Previous posts have explored various aspects of insurance funded buy sell arrangements
Based on adviser feedback, 5 of the most often asked questions during the planning process for implementing an insurance funded buy sell arrangement – with View’s short form answer – are set out below.
In no particular order, View generally asks for access to the following information before providing recommendations on the optimal way to structure the buy sell legal documentation:
the insurance policies for each principal – why: to ensure the agreements align with the ownership structure of the insurance;
copies of the most recent financial statements for each business entity (including any notes to the statements) – why: there is a material risk that loan accounts are not properly considered as part of the business succession arrangements. Certainly at a minimum, we would recommend that the legal documents specifically regulate how loans are to be treated on the various triggering events;
copies of the trust deeds for each of the trusts involved in the structure – why: many trusts do not permit the entering of buy sell arrangements (due to the rules against fettering of trustee discretion – concept explored in previous View posts);
the most recent ASIC statement (showing all shareholders and directors) for each business entity – why: to ensure the documentation is binding there should be an audit of the structure of shareholdings and directorships as against the records of the statutory authority; and
any existing legal agreements – why: if the existing documents are appropriate our preference is to leave them as is, as opposed to amending simply to ensure they align with View’s approach.
View’s initial review of the material provided is at no cost or obligation and is so that we can ensure we have a proper understanding of the circumstances before suggesting the best way to progress.
All information provided is only retained with authority and is otherwise treated in strict confidence.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Spandau Ballet song 'Only when you leave’.
One question that comes up from time to time is whether the trustees of a trust should have the power to gift assets of the trust – a standard power in most discretionary trusts (including testamentary trusts) drafted by View.
The power to gift (including to a non-beneficiary), like all the powers, is included based on our extensive experience in this area, often as a result of a difficulty faced by customers due to the absence of the particular power.
Each power is designed to minimise the risk of difficulties arising in the future, particularly as tax legislation, stamp duty rules and trust laws continue to evolve.
While we can amend any powers that there are concerns about, our recommendation always instead is to ensure the right trustees are appointed and trust them to decide how best to administer the trust, with reference to any wishes set out in a memorandum of directions.
The power to gift is one we see used mainly for tax planning reasons, for example:
to possibly help avoid restrictions any family trust election may impose
where a gift to a charity is to be made
to make transfers to other trusts, not as a distribution
Where there are concerns about allowing a trustee the power to gift, some issues to consider include:
There is however a significant difference between being a beneficiary and merely a potential recipient of a gift.
A hypothetical potential recipient of a gift has no rights at all under the trust.
In contrast, a potential beneficiary can (for example) force the trustee to correctly administer the trust – such a right would include preventing a proposed gift or holding the trustee accountable for a breach of trust in making an inappropriate gift.
While we generally recommend the gifting provision be retained, particularly if there is any chance that philanthropic activities may occur in the future, our experience is that any potential issues are resolved by ensuring appropriate trustees are selected who understand and take their role seriously.
Practically, if the trustee is not appropriate, our experience is that the terms of the deed become largely irrelevant (ie they are ignored anyway). In part (as a high profile example) this is what various children of Gina Rinehart were arguing about her conduct as trustee of a trust set up under her father’s estate plan.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Modest Mouse song 'Dashboard'.
One mantra in estate planning is the concept that beneficiaries should be treated fairly - however this does not automatically mean equally.
The decision in Firth v Reeves [2019] VSC 357 provides a stark example in this regard.
Briefly the factual matrix involved the following:
A mother with 2 daughters gifted one third of her estate to one daughter and two thirds to the other;
The daughter who received one third challenged the estate seeking a one half share;
At the date of the mother's death the estate was worth around $5M, by the date of the hearing the estate was valued at over $8M (meaning that the one third share was in dollar terms worth more by the hearing than a one half share at the date of death).
In rejecting the daughter's challenge and leaving her entitlement at one third the court confirmed:
Taking into consideration all relevant factors and surrounding circumstances, including the size and nature of the estate and the contingencies an estate of that size may warrant being provided for, there was nothing to suggest that the deceased failed to make adequate provision for the challenging daughter's proper maintenance and support.
While the challenging daughter may have had an understandable sense of grievance or hurt as a result of her mother’s unequal disposition of the estate, she did not establish any need or other consideration that would warrant further provision, even where (as here) the estate was relatively large.
On the contrary, it appeared that the existing one third provision would be more than sufficient to meet all needs that the challenging daughter identified.
A challenge against an estate based solely on breach of moral duty, without demonstrating need, will fail.
Furthermore, a willmaker is not obliged to treat their children equally, nor is the provision given to one child a measure of how another child who seeks provision should be treated.
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 Stone Roses song 'Love Spreads'.
Previous posts have considered an array of issues that arise at the intersection of the rules surrounding asset protection and family law.
The decision in Hsiao v Fazarri [2020] HCA 35 provides another interesting perspective in this regard.
Briefly the factual matrix involved a relationship between spouses, who while they had been in a de facto relationship for around 4 years, were only married for 23 days.
The total wealth of the husband was around $12M. The husband was required to pay the wife around $100,000, as well as contributing $80,000 to her legal fees, bringing her asset pool to around $430,000.
The court relevantly confirmed:
The relationship as a whole was of a modest length (ie even including the 4 year de factor relationship), with the wife's non-financial contribution to the acquisition, conservation or improvement of their property also modest, if not nominal.
There was nothing to suggest that the marriage had had any effect on the earning capacity of the wife.
Furthermore, there were no children whose interests stood to be affected by any alteration of the parties' interests in property.
Despite some arguments to the contrary, it was open to the trial judge to decide that the wife did not make any substantive financial contribution to the asset pool, and therefore had no particular claim to it.
The right a party has on appeal is to have a review of whether the primary judge's discretion to make a property settlement order had miscarried (see House v The King (1936) 55 CLR 499) - an appeal can not be used to try to make a case that a party chose not to make at the trial.
For clarity, the court also confirmed that the Family Law Act permits property settlement proceedings to be continued by or against the legal personal representative of a deceased party to a marriage (noting that this issue was not directly relevant in this case).
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 Pop Will Eat Itself song 'Wise up sucker'.
Posts over recent weeks have considered the fact that in the estate planning context, lawyers can owe a duty of care to disgruntled beneficiaries for negligence in acting on estate planning instructions.
The decision in Maestrale v Aspite [2012] NSWSC 1420 provides another example in this regard.
In this case a beneficiary received less than would have been the case had the instructions provided to the lawyer by the deceased seven days before death (at a time when he was terminally ill), been implemented. Somewhat tragically, the lawyer arrived to meet the willmaker to review and sign the will prepared 10 minutes after the willmaker had died.
Relevantly, the court confirmed:
By accepting instructions for a will, a lawyer enters upon the task of effecting compliance with the formalities necessary to transfer property from a willmaker on death to an intended beneficiary. It is foreseeable that, if reasonable care is not exercised in performing the task, the intended beneficiary will not take the property. Therefore, a lawyer who fails to exercise reasonable care whereby the formalities are not complied with (and the intended beneficiary thereby loses the property), will be liable in negligence (see Hill trading as R F Hill & Associates v Van Erp (1997) 188 CLR 159).
Defects in a lawyer's work, whatever their character may, depending upon the facts and circumstances in a particular case, be just as much a breach of duty to persons foreseeably damaged by them as they are to the willmaker directly.
This said, in the absence of indication from the willmaker that they want to sign a proposed will, then there will not be any duty of care owed by a lawyer to a potential beneficiary of the draft will. This is even the case where lawyers have acted in a manner that, in other fact situations, might be held to have been unduly dilatory, so long as the case is one where the lawyer's conduct can be said to be within acceptable limits to indecisive instructions from a difficult client who is stalling (see Queensland Art Gallery Board of Trustees v Henderson Trout (a firm) [2000] QCA 093).
In this case then, the breach of duty by the lawyer did not reside as such in an unduly dilatory approach to preparation of the will by allowing the passage of seven days before the will was prepared, but rather in the lawyer's failure to respond to the aggrieved beneficiary's urgent phone calls for advice and attention in the intervening seven day period.
This was particularly so given the lawyer had failed to keep proper file notes and had also failed to arrange for an informal or temporary interim will to be created - which would have likely avoided all the subsequent issues that arose.
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 a line in the Waterboys song 'A girl called Johnny'.
Last week’s post considered the case of Badenach v Calvert [2016] HCA 18 and the fact that in the estate planning context, lawyers can owe a duty of care to disgruntled beneficiaries.
The decision in McFee v Reilly [2018] NSWCA 322 provides a further example of the issues that can arise in this area.
The factual matrix was relatively complex, not least of which because of a key clause in the will that purported to gift a property that was at the heart of the dispute; but failed (due to a drafting error) to actually state who the property was in fact to pass to.
After the will maker had lost capacity, his wife acting under an enduring power of attorney (EPA) gifted the property, to the will maker's 4 daughters. The court accepted that at the time of drafting the will the will maker had intended that the property should pass to his son.
The son sued the lawyer who had assisted with the transfer implemented relying on the EPA. Although that lawyer who assisted with the transfer did not draft the will, he was aware of its terms.
In confirming (as set out in the Calvert case) that a lawyer does owe a duty of care to potential beneficiaries, here the court held the lawyer liable in negligence to the aggrieved son and stated:
Where the 'ultimate client', is incapable of giving instructions, and is represented by an attorney, the lawyer is still bound to protect the interests of the incapacitated client and owes them a duty of care directly.
Subsequent alterations to a will, or inter vivos transactions, are ordinarily outside the scope of any duty of care owed by a lawyer to an excluded beneficiary because the then current intentions of a will maker are key, not the former intention to include the beneficiary.
However, the position is different when the will maker has become incapable because there can be no current legally effective intention held by the will maker (whether consistent or inconsistent with the previous will) and there will invariably be an attorney who owes fiduciary duties to the incapable person.
The incapacity of the will maker essentially strengthens the interest of the beneficiary under the will because the interest of the beneficiary, although still contingent (because, amongst other ordinary contingencies, the beneficiary may predecease the will maker) is no longer liable to being extinguished by the will maker themselves changing their mind.
A lawyer acting for a will maker who has lost capacity on instruction from their attorney has an obligation to test that the attorney was properly authorised to give instructions and was not breaching their fiduciary duties owed to the will maker.
Here, without much investment, the lawyer could have easily determined the will maker's will was inconsistent with the basis given by the attorney for the new instructions - being an (alleged) informal agreement said by the attorney to have been made with the will maker three years prior to him executing his will.
Ultimately, faced with an irreconcilable clash between the source of the agent’s instructions and a client’s actual expression of testamentary intention, a competent lawyer would have advised against proceeding, and ceased to act.
The court did note however that the imposition of a duty of care of the kind found here will be rare indeed. In particular, the duty is confined to a lawyer engaged to advise the holder of an enduring power of attorney about estate planning issues where the grantor of the power has become incapable. In advising the grantee of the power as part of the estate planning retainer about an inter vivos transfer of property, the lawyer is obliged to exercise care and skill in giving that advice, taking into account any separate testamentary intentions of their (ultimate) client - that is, the incapable grantor.
As a thought exercise it is interesting to consider what the outcome in this case would have been had the EPA contained a provision expressly authorising the wife (as attorney) to act even if her interests conflicted with those of her husband.
Here, the EPA document deleted the clause which otherwise would have conferred authority “to execute an assurance or other document, or do any other act, whereby a benefit is conferred” on the donees. Thus the court was comfortable to hold that the wife was acting in conflict and used her powers to give effect to her own views, and not for the purpose of advancing her husband's interests.
As usual, please contact me if you would like access to any of the content mentioned in this post.
** For the trainspotters, the title of today's post is riffed from the Bob Evans song 'Friday comes five'.
It is well accepted that professionals, particularly lawyers, owe a duty to their client to ensure their objectives are met.
In the estate planning context, this duty has in a number of situations extended to claims by disgruntled beneficiaries.
The case of Calvert v Badenach [2015] TASFC 8 is a specific example.
Broadly the background was as follows:
The willmaker made a will leaving 100% of his estate to a named beneficiary, whom he also owned 2 properties with as tenants in common. Previous posts have explored the difference between owning property as joint tenants and tenants in common.
The willmaker's daughter challenged the will after his death and was successful in her claim, meaning the nominated beneficiary had his entitlements reduced and also incurred legal expenses.
The nominated beneficiary sued the willmaker's lawyer for negligence.
The court held that the lawyer was negligent and owed the nominated beneficiary a duty. The reasons for this included:
the law firm had acted in the purchase and registration of the two properties as tenants in common and an earlier will that provided for the daughter.
the lawyer should have investigated the situation of the daughter given that she was within a category of people that could potentially claim against the estate and advise accordingly. This advice should have included how to minimise the risks of a claim against the estate.
specifically here, the lawyer should have explained the consequences of not owning the properties as joint tenants (which would have seen them pass automatically to the surviving owner, instead of 50% of each property falling into the estate and subjected to the successful challenge).
importantly, strategies in relation to protecting against challenges against an estate would also need to factor in the 'notional estate' rules which are applicable for willmakers domiciled in NSW or with assets in NSW. Again, an earlier post explains the notional estate provisions.
While ultimately following appeal to the High Court in this case (namely, Badenach v Calvert [2016] HCA 18) much of the above decision was overturned, the fact that the matter went to the High Court is a warning in itself.
Furthermore, there were a range of competing views of judges at leach level of the process, including in the High Court.
It seems clear that this area will remain litigious, despite the High Court confirming that:
a lawyer’s duty is one to be protective of the client and their interests alone;
a lawyer will not be answerable in damages to a third party for a failure to advise the client on the consequences of a possible FPA.
a lawyer has no duty to a third party for failing to advise a client on strategies to avoid potential FPAs. The position in relation to adjacent areas however, such as failing to ensure a joint tenancy is severed to achieve a client's objectives, were not confirmed.
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 Paul Kelly song ‘Deeper water’.
