Dig it up** - Lost trust deeds & another case to remember

Last week's post considered arguably the leading case in relation to lost trust deeds.

The case of Re Porlock Pty Ltd [2015] NSWSC 1243 provides further insight into the issues a court will consider where a trust deed has been lost.

In this case, the plaintiff was the trustee of the JBD Carr Trust No 2 which was established in 1957 and by the time of the court application had substantial assets. The trustee applied to court seeking advice pursuant to the powers under the relevant Trusts Act confirming how it held the property.

As part of the search for the deed, a letter was produced by the accountant of the trust which outlined how the income and capital of the trust was to be distributed. The trustee produced a supporting affidavit from the accountant indicating the letter was likely to be an accurate summary of the deed as he recalled quoting the trust deed itself when drafting the letter.

In making an order, the court concluded that the trustee would be justified acting in accordance with the letter as this was the ‘best evidence’ of the trust’s terms.

Importantly, the court confirmed that if the trust deed were to be found and a claim brought against the trustee by other parties who may be entitled under the deed, the trustee would not be personally liable for any breach of trust so long as they followed the advice of the court.

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 Hoodoo Gurus song 'Dig it up'.

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Lost (in infinity**) and lost trust deeds - the leading case

In the lead up to another 30 June, it is timely to consider one of the most important issues leading to potentially seeing trust distributions fail, that is the trustee having custody of the original trust deed.

Arguably the leading case in relation to when a court will allow a trustee to rely on secondary evidence where a trust deed has been lost is Maks v Maks (1986) 6 NSWLR 34.

In this case, both parties lived in a number of homes purchased by the defendant in his own name.

The plaintiff sought a declaration that the defendant in fact held a half share of the relevant property 'on trust'.

The plaintiff argued that a document had been signed by both parties which amounted to a declaration of trust. The alleged document was never produced at trial. On balance, the court considered a document did exist, however the judge was not prepared to make a finding as to the terms of the document.

It seems apparent from the decision, there was no argument put forward as to the nature of the terms of the missing document.

The court concluded that where secondary evidence is being relied upon to prove the existence of a trust, there must be clear and convincing evidence not only of the existence, but also the terms of the trust.

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 World Party song 'Lost in infinity'.

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When prenups** will fail – part II

Last week’s post considered a number of the situations that might lead to prenups (or binding financial agreements) being declared unenforceable. Seven further examples are set out below:

1. Impracticality – for most agreements, they are unlikely to be determined entirely void for impractical reasons, although there may often be components of the agreement that are ignored, particularly in relation to specific assets that can no longer be dealt with in the manner originally anticipated by the agreement.
2. Lack of disclosure – while potentially caught by one of the other items set out above, the failure to provide full and complete disclosure can of itself be grounds for avoiding an agreement.
3. Just and equitable grounds – in many respects, this is reminiscent of the 'vibe' in the Australian movie ‘The Castle’ – i.e. the court interprets the overall circumstances to assess that the agreement should no longer be binding.
4. Public policy – this ground is similar to just and equitable i.e. the court determines that it is not in the public’s interest to see a precedent set for the agreement to be binding in the particular circumstances of the case.
5. Ending due to lapse of time – some financial agreements have a specific time or duration – if no other arrangements are made before the ending of the agreement, it will simply lapse.
6. Termination by agreement – if both the parties voluntarily agree, then the agreement can be terminated absolutely, or alternatively, a replacement agreement can be entered into.
7. Death – many binding financial agreements are specifically crafted to end on the death of either party, however this is often subject to certain provisions being made under the estate plan of the deceased. It is important to be aware that in some states it is possible to have a binding financial agreement whereby the parties also agree not to challenge the estate plan of the survivor, however these rules do not apply in every jurisdiction.

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 Kayne West song 'Gold Digger'.

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When prenups** will fail – part I

A number of previous posts have highlighted court decisions where prenups (or binding financial agreements) have been held to be invalid.

While the range of situations that might lead to this type of arrangement being declared are not enforceable, six of the main examples are set out below (next week’s post will list another seven):

1. The relevant legislative provisions are not followed – the laws in relation to binding financial agreements are very particular. If each aspect is not followed, then there is a real risk that the document will not be binding.
2. Failure to get independent advice – one of the key characteristics of the provisions is that each spouse must obtain independent legal advice. A failure to do so (or failure to receive specialist advice) can mean the agreement will be void.
3. Unconscionable conduct – this normally arises where it can be shown that one spouse has taken advantage of the other, in circumstances where that other spouse was in a weak position.
4. Abandonment or revocation by conduct – over time, the parties may start to consider themselves not to be bound by the arrangement, and even enter into inconsistent arrangements. If this occurs, then the original agreement is likely to be ignored.
5. Undue influence – this can arise in a range of circumstances and does not necessarily require that a spouse be completely overborne.
6. Duress – if one spouse can demonstrate that they effectively felt that they had no alternative but to sign the document, then a case of duress can be substantiated.

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 Prince song 'Illusion, Coma, Pimp & Circumstance'.

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Another prenup** held to be void

Previous posts have highlighted a number of examples where a binding financial agreement (or prenup) has been held to be invalid.

The case of Adame & Adame [2014] FCCA 42 provides another example where an agreement was set aside.

The factual background of the case was somewhat complex, however briefly:

1. The relationship was described as 'tumultuous' and the parties had separated and then reconciled on numerous occasions.
2. The wife had been told by two separate lawyers (one of whom was introduced and paid for by the husband) not to sign the draft agreement.
3. There was evidence that suggests that the husband may have attempted to avoid disclosing the existence of some assets to the wife.
4. There was a lack of evidence to support that the lawyer who ultimately signed the certificate saying that he had provided the required advice to the wife had in fact provided the advice.

In the context of the above factual scenario, the court decided the agreement was not binding for the following reasons:

1. the wife said she relied on the husband’s representation of the assets that he had and that those representations were false;
2. the court accepted that the wife was 'harassed until she signed the agreement'; and
3. the wife’s lawyer did not discharge all of his duties to provide her with independent advice.

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 Madonna song 'I don’t give a'.

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Like magic** - business valuations and family court cases

Where a business owned and operated by a couple forms part of the assets to be divided under a property settlement, there are a range of potential issues that can arise.

The case of Ledarn & Ledarn [2013] FamCA 858 provides an interesting insight into the types of concepts that the family court will consider.

The case involved a business that the wife was the general manager of and the husband was the original designer of the core product.

Both parties wanted sole control of the business as part of the matrimonial settlement, and the wife ultimately succeeded.

Some of the key aspects of the decision included the following:

1. Although there was an independent valuation suggesting the business was worth $8 million, the wife had argued that it was worth '$10 million' to her.
2. While generally, the value attributed to a business will be that which an arm’s length purchaser will pay, the family court can instead accept a value that one of the parties to the relationship subscribes to it.
3. The court also took into account the evidence that seemed to suggest that the wife had a much better understanding of the nuances of the business and how it would best operate in allowing her to take full control.
4. The wife’s request that there be a 5-year non-compete restraint imposed on the husband was however rejected on the basis that given she had significant business acumen, in addition to all of the assets of the business, the prospects of the husband successfully commencing a competing offering were at best remote.

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 Coldplay song 'Magic'.

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Sometimes** - in days gone by - you may have been able to use an inter vivos trust to access excepted trust income

One of the advantages of testamentary trusts is the ability to access the 'excepted' trust income rules and therefore ensure infant recipients are taxed as adults.

The Tax Act only allows excepted trust income in relation the amount which is assessable income of a trust estate that resulted from a will, codicil or court order varying a will or codicil.

Importantly, historically the legislation did not appear to expressly exclude an indirect interest as being a beneficiary for the purpose of the provisions.

This meant that as one example, any income received by an infant beneficiary derived from assets of a testamentary trust created under a deceased estate that may have been transferred to an interposed inter vivos trust may be able to be treated as excepted trust income.

It should be noted however that there are rules that provide that an amount will not be treated as excepted trust income if it was derived by a trustee ‘as a result of an agreement entered into for the purpose of securing that the income would be excepted trust income’.

However arguably, historically this prohibition was thought not apply to income derived via an interposed inter vivos trust as the income would have in fact been excepted trust income in the testamentary trust the assets were sourced from.

The Private Rulings mentioned in recent posts provide some support for the above interpretation.

Since the 2018 budget changes however (featured in many previous posts), the rules are now clear that access to excepted trust income is only possible while the assets of the deceased are owned via the testamentary trust under that person’s will. Once the assets are removed from the testamentary trust, for example, to an inter vivos trust, the ability to benefit from the excepted trust income regime ends.

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 John Butler Trio song 'Sometimes'.

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