Estate Planning and Beneficiary Loan Accounts: Fools gold**

The decision in Clark v Inglis [2010] NSWCA 144 remains a key case in relation to the interplay between beneficiary loan accounts and estate planning.

Broadly the background was as follows:

1. Dr Inglis established a trust in 1982 (Trust) with himself, his four children from his first marriage, his one child from his second marriage and his second wife Helen Margaret Inglis (Helen) as potential beneficiaries;
2. A company named ‘Inglis Research Pty Ltd’ acted as the trustee;
3. The main asset class of the Trust was a listed share portfolio that for many years was generally carried in the accounts of the Trust at cost;
4. Many years after the establishment of the Trust, and a change in the method of preparing the trust accounts, ‘income’, although unrealised, from the increase in value of shares was distributed to various beneficiaries creating (in relation to Dr Inglis) a credit loan account of more than $1 million;
5. Under Dr Inglis’ estate plan his personal wealth was gifted under his will to Helen, while control of the Trust and its assets was given to the children of his first marriage.

Among other issues in contention following the death of Dr Inglis, the children from his first marriage challenged the legitimacy of the steps that created a credit loan to his benefit from the Trust.

The Court held that while the accounting approach was perhaps imprudent, it was permissible under the trust deed and there was nothing under the accounting standards that prevented the arrangements.

In this regard it was noted that the trustee had the specific right under the trust deed to re-categorise income and capital and distribute unrealised income in its discretion.

This meant that there had been no breach of trust by the trustee and the debt owing by the Trust to the estate was enforceable and effectively an at call loan, repayable on demand to Helen.

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** For the trainspotters, the title of today's post is riffed from the Stone Roses song ‘Fools Gold’.

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The powers of an attorney: being under the thumb**

An issue that often arises is the exact extent of the powers an attorney may exercise on behalf of a donor.

One of the leading cases in this area is Taheri v Vitek [2014] NSWCA 209.

In summary the key aspects of the case were as follows:

1. The wife appointed her husband under a power of attorney and granted the husband the standard ability ‘to do on my behalf anything I may lawfully authorise an attorney to do’.
2. The attorney document (as is often the case) also empowered the husband as attorney to act despite any benefit that may pass to him.
3. The husband later used his appointment as attorney to sign on behalf of his wife and guarantee a purchase of land by a company the husband was sole director of.
4. The wife subsequently attempted to avoid her obligations under the guarantee on the basis that the document and wider transaction did not benefit her.

The court held that the wife was bound to comply with the guarantee, regardless of whether the transaction was for her benefit. The decision was primarily based on the term in the appointment document that allowed the husband to act even if the transaction did not benefit his wife.

It was however also confirmed that even if the appointment of attorney document does not specifically confirm an attorney can act against the interests of the donor, the attorney’s actions may still be binding. The reason for this general approach of the courts is to ensure certainty for third parties who reasonably rely on the apparent authority of an attorney.

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** For the trainspotters, the title of today's post is riffed from the Rolling Stones song ‘Under my thumb’.

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Letting little fury things ** like the tax tail wag the dog

Given the theme of ‘famous tax cases’ in recent posts, it seemed appropriate to revisit the tax aspects of the case involving the family of famous retailer Solomon Lew (Lew), in Solomon Lew & Ors v Adam Priester & Ors [2012] VSC 57.

Broadly the situation was as follows:

1. Based on tax advice about an impending tax change (which was ultimately never implemented), certain distributions were made by a trust ultimately controlled by Lew to each of his children
2. The potential change was proposed in the late 1990’s and was known as the ‘profits first rule’ which would have seen a mandatory requirement that any distribution from a trust would presumed to be of profits and therefore taxable.
3. 2 of Lew’s children some years later were caught up in (separate) property settlements following the breakdown of their respective marriages.
4. The former spouses claimed the outstanding loans were assets of Lew’s children and therefore able to be subject to orders of the Family Court.
5. Lew argued that his children did not have any beneficial interest in the loan accounts due to agreements entered which resulted in the amounts in fact being held by the children on a trust for Lew and his wife Rose.

While the exact outcome as to whether the loans were in fact assets of the children appears to be unknown (it is assumed the cases must have settled out of court or the decisions de-identified), the fact that the former spouses were able to mount the arguments is a reminder that the wider commercial implications of any tax planning strategy should always be considered carefully.

Similarly, in the high profile case of Cardaci v Filippo Primo Cardaci as executor of the estate of Marco Antonio Cardaci [No 5] [2021] WASC 331, in a situation where historically payments to a beneficiary were categorised as distributions of capital or income, a subsequent unilateral attempt by the trustee to commence treating the amounts as loans was rejected by the court.

This was ultimately on the basis that the trustee had not adequately or sufficiently explained how or why the change in characterisation occurred, nor was there any express or implied loan agreement in relation to the payments.

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** For the trainspotters, the title of today's post is riffed from the Dinosaur Jnr song ‘Little fury things’.

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Yeah right** - because before Rinehart, there was Murdoch

While the Rinehart decision received significant attention in relation to many issues, including the tax consequences of ending a trust, the tax principles of another famous case are worth remembering, namely the decision in Murdoch v Commissioner of Taxation [2008] FCAFC 86.

Broadly the situation was as follows –

1. Dame Elisabeth Murdoch (Dame) had a life interest in the income of several family trusts settled by her husband in the 1930s.
2. The remainder interest was held by one or more of the Dame’s children or grandchildren.
3. For many years, the trustee of the relevant trusts was effectively the Dame, her son Rupert Murdoch and a third party.
4. It was however noted that the Dame was likely influenced in her role to accept the investment decisions due to the very strong personality of her son Rupert.
5. A Reorganisation Agreement under which Dame surrendered her life interests under each of the Trusts were entered into, with the consideration a lump sum payment of more than $85m.
6. The payment was couched as releasing the trustees from potential claims for breaches of trustee duties.
7. In particular, the investment policy that had been adopted (apparently at Rupert’s strong recommendation) was overwhelming weighted to shares in Murdoch family companies that produced capital growth, but comparatively small dividend income. This investment approach essentially benefited the remainder beneficiaries, at the expense of the Dame as life tenant.
8. The payment was said to be to help avoid the need for litigation amongst the family.
9. Around 65% of the $85m was then gifted by the Dame to Rupert and charities she was associated with.
10. The payment was funded by the sale of pre capital gains tax shares and was essentially received tax free by the Dame.

In confirming the extremely onerous fiduciary duties of a trustee (see the post from last week) the court confirmed that Rupert had breached his obligations, even though there was no lack of good faith or particular damage to the Dame.

The court relied particularly on the principles of the case Phipps v Boardman [1967] 2 AC 26, which held that this style of claim was not for a reimbursement of the income shortfall.

The payment was therefore on capital, not income, account as a claim against the profit made by Rupert and in essence a constructive trust over assets of the trust.

As usual, please make contact 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 Dinosaur Jnr song ‘Yeah, right’.

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Fiduciary duties: they are out there**

Fiduciary duties are generally seen as the most onerous of all legal duties and where they apply they require a person to act solely in another party's interests.

One case often referred to that highlights the extent of fiduciary duties is Loughnan v McConnell [2006] QSC 359.

Broadly the situation was as follows:

1. Loughnan was a lawyer and a co-executor and trustee of the estate of Mr McConnell (Ross).
2. Nadia McConnell (Ross’ wife) was the co-executor and trustee.
3. Ross’ accountant was also an executor.
4. Duckett Pty Ltd was the trustee of a family trust.
5. The sole shareholder of Duckett was Ross, who held two shares, and he and Nadia were its directors.
6. Under the will, the shares in Duckett were to be held by the trustees of the will on trust for Henry McConnell (the son of Ross and Nadia) if he was living on 1 August 2021.
7. After probate was granted, Nadia undertook a number of actions without reference to Loughnan, including relevantly -
1. in her role as sole director appointed herself as chairman of Duckett;
2. appointed her mother as an additional director of Duckett;
3. Duckett then resolved to vary the deed for the trust to (among other things) make Nadia the appointor of the trust and allow her to remain a beneficiary even if she remarried. The trust deed prior to the amendment excluded Nadia as a beneficiary if she remarried and gave the appointor powers to Nadia and Loughnan jointly.
4. Under the trust deed as amended, Nadia then by further deed removed Duckett as trustee and in its place appointed NEM Investments Pty Ltd of which she was sole director.

Loughnan made an application to court for directions concerning the trust and in particular unwinding the steps Nadia had unilaterally taken. The court confirmed that proceedings against Nadia should be commenced by Loughnan on the basis that she had breached her fiduciary duties as an executor and trustee of the estate.

The court also observed however that the primary concern was Nadia’s failure to disclose her intentions and that if consent of the co-executors had been obtained the actions would not have been reviewable.

As usual, please make contact 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 Dinosaur Jnr song ‘Out there’.

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Step (child) on** ... and the list of people entitled under an estate

 

Last week's post considered some of the key issues, from a will drafting perspective, about whether a step child is entitled under a deceased estate.

The case of the Superannuation Complaints Tribunal in D19-20\023 provides a useful explanation of the wider position at law in relation to step children, including from a superannuation perspective.

In summary the decision confirms:

1. There is some support for the position for general law purposes, and in particular family provision (or testator family maintenance applications) that someone does not cease to be a ‘step-child’ of a person when their natural parent pre-deceases the person, if the marital relationship between their natural parent and the person was in place at the date of the natural parent’s death (see Scott-Mackenzie v Bail [2017] VSCA 108).
2. That is, the relationship of step-parent and step-child is one of affinity and does not cease merely because of the death of the natural parent. In other words 'once a step-child of the deceased, always a step-child of the deceased (providing the relationship of the deceased with the natural parent was not earlier dissolved otherwise than by death)'.
3. In contrast, there are also cases that conclude the relationship of ‘step-child’ ceases automatically on the death of the natural parent (see Re Burt (1988) 1 Qd R 23, Re Moreton (1996) 2 Qd R 174, Basterfield v Gay (1994) 3 Tas R 293 and Connors v Tasmanian Trustee Limited (1996) 6 Tas R 267).
4. For superannuation purposes, historically the Tax Office is on record as holding that a child only remains a stepchild while the relevant parents are a couple, for example see ATO ID 2011/77 where it was decided that a person ceases to be a 'stepchild' for the purposes of being a 'dependant' of the member under regulation 6.22 of the superannuation regulations, when the legal marriage of their natural parent to the member ends.
5. There is however support for the broader concept of ‘step-child’ - that is a relationship of affinity between the step-parent and step-child that can continue beyond the death of the natural parent.
6. In the factual matrix here, the Tribunal was satisfied that the step-daughter and the deceased member continued to have a sufficiently close relationship after the earlier death of the spouse of the member (who was the natural parent of the step-daughter).
7. As a result the natural daughter of the spouse of the member remained the step-child of the deceased member and in turn fell within the definition of ‘child’ at the date of the deceased member’s death. Therefore she was a ‘dependant’ for the purposes of both the trust deed of the fund and the superannuation legislation.

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** For the trainspotters, the title of today's post is riffed from the Happy Mondays song ‘Step On’.

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A drafting lesson: waiting for you in the shadows**

Recently we were reviewed a clause in a trust deed that confirmed the beneficiaries were ‘any and all of the children, grandchildren or great grandchildren of the mother and the father.

The drafting approach is a common one, and can lead to 2 starkly different interpretations, namely either all of the children, grandchildren and great grandchildren of:

1. the relationship between the father and the mother; or
2. each of the father and the mother (i.e. including children from other relationships).

Generally the position adopted by the courts is that where a phrase is capable of more than one correct grammatical interpretation the construction that conforms with current usage should prevail, while also having regard to the circumstances surrounding the establishment of the trust.

One of the leading cases is Boranga v Flintoff (1997) 19 WAR 1.

The case confirms that the primary task of courts is to discern the intention of the settlor from the words of the relevant trust deed, with reference to the position as at time the deed was entered into.

In this case the following facts were considered to be relevant in determining whether step-children would be included as beneficiaries under the phrase 'the children of A and B’:

1. the ages of the stepchildren at the time the trust was established and whether the step- children were dependants of A or B at the time;
2. whether the step-children had any special needs, e.g. a disability;
3. the existence and ages of any children from the relationship of A and B at the settlement date;
4. the ages of A and B at the settlement date and whether it was likely there would be any further children from the relationship of A and B; and
5. the pattern of trust distributions and whether the step-children received distributions from the trust.

Having factored in each of the above issues, it was held that the phrase 'the children and remoter issue of the said A and the said B’ included children of either A or B – in other words stepchildren were included.

As usual, please make contact 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 Thurston Moore song ‘Smoke of dreams’.

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