Barbie and keeping it (the) real (thing) this Christmas **

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 2021.

Similarly, the social media contributions by both the View and Matthew will also largely 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 posts.

Additional thanks also to those who have purchased the ‘Inside Stories – the consolidated book of posts’.

The 2021 edition of this book, containing all posts over the last year, edited to ensure every post is current, indexed and organised into chapters for each key area should be available early in 2021.

Very best wishes for Christmas and the New Year period.

P.S. Too cool seeing the latest release Barbie House at the local department a Christmas or 2 back.

As shown in this image, Lawyer Barbie (or was it Yoga Barbie or perhaps even Presidential Candidate Barbie) was passed out on the floor, unable to make it into her bed.

Totally capturing the spirit of Christmas for the young ones.

** For the trainspotters, name checking Russell Morris and his tune 'The Real Thing'

Death (to our friends) ** duty and joint tenancy

For many years in Australia, one of the most popular tax planning tools to manage death duties involved assets being held as joint tenants, instead of tenants in common.

Previous posts have the distinction between these two ownership structures. As usual, please contact me if you would like access to this content.

A surviving joint tenant receives the asset automatically (without anything passing via the deceased owner's estate). Joint tenancy ownership was often seen as the easiest way to delay the imposition of a death duty for as long as possible.

In jurisdictions that still have death duties, this ownership structure can provide a pathway to manage the tax impost.

Interestingly, under Australian law, the strategy can still provide planning opportunities.

In particular, where an asset is owned as joint tenants with a non-resident, the tax that would otherwise be paid by a non-resident on the death of a co-owner under capital gains tax (CGT) event K3 can potentially be avoided if the relevant asset is owned as a joint tenancy. This is because CGT event K3 is only triggered where assets actually pass via an estate.

It is important to note that in recent years the federal government moved to close this potential 'loophole'. At this stage however, no such changes have occurred.

** for the trainspotters, the title here is riffed from a Sonic Youth tune ‘Death to our friends’.

Unilateral severance** of joint tenancy assets

Last week’s post mentioned in passing the ability to unilaterally sever a joint tenancy.

Interestingly, there are in fact 6 ways to sever ownership of a property owned as joint tenants, namely:

1. an agreement to sever is reached between all parties (this is arguably the most common approach);
2. by mutual intention, as demonstrated by the conduct of the parties (relatively difficult to prove);
3. by court order;
4. due to the bankruptcy of a party (as explored in previous posts);
5. due to the homicide committed by one joint tenant against another (fortunately, relatively rare); and
6. a joint tenant unilaterally severs the tenancy.

It is also important to as mentioned last week, that where an asset owned on title records as joint tenants is a partnership asset it will be deemed to in fact be effectively owned as tenants in common. Previous posts have explored this aspect of the rules.

The ability to unilaterally sever a jointly owned property is enshrined in state-based legislation that permits any person who owns a property as a joint tenant to notify all other owners of their intention to sever the joint tenancy and for the registration of that severance to take place without the prior approval of the other owners.

If there are more than two owners of a property and only one owner wishes to sever the joint tenancy, the other owners will still hold their reduced interest in the property as joint tenants.

The legislative provisions in this regard generally require that the other joint tenants be notified by the Titles Office Registrar.

The Registrar may also require the full details of the other joint tenants and a statement by the party seeking to sever that they are unaware of any limitation on their right to do so.

For tax purposes, assets owned via a joint tenancy are deemed to be owned as tenants in common, in equal shares. This means that the conversion from one ownership mode to the other has no tax consequences. It also means that the death of a joint tenant owner will cause a tax event.

For example, on the death of one of two joint tenant owners of a pre-capital gains tax property, converting the ‘notional’ half share of the deceased owner into a post CGT asset (with a market value as at the date of death).

Similarly, there are stamp duty concessions for the conversion.

These conclusions in relation to the legal ability to convert the ownership structure without any tax or stamp duty consequences are however predicated on the basis that each owner will retain their deemed proportionate share in the asset.

In other words, if there are two owners, then they must each have a 50% share as tenants in common, if there are three owners, they must each have a one third share etc.

As usual, please contact me if you would like access to any of the additional content mentioned in this post.

** for the trainspotters, the title here is riffed from a Nick Cave and the Bad Seeds tune ‘The Ballad of Robert Moore and Betty Coltrane’

When is a joint tenant not (for you)** a joint tenant?

In the context of recent posts, it is an important estate planning issue to understand that where an asset owned on title records as joint tenants is a partnership asset it will be deemed to in fact be effectively owned as tenants in common.

If this deeming rule applies then the death of a partner essentially causes the value of their interest to pass under their will, and not by survivorship to the other owners.

The Partnership Acts in most states codify the rules in this regard. These rules generally state that unless the contrary intention appears, property bought with money belonging to the partnership is deemed to have been bought on account of the partnership and is considered partnership property.

The rules in this area were perhaps best explained in the case of Spence v FCT [1967] HCA 32. As usual, if you would like a copy of the case please let me know.

In this case it was relevantly held:

“It is … a mistake to say she got it simply by virtue of her joint tenancy. The legal estate devolved in accordance with the joint tenancy.

To that extent the maxim which was mentioned – ‘ius accrescendi inter mercatores locum non habet' – does not apply: see Lindley on Partnership, 11th ed. (1951), p. 428.

But it is applicable in equity; partners who hold as joint tenants in law hold beneficially as tenants in common.

That is an old rule.

It is more exactly stated today in terms of the Partnership Acts (the relevant provisions are ss. 30 and 32 in the Western Australian Act) the legal estate devolves according to its nature and tenure but in trust so far as necessary for the persons beneficially interested; and as between partners land which is partnership property is to be treated as personal estate.”

The ‘old rule’ reference in the quote above comes from cases such as Lake v. Craddock (1732) 3 P Wms 158; 24 ER 1011. Again, if you would like a copy of the case please let me know.

** for the trainspotters, another classic song from Pearl Jam this week, namely ‘Not for you’.

When possession is 10**/10ths of the law

The interplay between legal principles, family law rules and estate planning can be complex.

Arguably, one of the highest profile examples of this was the High Court’s decision in Stanford, which was analysed in an earlier post (please contact me if you would like access to this content).

The decision in Paxton v Paxton [2016] FCCA 1689 (7 July 2016) provides another useful example. As usual, if you would like a full copy of the decision, please let me know.

Broadly, the factual matrix was as follows:

1. A married couple owned a home as joint tenants, as opposed to tenants in common.
2. Some years later, the husband of the marriage and commenced a de facto relationship.
3. Some years later again, the husband then commenced property proceedings seeking division of the matrimonial home, although he died before any decision was handed down.

The court confirmed that the key principle from Stanford contained two limbs namely:

1. Would the court have made an order in relation to property if the relevant party had not died?
2. Is it appropriate, despite the death, to still make that same order?

In confirming that the wife was entitled to keep the entirety of the property as the surviving joint tenant, the court confirmed:

1. So long as property proceedings commence before death, the person’s estate is permitted to continue with the proceedings.
2. Even though the parties had previously agreed that the property should be sold, the court refused to enforce this on the basis that it would not be just and equitable in all the circumstances. The relevant circumstances included the fact that the wife was of ill health, financially destitute, had limited employment prospects and had to care for an adult child from the marriage who had a disability.
3. Furthermore, the executor of the former husband’s estate was required to pay the wife’s costs of the proceedings.

While obviously open to conjecture, there is every chance that if the joint tenancy ownership of the property had been severed so that the parties owned it as tenants in common, the husband’s estate would have been likely entitled to retain most, if not all, of the 50% interest.

In this regard, it is important to note that the joint tenancy can be severed by the unilateral actions of one party (i.e. without requiring the consent of the other owner or owners as the case may be).

** for the trainspotters, a classic song from Pearl Jam’s album ‘Ten’, namely ‘Even flow’.

Changes** and ownership structures and the bankruptcy rules

Recent posts have looked at various aspects of the bankruptcy regime in relation to jointly owned assets.

As set out in last week's post, from an asset protection perspective, it is generally preferable to own assets with other parties on a tenants in common basis, so that if a co-owner dies, their interest can be distributed to a testamentary trust.

Arguably the leading case in this area is Peldan v Anderson [2006] HCA 48.

As usual, if you would like a copy of the case please contact me.

In this case, the wife as one of the co-owners of a house, who was in no financial difficulty, was diagnosed with an illness that meant she did not have long to live.

Driven largely by asset protection objectives, given the husband’s financial difficulties, the two owners decided to change the ownership structure of the property from joint tenants to tenants in common.

This meant that the husband as co-owner who was also at risk would not receive 100% of the property automatically on the death of his wife, rather her 50% would pass via a will, which was structured to include a testamentary trust.

The High Court held that this change in ownership was not a transaction that was void against the trustee in bankruptcy and therefore only the husband’s 50% interest was exposed to his creditors.

** for the trainspotters, the title here is riffed from the David Bowie song ‘Changes’.

‘Retro’** witnessing of wills and BDBNs: AKA no one knows you weren’t there, until it is a problem

Witnessing rule

A fundamental aspect to create a valid will, and indeed most binding death benefit nominations, is that there must be two witnesses and they must be present and observe the willmaker sign (and date) the document.

The rule in this regard is inflexible, particularly where a lawyer is involved.

Background

The decision in the case of Lewis v Lewis [2020] NSWSC 1306 is another stark reminder of the legal system’s view of ideas such as backdating, witnessing without witnessing, retro-dating, retro-witnessing and similar ‘near enough is good enough’ strategies.

In particular, one of the key aspects of the case for advisers involved an analysis of the requirements of signing a will validly

Factual matrix

Relevantly in relation to the witnessing aspect, the factual matrix in Lewis involved a son who was a qualified lawyer and prepared a will on behalf of his mother.

Likely realising that if he was one of the witnesses he would be automatically excluded from taking any benefit under the document (see Hill trading as R F Hill & Associates v Van Erp (1997) 188 CLR 159), he arranged for 2 neighbours to be the witnesses.

After handing the will to his mother and explaining the witnesses would be over later in the day the son went out.  When he returned his mother had gone to bed, leaving the will, signed, on a table in the lounge room.

When the witnesses arrived the son told them that his mother had already signed the will and gone to bed and said 'This is not the right way to witness the will but I will have to deal with it at a later stage. Do you mind signing anyway?'. 

Court’s view

The approach the son suggested at least somewhat reminiscent of the conduct nab found itself in trouble over for regularly allowing advisers to witness binding death benefit nominations with only one witness in attendance - and a second witness later signing; despite not actually having been present.

During the hearing when the lawyer was questioned as to why he had knowingly procured false attestations, he evidently did not seem especially troubled - and indeed responded by saying he offered the witnesses a choice and that they could always have refused if they were worried.

The court confirmed its view that the lawyer's conduct was completely unsatisfactory and it was grossly improper of him to ask the witnesses to make solemn statements that they had witnessed the willmaker signing the will when in fact they had not.

Furthermore, the attempt to deflect blame on to the witnesses was described as 'positively discreditable'. 

Ultimately, the court concluded that the conduct of the lawyer may have justified referral to the Law Society for consideration of disciplinary action, although gave the lawyer the right to make submissions against this occurring.

Based on the decision in Council of the Law Society of New South Wales v Renfrew [2019] NSWCATOD 63, there is every chance of disciplinary consequences.  In that case a lawyer was the only witness to a will at the time the willmaker signed, and then arranged for a second witness to sign some period of time later (after the willmaker had died), before then attempting to mislead the court on a probate application that both witnesses had in fact been present.  Although there were other issues of concern, this aspect was held to amount to professional misconduct.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Silverchair song ‘Insomnia’. 

View here:

https://www.youtube.com/watch?v=BEpqbyl-XFM

PS: the original version of this article appears SMSF Adviser Magazine, see here: https://www.smsfadviser.com/strategy/19394-pre-signing-of-wills-and-bdbns-another-warning