the process; 
3. generally, any client that has an ongoing relationship with a financial adviser or accountant has a very good understanding of their financial affairs and the significance of them; 
4. the financial adviser or accountant facilitating the process will be considered by the client as their 'trusted adviser' and will often have a deep, longstanding and regular relationship with the client. Rarely do traditional law firms enjoy such a relationship with a client; 
5. as the adviser and View Legal work collaboratively, sensitive issues such as capacity of the client are far easier to raise, discuss and address; 
6. again, largely due to the collaborative approach between the adviser and View Legal, the lawyer will have received and reviewed a significant amount of detailed information about the client, which in comparison is often far more comprehensive than in the traditional process. This allows View Legal to ask far more probing and relevant questions as part of the web-based meeting; 
7. the web-based meeting is fully recorded (with the client's consent), which provides significant evidentiary advantages if ever needed, as compared to the traditional approach; and 
8. finally, the signing meeting is regularly hosted by the referring trusted adviser, who in most instances, will be best placed to very quickly identify if there has been a significant deterioration in the mental capacity of the client.

Until next week.

Assessing Testamentary Capacity (Part II)

Last week's post looked at the general rules for assessing the testamentary capacity of a will maker. In particular, six of the twelve main items to consider were listed.

As promised, this week's post lists the other six main issues to consider, which are as follows:

1. the person does not seem unduly influenced by others about their decision making; 
2. the person does not display an unreasonably low level of concern with the activities of other people (particularly their immediate family members); 
3. the person does not display an unduly low ability to adapt to change; 
4. the person did not appear to be prone to unduly losing things or themselves getting lost; 
5. there is no reason to believe the person has recently undergone a change in behaviour or experienced a change in personality; and
6. there is no reason to believe that there are any other factors present that might indicate impaired testamentary or decision-making capacity. 

In next week's post, we will consider some specific issues in relation to assessing testamentary capacity in a web-based environment.

Until next week.

Assessing testamentary capacity (part I)

One issue that comes up relatively regularly is the ability of a lawyer to determine whether a client has the required capacity to make a will.

Arguably, the leading case in relation to testamentary capacity dates back many years and is the decision in Banks v Goodfellow [1870] 5 LR QB 549. If you would like a full copy of the court decision please email me directly.

As set out in the decision, and as subsequently adopted and expanded on in many related cases, there are a number of key tests that a lawyer or witness to a will should consider.

The first six of these considerations are set out below (next week's post will summarise another six tests):

1. there is no reason to consider that the person has a diagnosed condition that may affect their decision-making capacity (such as an intellectual or psychiatric disability, acquired brain injury or dementia); 
2. the person does not seem unduly forgetful of recent events; 
3. the person does not repeat themselves unduly; 
4. the person seems able to grasp new ideas; 
5. the person does not seem unduly anxious about having to make decisions; and 
6. the person does not seem unduly irritable or upset about their ability to manage tasks. 

Until next week.

Share self-ownership - a structuring warning

For those that do not otherwise have access to the Weekly Tax Bulletin, the article from last week is extracted below.

Recent articles in this Bulletin (for example, 2013 WTB 38 [1642] and WTB 43 [1821]) have focused on the various issues that can arise in relation to the use of corporate beneficiaries by discretionary trusts.

A separate issue that practitioners must be aware of whenever reviewing existing structures or establishing new entities, arises under the Corporations Act 2001. In particular, the Act expressly prohibits companies from owning shares in themselves.

This can arise in instances where a trustee company is incorrectly established with the trust (for which it is trustee) owning some or all of the shares. As the legal owner of those shares is the trustee, this results in the trustee owning shares in itself.

The relevant section is s 259A, which provides as follows:

"A company must not acquire shares (or units of shares) in itself except:

(a) in buying back shares under section 257A; or

(b) in acquiring an interest (other than a legal interest) in fully-paid shares in the company if no consideration is given for the acquisition by the company or an entity it controls; or

(c) under a court order; or

(d) in circumstances covered by subsection 259B(2) or (3)."

Under s 259F of the Act, if a contravention has occurred, a person who was involved (which is widely defined and includes any person who was, directly or indirectly, knowingly concerned in or party to the contravention) in the contravention may be subject to a civil penalty of up to $200,000. There are also potential criminal consequences that can flow from the breach.

Due to the potentially significant penalties that can arise under the Act, together with the likely adverse commercial ramifications, any identified breach of s 259A should be remedied as soon as practical following identification of the issue.

One option is for the persons involved in the contravention to apply to ASIC for a no-action letter, whereby ASIC confirms it does not intend to take any steps as a result of a particular contravention of the Act.

As flagged above, a breach of the Act in the SME space most typically arises where a trustee company of a family discretionary trust is listed under ASIC records as having its shares owned by the trust. That is, the trustee of the trust owns shares in itself. While "circular" ownership arrangements can be beneficial from an asset protection perspective, they must still comply with the Act.

The preferred approach therefore, where the shares in a corporate beneficiary are to be owned by a trust, is for a structure along the following lines:

1. the shares in the corporate trustee should be owned by individuals with a low risk profile; 
2. the corporate trustee should undertake no activities other than its trusteeship and the value of the shares in the trustee company should therefore be limited to their issue price; and 
3. the trustee company in its capacity as trustee should own all of the shares in the corporate beneficiary.

Until next week.

Corporate trustees and SMSFs

Many specialist advisers to self managed superannuation funds (SMSFs) recommend the use of a corporate trustee, as opposed to individual trustees.

While the initial setup costs of a corporate trustee are generally higher than individuals, there are a range of reasons that the use of a company is beneficial, including:

1. as other posts have demonstrated, the use of a corporate trustee provides limited liability protection. This can be particularly important if the SMSF owns real property; 
2. special purpose corporate trustees of an SMSF are entitled to discounted annual ASIC fees; 
3. record keeping and compliance is significantly improved with a special purpose corporate trustee in terms of what the auditor (and ultimately the Tax Office) expects to see; 
4. from a succession planning perspective, it is significantly easier to regulate the control of a corporate trustee (i.e. by simply changing the directors from time to time) as opposed to individual trustees, where each time an individual trustee changes, there is often a myriad of documentation that needs preparing and notifications that must be made; and 
5. particularly in relation to sole member funds, the use of a corporate trustee significantly simplifies the overall structure of a SMSF, as a sole director company is permissible. In contrast, it is impossible to create a valid SMSF with an individual trustee and sole member (there must always be an additional individual who acts as a co-trustee in this instance). 

Until next week.