Business Succession and Estate Planning Bulletin

Transcription

1 November 2017 Business Succession and Estate Planning Bulletin In this bulletin: Binding death benefit nominations post-1 July 2017 The risks of establishing a charitable trust in a will Contact Paul Paxton-Hall Director Level 10, 15 Adelaide Street, Brisbane Qld 4000 Telephone: paul.paxton-hall@paxton-hall.com.au

2 Contents Binding death benefit nominations post-1 July Tricks and traps... 2 Death benefit pensions v- reversionary pensions... 2 Can a death benefit nomination create a reversionary pension?... 3 Lesson... 4 The risks of establishing a charitable trust in a will... 5 Introduction... 5 Simple legacies and charitable trust legacies... 5 An example of the problems that can arise... 6 Decision of the Court... 6 Lessons to be learned... 6 w:\matter\270380\ doc November 2017 bulletin

3 Binding death benefit nominations post-1 July There has been a recent flurry of changes to the superannuation system, most of which commenced on 1 July These included: (1) the transfer balance cap whereby members of superannuation funds can have a maximum of $1.6M credited towards their pension account (indexed to inflation in $1,000 increments); (2) new contribution cap for both concessional and non-concessional contributions; (3) segregation changes; and (4) many other changes. 2. This article looks at how some of these changes to superannuation impact estate planning for superannuation and death benefit nominations (DBNs) in particular. Structure of DBNs unchanged 3. The first thing to note is that the legislative structure and mechanics of DBNs, death benefit pensions (DBPs) and reversionary pensions (RPs) remain largely unchanged. 4. Also, the importance of locking in the succession of control for self-managed superannuation funds (SMSF) as part of the estate planning process remains as critical as ever. Transfer Balance Cap 5. There is now a legislative maximum amount allowed to be transferred to a pension account, called the transfer balance cap (TBC). The TBC is initially $1.6M and will increase in line with inflation, albeit each increase will be by an increment of $100, The main difference for estate planning and DBNs after 1 July 2017 is simply the fact that more people will have, simultaneously, a pension account and an accumulation account. Whist some members had both accounts prior to 1 July, there will now be significantly more members who have both accounts because of the introduction of the TBC. That is, when the member has hit the maximum allowed in their pension account, being the TBC, the remainder of their superannuation must go to an accumulation account, hence giving them both a pension account and an accumulation account. Members are not able to "transfer" or "give" any part of their superannuation balance to their spouse or another member of their super fund in order to try to retain funds in a pension account. 7. The consequence of having both types of accounts is that both types of accounts must be considered in the estate plan i.e. where previously for couples it was common for each member to revert their pension to the other, and there would need to be no consideration for accumulation accounts because they did not have one, now the situation is that they may have an accumulation account as well. w:\matter\270380\ doc November 2017 bulletin 1

4 8. This means that in addition to the members setting up reversionary pensions, they also need to make a death benefit nomination for the balance of their superannuation which is in their accumulation account (if any). Typically this would still be to their spouse and then in the event that their spouse predeceases them, to their children (or to their estate so that the death benefit can pass through their estate to a trust for their children or to such other beneficiary as desired). 9. This is most critical when someone desires a binding outcome i.e. they want to do a binding DBN (BDBN). If there is no BDBN in place for an accumulation account, the trustee of the super fund will have significant discretion as to how it is paid after the death of the member, remembering of course that only certain persons are eligible to receive superannuation death benefits in any event. Tricks and traps 10. Whilst this is not a new issue, it is pertinent at this point to check how the DBN provisions of the superannuation fund trust deed (Fund Deed) interact with the DBN, DBP and RP provisions in the Fund Deed. That is, we need to ensure that a DBN does not inadvertently undo or commute an existing pension which the member desires to revert to their spouse. This could happen in a Fund Deed where it was not clear what happens if there is both a DBN and a RP in place, and the Fund Deed does not have provisions dealing with this scenario i.e. which trumps the other? 11. I have heard commentators say there is no problem in this conflict because there is no death benefit in the event of a pension reverting, because the pension simply reverts to the surviving spouse. Unfortunately it is not that simple. Section of the Income Tax Assessment Act 1997 defines superannuation death benefit to be "a payment to you from a superannuation fund, after another person's death, because the other person was a fund member". This broad definition will certainly include a RP. Therefore if there are provisions in a Fund Deed which are broadly expressed to apply to all "death benefits" and the term "death benefits" is not satisfactorily defined, there may be an issue as to whether a death benefit nomination conflicts with a reversionary pension. 12. The solution to this is, as always, read the deed! 13. Ideally the trust deed will be clear that DBNs do not apply to pension accounts, unless the member expresses the clear intention on the nomination form that it should apply to pension accounts. There will be situations where the estate plane is for a pension to be commuted and then a DBN will direct that the resulting lump sum is paid to a particular beneficiary. Death benefit pensions v- reversionary pensions 14. Another issue which can cause confusion is the DBPs and RPs. A DBP is a pension which commences after the death of a member whilst an RP is a continuation of the deceased member's existing pension. 15. For a pension to be an RP, and receive the tax treatment of an RP, it must comply with Taxation Ruling 2013/5 which provides the Tax Office's view as to when a superannuation income stream (i.e. a pension) is taken to have commenced or ceased. TR 2013/5 provides that if a pension continues after the death of a member at the discretion of the beneficiary member, or the trustee has a discretion to cease or amend the pension, it will not be an RP (and instead will be a DBP). This is important w:\matter\270380\ doc November 2017 bulletin 2

5 because there are certain characteristics of RPs and DBPs which differ and may be desired in a particular estate plan. 16. For example, the timing and valuation provisions of the transfer of a pension from a deceased member to their beneficiary's pension account. For a RP: (1) the pension account balance is valued for the purposes of determining the size of the credit to the beneficiary's TBC at the date of death of the deceased; and (2) the credit to the beneficiary's TBC occurs 12 months after the date of death. 17. In relation to DBPs: (1) the value of the deceased's pension account balance is taken at the date of commencement of the DBP; and (2) the credit to the beneficiary's TBC also occurs at the date of commencement of the DBP. 18. This timing difference could have quite different outcomes for beneficiaries - depending on their circumstances. Can a death benefit nomination create a reversionary pension? 19. TR 2013/5 says at paragraph 94: "A superannuation income stream ceases when there is no longer a member who is entitled, or a dependant beneficiary of a member who is automatically entitled, to be paid a superannuation income stream benefit from a superannuation interest that supports a superannuation income stream." 20. Law Companion Guideline (LCG) 2017/3 provides at paragraph 15: "A binding death benefit nomination, by itself, does not make a superannuation income stream reversionary. If the governing rules or the agreement/standards under which the superannuation income stream is provided does not expressly provide for reversion, then a binding death benefit nomination cannot alter this. The binding death benefit nomination may have the effect of directing the superannuation provider as to whom the death benefit is to be paid and the form, but it cannot turn a nonreversionary superannuation income stream into a reversionary superannuation income stream." I respectfully submit that the first 2 sentences do not logically produce the outcome the third sentence suggests. 21. See paragraph 13: "The superannuation income stream reverts in this manner because the governing rules or the agreement/standards under which the superannuation income stream is provided expressly provides for reversion, as opposed to the superannuation provider exercising a power or discretion to determine a benefit in the beneficiary's favour. That is, the preconditions necessary for a superannuation income stream to revert must exist within the rules governing the superannuation income stream prior to the member's death." w:\matter\270380\ doc November 2017 bulletin 3

6 22. In my view, if the Fund Deed provides that a member in receipt of a pension can make a DBN which causes that pension to be varied and become reversionary, then we reach a situation where a DBN can effectively "create" a reversionary pension. On the death of that member, the income stream will automatically revert in accordance with the Fund Deed. This is because the combination of the terms of the trust deed and the binding death benefit nomination of the member will create the conditions necessary for a pension to comply with both TR 2013/5 and LCG 2017/3 i.e. the pension would continue without ceasing to the intended reversionary beneficiary and there would be no discretion as to the trustee or to the member. This would seemingly qualify it as a reversionary pension despite the last sentence of paragraph 15 of LCG 2017/3 (quoted above). Lesson 23. I expect modern well thought out deeds will not have any deficiencies and will cater well for the new superannuation environment. However, we ought to all check our superannuation trust deeds to ensure this is the case, rather than make assumptions when preparing our client's estate plan. Cameron Cowley w:\matter\270380\ doc November 2017 bulletin 4

7 The risks of establishing a charitable trust in a will Introduction 1. As more charities look to diversify their fundraising alternatives, many are increasing their focus on charitable bequests. 2. If a person is considering making a charitable bequest, the following matters need to be considered by the will-maker; namely: (1) the precise name of the charity; (2) whether the charity is incorporated or unincorporated; (3) whether it is a charity or not and whether it is registered with the ACNC; (4) whose receipt may be accepted by the executors as sufficient discharge for the gift; and (5) whether the body has a preferred form of bequest. Simple legacies and charitable trust legacies 3. Some people however do not necessarily want to benefit an existing charity but set up a charitable trust in their own will. In this situation it is necessary to understand the difference between a simple legacy and the creation of a charitable trust. 4. A simple legacy is different from a trust created for charitable purposes. A gift of money to a named charity e.g. St Vincent de Paul is a simple legacy and takes effect on the death of the testator; it does not impose a charitable trust as such (often referred to as "embedded trusts" in some large charitable organisations). This is particularly relevant for gifts made to churches and how such gifts should be accounted for in the books of the Church. 5. However, a legacy for the creation of a charitable trust is one where there is an impressed trust on the donee. Such a gift may be void if the gift does not satisfy criteria (either at law or legislation) to uphold its validity. So, if a legacy provides for a gift of "$10,000 to The Society of St Vincent de Paul" then that gift does not necessitate an inference that the legacy is to be held on trust; indeed, the gift is deemed to be made as part of its general funds. On the other hand, a gift to, say, the "The Catholic Church for the education of the poor and needy" impresses a trust on the Church to use those monies for such charitable purposes only. 6. The Courts traditionally will endeavour to uphold a charitable trust. However, a gift in the nature of a trust for purposes will fail unless the purposes are charitable. 7. Whether a gift is made to a charitable institution or for charitable purposes is important from a tax perspective. A charitable institution is only entitled to tax exemption under Division 50 of the Tax Act if it has been endorsed as a tax concession charity. This in turn requires that the charitable institution meet the "entity" requirements of the Tax Act and have an ABN. w:\matter\270380\ doc November 2017 bulletin 5

8 8. The significance of whether a legacy creates a charitable trust is how moneys are to be accounted and reported by the receiving organisation. This is particularly so given the reporting obligations that all charities have now under the ACNC Act. Other implications arise too in that a charitable trust must meet the "entity" requirements for the Tax Act. One practical aspect of that is that moneys held on trust in this way do not form part of the organisation's general funds. An example of the problems that can arise 9. In a recent decision of the Victorian Supreme Court in Letcher v- Indian and Attorney-General 1, the Court had to consider the loosely-drafted provision in a will that, amongst other things, directed the deceased's residuary estate to "be used to develop properties at the Melbourne Road property to provide for the display of certain chattels and to construct units for rental purposes, with the wish expressed that preference for tenancies be given to ex-servicemen". 10. The Court heard that it was impractical to develop the property in the way the deceased had wanted and so the issue was whether a general charitable intention was expressed in the will (meaning that monies could be applied cy-près for another charitable purpose) or whether the residue went to distant relatives of the deceased. Decision of the Court 11. The Court decided that the relevant clause in the will did create a charitable trust but that led to the further question as to whether the clause expressed a general charitable intention because if a general charitable intention exists then the court will order another scheme if impracticality exists. 12. To this question, the Court said there was no general charitable intention. In turn, because there was no general charitable intention, the fact that the proposed use of the land was impractical meant cy-près was not available and so distant relatives won the day. Lessons to be learned 13. Apart from the obvious comment that we often talk about i.e. the need for careful drafting in any will, the case highlights the very real danger of charitable trust legacies. They are fraught with difficulty. 14. The main reason for the risk in setting up charitable trusts in a will is that if the trust wants to avail itself of the income tax exemption provisions in the Tax Act, it can only do so if it is registered with the ACNC under the ACNC Act. That in turn requires some very specific requirements in the ACNC Act to be followed. Further, if there is no variation power, or a limited one, in the terms of the trust set out in the will, then it can be a very difficult exercise to obtain Court approval to vary the trust to permit registration. 15. It is for these reasons that we strongly recommend that any will-maker motivated by philanthropic intentions at least explores the possibility of leaving a simple legacy to an existing registered charity. Paul Paxton-Hall 1 [2017] VSC665 (1 November 2017) w:\matter\270380\ doc November 2017 bulletin 6