When cross owned insurance policies are Glorious

In business succession arrangements, cross owned insurance policies are rarely, if ever, utilised. Avoiding the use of cross owned policies is driven by a range of commercial reasons and the fact that invariably adverse tax consequences are unnecessarily triggered as the desired commercial outcomes can normally be achieved utilising self owned policies that almost always deliver favourable tax outcomes.

One scenario where cross owned insurance arrangements historically provided significant potential benefit however related to where a self-managed superannuation fund (SMSF) borrows funds via an instalment trust arrangement to acquire an asset which forms a substantial part of the total value of the fund.

An example of how this approach (which was given in principle support by the Tax Office historically) worked is as follows:

1. The SMSF establishes an instalment trust and borrows funds from a third party to acquire an asset.
2. The (say) only two members of an SMSF are concerned that on the death of one of them, the ability to pay out the member’s entitlement may be impossible to achieve without selling the underlying asset (i.e. neither member’s account balance is large enough to represent the entire value of the acquired asset).
3. If the members took out self-owned insurance policies, this would obviously not assist, given that the exiting member would effectively be entitled to an even greater share of the total assets of the fund.
4. In contrast, if permissible under the trust deed for the SMSF, if cross owned policies were implemented, then the remaining member’s balance would be the one that increases and the cash from the insurance policy could be used to pay the death benefit, while the continuing member would effectively have their member balance represented entirely by the asset originally acquired via the instalment trust.

Despite the above, since 1 July 2014, the view of the Tax Office has been that the superannuation rules do not allow SMSFs to provide insurance for a member, unless the insured event is consistent with one of the following conditions of release:

1. death;
2. terminal medical condition;
3. permanent incapacity; and
4. temporary incapacity.

The Explanatory Memorandum associated with the amended rules made it clear that the proceeds of an insurance policy must be released to the member who is the insured under the policy.

This means that cross-insurance arrangements where the proceeds of an insurance policy are paid to someone other than the insured under the policy are not permitted. 

** for the trainspotters, the title today is riffed from the Breeders song ‘Glorious’. 

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Why?** will a court remove an executor

Posts over recent weeks have explored what issues a court will consider before a trustee of a trust is removed against their will.

Many of the themes mentioned are relevant to the issue of whether a court will remove an executor (or legal personal representative (LPR)) of a person’s will.

As a threshold issue, any person with an interest sufficient to entitle them to oppose an application for a grant of probate also has sufficient standing to seek revocation of a grant (see Re Hartley [2020] QSC 251).

As confirmed in Gardiner and Ors v Hughes and Anor [2017] VSCA 167 “…[I]n order to establish standing, an applicant for an order revoking a grant of probate or letters of administration must have a sufficient interest in the proceeding. Sufficiency of interest is established by showing that the applicant’s rights would or might be affected if the grant were to be revoked. The bare possibility of an interest will suffice."

The decision in Re Franks [2021] QSC 134 provides a useful summary of the key issues in this area.

In a situation where 2 executors were unable to agree on how to administer the estate (after a third executor had renounced their role due to the conflicts between the parties), one of the executors applied to the court for an independent executor to be appointed. Importantly, an executor can not resign without order of the court once probate had been granted. Furthermore, unless a law firm has joint instructions from the executors, they are unable to act.

The court confirmed:

1. Similar to its role when there is an application for removal of a trustee of a trust, at the highest level, the question for the court when considering the removal of an executor is what is in the best interest of the persons who have an interest in the estate, including creditors and beneficiaries, and its due administration.
2. A conflict between personal representatives is not solely determinative and there is no precondition of default on the part of any executor before the power of the court can be exercised (see Chesney & Anor v Tognola & Anor [2011] QSC 340).
3. Due regard must be paid to the willmaker's wishes as to the identity of their LPR, however it should not be assumed that a willmaker who was aware of potential disputes among beneficiaries will also have anticipated disputes among the executors (see Baldwin v Greenland [2007] 1 Qd R 117).
4. Ultimately, each case must turn on its own facts (see Re Flavel; Application by Lipshut [2018] VSC 228, Re McLennan [2018] QSC 124 and Mann Jnr v Grantham [2004] VSC 156).

Here there was held to be sufficient benefit in an independent administrator being appointed who would not need the agreement for joint action and who would not be compromised by conflicts of interest or personal interest. This was despite the nomination made by the willmaker in their will and the additional expenses the estate would incur.

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

** For the trainspotters, the title of today's post is riffed from the Bronski Beat song 'Why?’.

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Court removal of trustees and appointors (who should hang their heads low)

Last week’s post explored what issues a court will consider before a trustee is removed against their will and mentions the (in)famous decision from the Lang Hancock and Gina Rinehart saga (namely Hancock v Rinehart [2015] NSWSC 646).

A related issue is whether a court will unilaterally remove an appointor or principal of a trust – that is a party who has the right under a trust deed to change the trustee.

The decision in McNee v Lachlan McNee Family Maintenance Pty Ltd [2020] VSC 273 is a useful reference point in this regard.

Relevantly the factual matrix was as follows:

1. A 12 year old son of former life spouses was the primary beneficiary of a child maintenance trust (a form of trust explored in other View posts that allows access to excepted trust income for infant beneficiaries following a relationship breakdown).
2. The mother was the sole director and shareholder of the trustee company and sole appointor of the trust until the son turned 18, at which time the deed mandated he would become the appointor.
3. The trust owned a residential property which the mother and son lived in, until their relationship fractured and the son moved in with his father.
4. The mother continued to live in the property owned by the trust (and had been given this right to occupy under the trust deed, as had the son) and the son (via his father) approached the court to remove the trustee and appointor and appoint an independent third party.

The court confirmed as follows:

1. as mentioned in last week's post, whether the court exercises its discretion to remove a trustee turns upon the circumstances of each case;
2. a lack of confidence in the trustee can be sufficient justification that the court should exercise its powers;
3. this said, here there were a range of reasons that meant removal as trustee was appropriate such as friction and hostility between the key parties, the trustee's failure to read and understand the trust deed, the trustee consciously acting in breach of the trust deed (including a failure to keep proper records), the trustee preferring the interests of others rather than the beneficiary, failure to exercise powers of investment for the benefit of the beneficiaries, failure to proactively address a clear position of conflict and a failure to offer any reasons for why an independent trustee would not be appropriate;
4. any one of the above reasons on its own may have been sufficient to justify removal, however in combination made the decision overwhelming in favour of removal;
5. the suggestion that a co-director could have been appointed to the trustee company was rejected as it would have failed to address the inappropriate conduct of the mother;
6. for similar reasons, the mother was also replaced as appointor of the trust, given that if she retained this role she could have later removed the independent trustee appointed by the court. In this regard, the court confirmed that where the trust instrument already contains an express power of appointment, the court has the ability to change the appointor. This outcome was contrasted with the decision in W E Pickering Nominees Pty Ltd v Pickering [2016] VSC 71 where it was held the court can not ‘grant’ a general power of appointment in circumstances where the trust instrument does not make any provision for an appointor;
7. the court confirmed that it was appropriate for the trustee and appointor to be the same person, given that the trust clearly established the settlor’s intention in settling a trust with a trustee whose controlling mind (ie being the mother as sole director) was also the appointor (again, the mother);
8. the trustee and appointor would be an independent third party, nominated by the President of the Law Institute; and
9. the mother was however entitled to continue to reside in the property subject to certain conditions. This said, the son (under the deed) would have the right once he turned 18 to terminate the trust (and thus end his mother's right to occupy).

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 Bananarama song 'Cruel Summer’.

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Court's unilaterally removing trustees - the Judge will carry the Weight**

Posts over the last 2 weeks have explored a number of aspects of the super death benefit case of Marsella.

One other key aspect of the case also explored what issues a court will consider before a trustee is removed against their will.

Another View post considers a number of the key issues in this regard, as explained in the decision about one aspect of the Lang Hancock and Gina Rinehart saga (namely Hancock v Rinehart [2015] NSWSC 646).

The Marsella case quotes the decision in Elovalis v Elovalis [2008] WASCA 141 and summarises the approach the courts must take in this area as follows:

1. In determining whether a trustee should be removed the chief consideration is the welfare of the beneficiaries.
2. The Court will have regard to the security of the trust property, the efficient and satisfactory execution of the trust and the faithful and sound exercise of powers conferred upon the trustee.
3. A breach of trust will not necessarily lead to the removal of a trustee, nor will the existence of a conflict between duty and interest.
4. At times, however, such factors may be sufficient to justify the trustee’s removal.
5. Ultimately, whether the Court exercises its discretion turns upon the circumstances of each case - or, as quoted from the case of Miller v Cameron (1936) 54 CLR 572:

'a judgment (to remove a trustee against their will) must be largely discretionary.

A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.

But in a case where enough appears to authorise the Court to act, the delicate question whether it should act and proceed to remove the trustee is one upon which the decision of a primary Judge is entitled to especial weight.'

Thus, in Owies and Owies v JJE Nominees Pty Ltd (ACN 004 856 366) (in its capacity as trustee for the Owies Family Trust) [2022] VSCA 142 (a case also featured in other View posts) the trustee was removed due to the court concluding that over a number of years the trustee had failed to:

1. act impartially;
2. give real and genuine consideration to the interests of two of the three primary beneficiaries;
3. appreciate that the relations between the beneficiaries and the trustee were irreconcilably damaged.

Therefore, it was not in the best interests of the beneficiaries for the trustee to continue in office.

Similarly, in JPD as Guardian v DMS as Trustee [2022] QSC 181 a trustee of testamentary trusts set up for infant children, who was a friend of the deceased mother, was removed by the court at the request of the father (who was divorced from the mother at the time of her death).

The reasons included the trustee:

1. demonstrating a pattern of holding a very low opinion of the father (who had no wealth and was not in paid employment) and giving no genuine weight to the importance of his position in the children’s lives as their sole guardian and surviving parent;
2. not making any attempt to consult with the father adequately;
3. unilaterally reducing income distributions to the children by around 75%;
4. purporting to evict the father and the children from a home owned by the trust, and requiring a move to a new property owned by the trust;
5. rejecting a request (which the court believed was reasonable) by the father to move the family to Brisbane;
6. regularly and inappropriately intervening in parenting aspects of the children.

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 Aretha Franklin song 'The Weight'.

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Trustee duties and payment of super death benefits: you must work on it**

Last week’s post explored the original decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65.

The case provided another example of the types issues that need to be considered by trustees of self managed superannuation funds before making a decision on how to distribute a member’s death benefits.

The original decision was upheld, essentially without any exceptions in the appeal case of Caroline Elizabeth Wareham and Martin Wareham (as trustees of the Swanson Superannuation Fund) v Riccardo Giacomo Marsella (both personally and as executor of the estate of Helen Freeth Marsella (also known as Helen Freeth Swanson)) [2020] VSCA 92.

The central arguments by the trustees on appeal revolved around their belief that they had exercised their discretion validly and therefore the payment of 100% of the death benefit to one of the trustees personally should be reinstated. As mentioned in last week's post, in essence this result would have been analogous to the outcome in the similar earlier case of Katz.

In rejecting the argument, the appeal court confirmed:

1. The trustees (through their lawyers) were on record as stating their belief that the deceased's surviving husband (who she had been married to for over 30 years) was ‘(not a) Beneficiary of the Fund’ - a conclusion that was plainly wrong.
2. There was also evidence to suggest the trustees believed they owed ‘no duty to the estate or other beneficiaries’ - again an erroneous assumption.
3. Furthermore the evidence supported a conclusion that the trustees had failed to look at the trust deed for the fund - a further breach of their duties.
4. Ultimately therefore the court concluded that if the trustees did not exercise their discretion upon real and genuine consideration, there was no proper exercise of the discretion. The fact that the discretion could have been properly exercised in the same way (ie to pay the benefit entirely to one of the trustees, as was the case in Katz) could not alter that position.
5. The court also confirmed the importance of the decision in the case of Karger v Paul (featured in other posts by View), and the fact that there are three obligations on a trustee exercising a discretion, namely:
• to do so in good faith;
• upon a real and genuine consideration (a requirement that is so obvious that it is often not mentioned); and
• in accordance with the purpose for which the discretion was conferred.

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 Alicia Keys song ‘Work on it’.

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I want it all** - Duties of SMSF trustees and yet another case concerning death benefit payments

In recent years the number of reported decisions in relation to death benefit payments by SMSFs have increased significantly. This is particularly so given that for many years the only substantive decision was from 2005, namely the case of Katz v Grossman [2005] NSWSC 934.

The decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65 provides another example of the types of issues that need to be considered in this area, and is particularly interesting given that there were some aspects analogous with the Katz decision, and yet the court reached the opposite conclusion.

Briefly in the Marsella case:

1. the deceased was the sole member and a co-trustee with her daughter of an SMSF (similar to Katz);
2. while historically a binding nomination had been signed, it had lapsed; and in any event was invalid as it nominated the member's grandchildren (who were not dependants as defined under the superannuation laws);
3. the daughter appointed her husband as the co trustee following her mother's death (similar to Katz);
4. the deceased's will provided certain benefits to her second husband. All remaining assets under the estate then passed equally to her daughter and her son (similar to Katz);
5. the daughter and her husband resolved to distribute 100% of the death benefit to herself ignoring her brother (again similar to Katz) and her step father.

Unlike Katz, where the daughter was entitled to retain the entirety of the death benefit, in Marsella the payment was held to be invalid and the daughter and her husband were removed as trustees of the SMSF.

The court listed a number of reasons for reaching this conclusion, including:

1. the daughter acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties and the way in which the superannuation laws are structured in this area;
2. the daughter acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict;
3. as a result she was not in a position to give real and genuine consideration to the interests of the dependants;
4. the above conclusion was supported by the outcome of the exercise of discretion, which itself was contrary to one of the daughter's key arguments - that being that her mother wanted the daughter and the brother (and the grandchildren) to benefit from the death benefit; and yet she paid 100% of the benefit to herself;
5. ultimately, the court believed that the outcome of the daughter's decision was ‘grotesquely unreasonable’ which helped support the conclusion that the discretion was never properly exercised, or was exercised in bad faith;
6. thus, the fact that the daughter was within the class of potential objects did not negate her duty to exercise the power in good faith, upon real and genuine consideration, and for proper purposes.

The above conclusions were upheld on appeal, and that decision will be explored in next week’s post.

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

** for the trainspotters, an obvious choice, with Queen and 'I want it all'. 

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The (heavy) duty** to account

A reminder came to me recently about the duty of trustees ‘to account’.

Relevantly the High Court in Byrnes v Kendle [2011] HCA 26 highlighted that the term 'duty to account', encompasses several important obligations:

1. A duty to keep records;
2. A duty to report to the beneficiaries or the court concerning the administration of the trust; and
3. The duty to pay amounts, the trustee is obliged to pay to the beneficiaries.

The trustee's duty to account is a fundamental fiduciary obligation imposed upon a trustee.

In discharging that duty, the trustee is required to keep proper accounts of the trust.

Importantly however, in relation to the right of a beneficiary to request information from a trustee, there is likely to be a divergence in terms of the level of detail a trustee of a discretionary trust is required to provide a beneficiary, as opposed to the trustee of a unit or fixed trust.

In particular, in relation to discretionary trusts, where each beneficiary only has a mere expectancy (that is, as explained in other View posts, the right to be considered), the duty to account imposed on a trustee is likely to be less onerous than for fixed trusts.

This is because the trustee of a discretionary trust also has a duty to act in the best interests of all beneficiaries - which means disclosure of certain information on demand of some beneficiaries may not in fact be appropriate, if the trustee on reasonable grounds so decides.

Practically, where there is contention around these issues it may be the conclusion in Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] 2 A.C 709 is most relevant. In this case it was relevantly held that a beneficiary's right to seek disclosure of trust documents and accounts, is best approached as one aspect of the court's inherent jurisdiction to supervise, and if necessary intervene in, the administration of trusts.

The nature of any court's intervention will depend on the court's discretion on a case by case basis.

In particular, the court will determine:

1. whether a discretionary object (or some other beneficiary with only a remote or wholly defeasible interest) should be granted relief at all;
2. what classes of documents should be disclosed, either completely or in a redacted form; and
3. what safeguards should be imposed (whether by undertakings to the court, arrangements for professional inspection, or otherwise) to limit the use which may be made of documents or information disclosed.

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

** for the trainspotters, ‘Heavy Duty’ is a song from Spinal Tap. 

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