Structuring trusts for intergenerational transfers

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Structuring trusts for intergenerational transfers’ at the following link - https://www.youtube.com/watch?v=E9Sna2eXvag

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

Probably the biggest risk when structuring trusts is to look at any particular issue in isolation.

Obviously, asset protection from a family law perspective is critical and fundamental in many situations. However, it is also important to be factoring in a myriad of commercial and revenue issues, such as tax, stamp duty and GST.

There's also related issues in terms of asset protection from a bankruptcy perspective, and the overall estate and succession planning objectives.

There are a number of adjacent issues that mean whenever an arrangement is put in place, it must be reviewed regularly.

Adopting a holistic approach is absolutely critical if steps are being considered immediately before a relationship actually breaks down, because arguably the one key principle, not just out of Spry, but out of all the family law cases in recent times, is that the courts will look very dimly on any such steps.

Party de-identification in court decisions

As a general statement, one of the key principles of the court system in Australia is that of open justice. The vast majority of cases are held in an open court, and the decisions when released, provide a full factual background and detailed analysis of the relevant legal issues.

This said, the principles of open justice do not automatically require the publication of the identity of the parties involved.

Particularly where the court believes that an individual involved in the case would be impacted on adversely in terms of their privacy and dignity, their personal details are often de-identified when the decision of the case is released.

The three primary techniques used in this regard are:

a. referring to the parties by reference to initials;

b. referring to the case simply by reference to a number; and

c. particularly in family court cases, a protocol is often adopted where the first initial of the parties’ names is used and the same number of letters are also used, however an entirely new word is created. For example, a case involving a party named 'Burgess' may instead be referred to as the case of 'Boseman'.

Image credit: Jack cc

Spry enforcement proceedings

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Spry enforcement proceedings’ at the following link - https://www.youtube.com/watch?v=6ewuWIpJE3g

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

Stephens is the case about the actual enforcement proceedings of the Spry case and it reinforces just how wide powers of the court are, in terms of making and implementing decisions under the property settlement regime.

In the particular case of Stephens, there were aspects of the judgment that saw transactions that took place after the relationship had broken down, completely ignored and unwound.

What the court also did was unwind transactions that had taken place before the relationship had broken down as well as those which related to third parties. For example, independent trustees and the children of the relationship who had been involved in those transactions were actually forced to comply with orders, that on the face of it just applied to Dr and Mrs Spry.

Apple iTunes Podcasts launched by View

Leveraging our successful webinar series, View is excited to announce the launch of our iTunes podcast channel. 

In creating this new service we have joined the thousands of public and commercial broadcasters, renowned celebrities and independent podcasters on iTunes giving you immediate free access via your iphone, ipad or computer to specialist content across a range of topics. 

Each podcast contains 60 minutes of audio content from View’s various webinar and seminar programs.  The podcasts can be found on our website at the following link – http://viewlegal.com.au/view-legal-podcast/ or directly on iTunes – simply search ‘View Legal’.

Podcasts already released include –

(a) Failed Trust Distributions

(b) Estate planning and asset protection

(c) Superannuation and estate planning

(d) Are you ready for June 30?

(e) Testamentary trusts - the fundamentals

Making our webinars available as podcasts offers yet another mode of accessing specialist content and the ability to ‘try before you buy’ – recordings giving access to the full video presentation of each webinar and seminar are also available via our website in DVD, USB and streaming formats – see http://viewlegal.com.au/recorded-webinars/ 

New View podcasts will be released on iTunes every few weeks, so consider subscribing for automatic notification.

Sham trusts and the Family Court

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Sham trusts’ at the following link - https://youtu.be/ERpGAlIf_ro

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

Sham Trusts are probably the most interesting aspect of what is otherwise a very interesting topic in terms of structuring of trusts from an asset protection perspective under the family law provisions.

Ultimately, a sham trust will be held to exist where there has been a deliberate and focused attempt by the people behind the trust to actually completely mislead and deceive anyone else that might have come into contact with it, whether it be other beneficiaries, former spouses or indeed the court.

Where a sham trust is held to exist, what the court is empowered to do is just completely ignore it as if the trust is a complete nullity. Obviously this is a very radical power given to courts, in that despite the legal documentation, the court can just completely ignore it.

What the cases have shown is that while the Family Court certainly has the power to deem a trust to be a sham, they are very reticent to do so, unless there is very clear evidence to support such a finding.

Superannuation proceeds trusts: Tricks and traps

For those that do not otherwise have access to the Weekly Tax Bulletin, the further article from earlier this month by fellow View Legal Director Patrick Ellwood and me is extracted below.  It provides a more technical analysis of the various issues surrounding superannuation proceeds trusts, building on the discussion in recent posts.

A superannuation proceeds trust (SPT) is a trust established solely to receive superannuation proceeds on the death of a fund member.  A SPT can be established by a will or by deed after the death of an individual, although establishing the structure post death can be problematic and is outside the scope of this article.

The ITAA 1997 provides that a superannuation death benefit, paid to a death benefit dependant as a lump sum, is not assessable income.  A death benefit dependant (defined under s 302-195 of the ITAA 1997) is a:

• spouse or former spouse of the deceased;

• child, aged below 18, of the deceased;

• person with whom the deceased had an "interdependency relationship", as defined by s 302-200 of the ITAA 1997; or

• person financially dependent on the deceased just before they died.

Payments to the estate

Where there are death benefit dependants under a deceased estate who are potential recipients of superannuation benefits, it is often an appropriate estate planning strategy to allow for a separate SPT under the will in addition to any testamentary trust (TT), so that a tax-free distribution of the superannuation proceeds can be achieved via a protected structure.  Other estate assets can be distributed to a TT that has beneficiaries who are not death benefit dependants.

When the superannuation proceeds are paid to a SPT, the legal personal representative (LPR) is taxed in accordance with how the person or persons intended to benefit from the estate would be taxed were they to have received the payments directly.  That is, ATO will generally adopt a "look through" approach as if the death benefit had been paid directly to the recipient.

To ensure that any receipt of superannuation proceeds is tax-free, the LPR should ensure that, at least at the time of receipt of the superannuation proceeds by the SPT, the only capital beneficiaries of the SPT are those who meet the definition of "death benefit dependant" under s 302-195 of the ITAA 1997.

In practical terms, this means that where there is more than one death benefit dependant, the terms of the SPT should provide that they receive the trust capital in specified shares on vesting.

In particular, ATO Interpretative Decision 2001/751 (which has since been withdrawn on the basis that its view has been subsumed into s 302-10 of the ITAA 1997) confirms that it appears to be the clear intention of the legislation that the fact that a payment is made to a trustee, rather than directly to the dependant, should not obscure the fact that the payment is ultimately for the benefit of the dependant.

In the facts considered in ATO ID 2001/751, the death benefit dependant was the sole beneficiary of the trust and, therefore, absolutely entitled to the income and capital of the trust.

Income beneficiaries of a SPT

The requirement that death benefit dependants receive the capital on the ending of the trust is also driven by the requirements of s 102AG(2) of the ITAA 1936, which sets out the basis on which trust property must be regulated when the trust ends, in order to access the excepted trust income provisions.  The excepted trust income provisions effectively allow infant beneficiaries of income distributions to be taxed as adults.

There is limited guidance about whether the ATO will require all the income beneficiaries of a SPT to be death benefit dependants.

The conservative position would be to limit the income beneficiaries of the SPT to death benefit dependants only.  In particular, the guidance available in relation to whether tax will be payable on receipt of the superannuation proceeds under s 302-10 of the ITAA 1997 indicates that the income and capital beneficiaries should be limited to death benefit dependants.

It is arguable however, based on the ATO's comments in Taxation Ruling TR 98/4, that a SPT can include a broad range of discretionary income beneficiaries.  While TR 98/4 sets out the ATO's view in relation to child maintenance trusts (see 2015 WTB 11 [287]), it can by analogy be argued that the comments apply to other similar types of trusts (including SPTs).

Furthermore, in practical terms, it appears that the ATO only tests the range of potential beneficiaries of the SPT at the date at which the superannuation proceeds are received by the SPT (for example, see private ruling authorisation number 1011741138466). 

Therefore, even if a trustee takes the conservative approach, that is, to limit the range of potential income beneficiaries to death benefit dependants, following receipt of the proceeds, it may be possible for the range of beneficiaries to be expanded to include non-death benefit dependants.

Below is a diagram giving an example of making distributions under a will to a TT and a SPT.

Provisions of a will

For completeness, as superannuation proceeds do not automatically form part of the estate of the deceased member, it may be necessary to ensure that appropriate nominations are made by the member to direct that the superannuation death benefits are paid to the LPR for distribution under the will, and if appropriate, to any SPT established.

Assuming proceeds are paid under a will, the LPR should have the power to ensure that the range of potential beneficiaries can be limited to persons: 

• within the provisions of s 295-485(1)(a) of the ITAA 1997; and
• who satisfy the definition of "death benefits dependant" under s 302-195 of the ITAA 1997.

The main reason both these provisions should be mentioned is due to the requirement under s 295-485(4) that regard needs to be had to the extent to which a death benefit dependant can reasonably be expected to benefit from the estate.

In particular, s 295-485 of the ITAA 1997 gives superannuation funds the ability to claim a tax deduction based on an increased amount of superannuation lump sum death benefit paid under the "anti-detriment" rules, with reference to the tax paid on contributions.

Conclusion

In many respects, the ability to utilise a SPT under a will incorporating a TT is a simple, yet powerful, strategy that practically is useful in a large range of circumstances.

There are however some fundamental threshold issues that need to be addressed to ensure the expected income tax concessions can be validly accessed.  Furthermore, given the significant number of estate planning related issues aside from tax that are potentially relevant, it is critical that a methodical approach is adopted.

Image credit: Martin Howard cc

'Look through' powers of the Family Court

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of 'Look through' powers of the Family Court’ at the following link - https://youtu.be/4I57VXYU0w4 

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

The ultimate rationale in relation to the look through powers of the Family Court which are extraordinarily wide - the Family Court has powers that do not exist in other area of the law-, is public policy.   

This is because it is seen as inequitable that a party who has been in a longstanding relationship has access to assets that they can effectively deal with as their own via a trust structure, but then suddenly those assets are completely ignored in a property settlement.   

The rules are driven by public policy and this is why the concept of 'continuum' as to the way the courts deal with trusts is so relevant. The answer to the question 'is that asset protected?' in many situations will ultimately often be 'it depends'. And it depends on the court's perception and interpretation as to how that overriding and overarching public policy framework applies to any particular factual scenario.