(Nothing) challenging** a trustee's decision

Previous posts have considered the key aspects of the Ioppolo decision.

One aspect of the decision, which is potentially very relevant for advisers and clients alike, relates to the plaintiff's argument that the trustee (being effectively the surviving husband) had not exercised his discretion in paying the entirety of his deceased wife's death benefit to himself in a 'bona fide' (or in good faith) manner, and therefore, should have been forced to repay the benefit to the fund.

In addressing this issue, the court specifically commented as follows:

1. The husband had sought specialist advice in relation to his rights and obligations as the trustee;
2. The husband deliberately waived his right to confidentiality (or privilege) in relation to this advice;
3. The court on reviewing the advice agreed with the conclusion given, that being that the husband was able to make the payment to himself;
4. Where a trustee is acting on advice of a specialist, it will be generally very difficult to successfully argue that the trustee lacked good faith in making a decision;
5. Even whereas here, there was a provision of the deceased’s will that contradicted the decision ultimately made by the husband, this of itself did not automatically mean that the husband was acting without good faith, particularly when there was no other evidence to support the allegation; and
6. Ultimately, a court will only review the way in which the discretion of a trustee is exercised in very limited circumstances.

Next week’s post will provide commentary on the outcome of an appeal of the original decision.

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 James song ‘Ring the bells’.

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Sometimes** the Family Court will allow access to trust documents

The case of Schweitzer & Schweitzer [2012] FamCA 445 considers the disclosure of documents claimed by one spouse to be in the possession, or under control, of the other.

The specific facts of this case were that the husband was a director of two corporate trustees, but not the sole director. In one corporate trustee, the husband's father was the other director. In the other corporate trustee, the husband's father and mother were the other directors.

While the husband was not a shareholder of either of the trustee companies, however he was a discretionary beneficiary of both trusts.

The appointor of both trusts was the husband's father.

The wife applied to the court asking that the husband disclose the financial statements, tax returns, bank statements and the minutes of meeting relating to trust distributions by the corporate trustees.

The wife’s request was rejected on the grounds that the husband had a fiduciary obligation in relation to the holding and use of trust and corporate trustee documents.

The court also held that the documents were not under the husband’s ‘control‘ for the purpose of the Family Court rules. The decision confirms that directors of corporate trustees have no right to 'possession' or 'control', but only to 'access' trust documents and that such access must be used strictly for the trust or company purposes.

The documents might have been accessible if the wife was able to join the corporate trustees as parties to the proceedings, although this was not necessarily something the court would approve; and even if they were joined, disclosure of the documents would still be subject to the court’s discretion.

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

** for the trainspotters, ‘Sometimes’ is a song by Badfinger.

Listen hear (sic):

Tax law v Property law – as stark as the difference between Wit and Chu**

Many previous View posts can be filed under the heading ‘trust horror stories’ – and indeed every year we run seminars solely on this topic (with entirely new content each year).

Recently we were reminded of a Tax Office private ruling (being Authorisation Number 1012450031835) that was a horror story, at least with reference to the interplay between the property law regime and tax law.

Briefly the factual matrix was as follows:

1. A firm (presumably a law firm) prepared and supplied four copies of the trust deed to the settlor of the trust.
2. The settlor paid the settlement sum to the trustee and it was banked in the trust bank account.
3. The accountant involved provided the four unsigned copies of the trust deed to the trustee for signing.
4. The trustee executed all four copies of the deed and returned them to the settlor for signing.
5. The accountant held the trust deeds in safe keeping for a few years and then returned three copies of the trust deed to the trustee. On receipt, the trustee discovered that the settlor had not signed any of these three copies of the trust deed.
6. The sole signed copy was retained by the accountant and not returned to the trustee. However on that document, the settlor had signed in the witness space, and the signature was not witnessed.
7. A Deed of Confirmation was drafted to show that a trust was created and the parties intended to create the trust, however while the trustee and beneficiaries were willing to sign this document, the settlor refused.

The Tax Office confirmed:

1. The trust deed was invalid under the Property Law Act 1974 (Qld) due to the failure of the settlor to validly sign the document.
2. This said, the 4 key elements of a trust (being a trustee, trust property, beneficiaries and obligations on the trustee) were all present.
3. That is, as explained in Harmer v FCT (1989) 20 ATR 1461, a trust is the relationship which arises wherever a person called the trustee is compelled in equity to hold property, whether real or personal, and whether by legal or equitable title, for the benefit of some persons or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustee, but to the beneficiary or other object of the trust.
4. Unlike under the Property Law Act which requires trusts in relation to real property to be documented in writing, a formal trust deed is not a specific requirement under tax legislation, so long as there is a clear intention - which there was here.

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 song by Queens of the Stone Age and ‘Make it Wit Chu’.

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How many calls must be made?** - Insurance funded buy sell arrangement: 5 key questions

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:

1. the insurance policies for each principal – why: to ensure the agreements align with the ownership structure of the insurance;
2. 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;
3. 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);
4. 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
5. 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’.

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Should trustees have the power to gift on their dashboard**

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:

1. to possibly help avoid restrictions any family trust election may impose
2. where a gift to a charity is to be made
3. 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:

1. There is however a significant difference between being a beneficiary and merely a potential recipient of a gift.
2. A hypothetical potential recipient of a gift has no rights at all under the trust.
3. 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.
4. 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.
5. 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'.

Challenging a deceased estate - do not assume that love spreads** equally

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:

1. A mother with 2 daughters gifted one third of her estate to one daughter and two thirds to the other;
2. The daughter who received one third challenged the estate seeking a one half share;
3. 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:

1. 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.
2. 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.
3. 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.
4. A challenge against an estate based solely on breach of moral duty, without demonstrating need, will fail.
5. 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'.

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Thinking that on a marriage breakdown the wife 'automatically' gets 50%? - wise up sucker**

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:

1. 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.
2. There was nothing to suggest that the marriage had had any effect on the earning capacity of the wife.
3. Furthermore, there were no children whose interests stood to be affected by any alteration of the parties' interests in property.
4. 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.
5. 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.
6. 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'.

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