Business Succession and Estate Planning Bulletin

Transcription

1 August 2013 Business Succession and Estate Planning Bulletin In this bulletin: Blended families and accommodation how can we accommodate competing interests? Glassock v The Trust Company (Australia) Pty Ltd & Anor Tailored trust deeds not just for hipsters Contact Paul Paxton-Hall Director Level 10, 15 Adelaide Street, Brisbane Qld 4000 Telephone: paul.paxton-hall@paxton-hall.com.au

2 Contents Blended families and accommodation how can we accommodate competing interests?... 1 Issues in respect of life interests... 1 Tax implications... 2 Attitude of the Supreme Court of Queensland... 3 Summary... 3 Glassock v The Trust Company (Australia) Pty Ltd & Anor [2012] QSC Introduction... 4 Facts... 4 Application... 5 Positions of the parties... 5 Decision... 6 Conclusion... 6 Tailored trust deeds not just for hipsters... 7 w:\matter\270380\ doc August 2013

3 Blended families and accommodation how can we accommodate competing interests? 1. The increase in the number of blended families has meant that willmakers are seeking ways in which to balance the needs and expectations of a surviving second spouse with the willmaker's adult children from a previous relationship. 2. Often there is a strong desire to ensure that a surviving second spouse has suitable ongoing accommodation but likewise the willmaker may wish to preserve the family home as an asset for his or her children rather than for step-children or the potential new domestic partner of a surviving spouse. 3. One strategy that may be used to address these competing objectives is the creation of a life interest in the family home. 4. A life interest over the family home allows a surviving spouse (called the life tenant) to have the use of and receive the benefit of the family home without becoming the owner of the property. Upon the life interest ceasing (usually on the death of the life tenant but it could also cease on the creation of a new domestic relationship) the ownership of the property the subject of a life tenancy passes to the ultimate intended beneficiaries of that capital (called the remainder beneficiaries). In this example, the remainder beneficiaries may be the adult children of the willmaker. 5. A life interest is different to a mere right of occupation of a home. A right of occupation is simply an entitlement to reside in a home, whilst a life interest goes beyond this and allows the life tenant to receive rent, income and profits from the property as well as reside in the property. Issues in respect of life interests 6. Using a life interest is a traditional estate planning strategy, but the changing social and legal environment means that the creation of life interests in wills must be carefully thought through and implemented. Some of the issues that arise for consideration are: (1) Life interests can create disharmony between a life tenant and the remainder beneficiaries as often remainder beneficiaries may face long delays before receiving an inheritance, especially if the surviving spouse is relatively young. (2) The executor is often caught up with accusations of favoritism when trying to balance the interests of the life tenant and the remainder beneficiaries who will ultimately benefit from the capital. In administering a life interest, unless the terms of the life interest say otherwise, the executor/trustee is required under the prudent person provisions of legislation (Trusts Act 1973) to consider the needs of both the life tenant and the remainder beneficiaries. (3) If a willmaker intends for the interests of a particular beneficiary to be preferred over another (and this may especially occur where the life interest is for the benefit of a person with a vulnerability or a disability), then the willmaker may want to include a provision in the terms of the life interest enabling this to occur. (4) Careful thought needs to be given to whether the intended beneficiaries of the asset are reliant upon means tested pensions. Life interests may impact upon a person's eligibility to receive a means tested pension in 3 ways: w:\matter\270380\ doc August

4 (a) (b) (c) If the source of the life interest was a domestic partner, the assets of the life interest will be included in the assets test; If the life interest includes a home in which the life tenant lives free of any rent, the life tenant may be treated as a home owner for the purposes of calculating the assets test; and If the life interest (regardless of its source) generates income (e.g. if the home ultimately is rented out for the benefit of the life tenant) then that income will be included for the purposes of the income test. In the case of a remainder beneficiary, the remainder interest is an exempt asset for the purposes of the asset test until the life tenant dies or the term of the life interest comes to an end for some other reason. Even if the life tenant is not receiving a means tested pension, his or her circumstances may alter in the future such that the life tenant receives such income (for example, the life tenant becomes disabled and obtains a disability pension). To cover such contingencies, the willmaker may want to empower the executor administering the life interest to contribute the family home to a special disability trust, which is a trust that is treated concessionally as regards means tested Centrelink pensions. (5) The willmaker will need to decide who is to bear the maintenance costs of the family home during the life tenancy. If the executor is to maintain the property and insure the property, rather than the life tenant, then the willmaker may want to include as part of the life interest a lump sum of money which the executor may use to meet the ongoing maintenance of the home. (6) Further, some thought may need to be given to whether the executor should have the power to augment that lump sum from the residue of the estate should the initial amount prove insufficient. (7) Given that a life tenant's circumstances and therefore accommodation needs may change over time, and particularly if the life tenant does not have ready access to employment income, the willmaker should consider providing powers to the executor administering the life interest to provide a substitute residence or funds for other types of accommodation (such as an accommodation bond for an aged care facility). In this context, the willmaker should consider whether the value of the substitute accommodation or funds is to be capped to the value of the sale proceeds from the family home, or whether the executor has the power to access additional capital to meet the accommodation needs of the life tenant. (8) If it is envisaged that the property will be rented out to generate income for a life tenant during the life tenancy, the willmaker may want to consider whether other income beneficiaries are included in the life interest to enable the income generated to be distributed tax effectively. Tax implications 7. The ATO Taxation Ruling TR 2006/14 is a lengthy public ruling which sets out the ATO's view of the capital gains tax (CGT) consequences of the creation of a life interest and a remainder interest in a will and any subsequent dealings with those interests. w:\matter\270380\ doc August

5 8. Where a life interest is being contemplated, it is important to read this ruling to understand the correct CGT treatment of the assets the subject of the life interest and to ensure that the executors are given appropriate powers to reimburse the relevant beneficiaries to ensure there is not an unfair incidence of CGT on either the life tenant (in the case of a deemed present entitlement to a CGT gain) or to the remainder beneficiary (in the case of a specific entitlement to a CGT gain). Attitude of the Supreme Court of Queensland 9. The Supreme Court in Queensland has been willing to embrace a flexible life interest as a solution to litigation involving blended families. A demonstration of this is the case of Kowalski v Kowalski [2012] QCA 234. In this case the plaintiff was Elizabeth Kowalski, the 80 year old widow of the willmaker, Stanislaw Kowalski. Elizabeth and Stanislaw had been married for 25 years and had a child each from their previous relationships. Stanislaw made a will leaving Elizabeth a simple right to reside in his Rockhampton home, with the residue of his estate then passing to his daughter Leigh. 10. Elizabeth sought an order to vary the terms of the right of occupation granted to her under the will, primarily to ensure that her potentially changing accommodation needs were provided for during her lifetime. Elizabeth was successful before McMeekin J. The Judge ordered that Elizabeth receive from the estate: (1) $100,000 absolutely; and (2) The right to reside in the family home. The Judge also gave power to the executors to do 2 things: (a) (b) to provide a substitute residence for Elizabeth if she so requested, which would be funded from the proceeds of sale of the family home; or to provide an accommodation bond for an aged care facility if requested by Elizabeth, again funded from the sale proceeds of the family home. Summary The Judge capped the amount available to Elizabeth for these purposes to the value of the sale proceeds of the family home (i.e. he did not allow augmentation from the residue of the estate). In this way, Elizabeth achieved a more flexible arrangement to meet her changing needs and Leigh's interests as the residuary beneficiary were not prejudiced. Creating a life interest is one option in the estate planner's tool kit to address the competing interests in an asset such as the family home. The life interest must be carefully thought through and should cover possibilities such as the ongoing maintenance of the home, allowing for future changes to the accommodation needs and income sources of a life tenant and the incidence of CGT. If the life interest created in the will is inflexible or too restrictive, it may be open to a costly challenge and amendment such as occurred in the case of Kowalski v Kowalski. w:\matter\270380\ doc August

6 Glassock v The Trust Company (Australia) Pty Ltd & Anor [2012] QSC 15 Introduction 1. It is a common estate planning arrangement for a willmaker to grant a right of occupation in respect of their principal place of residence to a second spouse in order to provide their current spouse with accommodation during their lifetime while ensuring that the willmaker's children from a previous relationship ultimately inherit the property as residuary beneficiaries. 2. However, issues can arise if the willmaker subsequently sells or transfers the property but does not amend their will accordingly. 3. Further issues can arise if the residuary beneficiaries are not aware the willmaker dealt with the property until after the willmaker's death, as was the case in the Supreme Court decision of Glassock v The Trust Company (Australia) Pty Ltd [2012] QSC 15. Facts 4. The deceased died on 16 October 2011 at the age of The deceased had 4 children from his first marriage (which ended in divorce in 1983) and married his second wife (Janice) on 7 September The deceased purchased a property at Maleny (property) in his sole name before his marriage to Janice. After their marriage, the deceased paid for a house to be built on the property and the deceased and Janice resided in the property. The property remained, at this time, in the deceased's sole name. 7. In 2002, the deceased suffered a stroke and was left with some physical disabilities. 8. On 28 June 2006, the deceased made a will that provided: (1) The Trust Company (Australia) Pty Ltd and 2 of the deceased's children were appointed as executors and trustees. (2) The deceased granted a right of occupation over the property in favour of Janice for her lifetime or until she remarried or entered into a de facto relationship. (3) The residue of the estate was to be invested (fund) and the income of the fund was to be applied to: (a) (b) (c) pay costs associated with the property for which Janice was not responsible under the terms of the right of occupation; pay fortnightly instalments to Janice; and pay the balance income to the deceased's children and grandchildren in the trustees' discretion. (4) Upon the death of Janice, the balance of the fund and the property (or the proceeds of sale of the property) were to be divided between the deceased's children. w:\matter\270380\ doc August

7 9. On 24 March 2011, the deceased purported to sign a transfer of the property from his sole name to himself and Janice as joint tenants by way of gift (transfer). 10. The deceased's children did not become aware of the transfer until after the deceased's death. 11. Under the rules of survivorship, the property automatically passed to Janice on the deceased's death, rather than forming part of the deceased's estate to be dealt with under the terms of the will. Application 12. Where an executor or trustee is in doubt as to the course of action they should adopt, they may seek directions from the Court. In deciding such an application, the Court merely has to determine whether or not proceedings should be taken, not whether the proceedings will ultimately be successful. 13. The applicants in this matter were the 2 children of the deceased who were also 2 of the executors under the will (applicants) and they sought directions from the Court as to whether they should commence proceedings seeking to set aside the transfer of the property. They also sought directions as to whether the costs of those proceedings should be borne out of the estate or by them personally. Positions of the parties 14. The applicants submitted: (1) The transfer was inconsistent with the terms of the will, as the will contemplated the property forming part of the deceased's estate; (2) The deceased may not have had capacity to enter into the transfer as he had been diagnosed with dementia in 2009 and, by the time of the transfer, had significant impairment; (3) The deceased had not obtained independent legal advice regarding the transfer as it was undertaken by a solicitor instructed by Janice; and (4) The transfer involved a gift of real property to the deceased's attorney (Janice) and so there was a presumption of undue influence under the Powers of Attorney Act 1998 that had to be rebutted with contrary evidence by Janice. 15. Janice submitted: (1) There was a breakdown in the relationship between the deceased and his children prior to the transfer; and (2) The evidence of the solicitor who prepared the transfer and the deceased's medical practitioner did not support the assertion that the deceased lacked capacity to enter into the transfer or that the deceased was subjected to undue influence. 16. In relation to costs: (1) The applicants submitted that, if the Court was of the opinion that the applicants should commence proceedings seeking to set aside the transfer, their costs should be paid out of the estate; and w:\matter\270380\ doc August

8 Decision (2) Janice submitted the applicants should bear their own costs if proceedings seeking to set aside the transfer were commenced, as the proceedings, if successful, would ultimately benefit the applicants in their capacity as residuary beneficiaries. 17. Justice Boddice found it would be in the best interests of the estate as a whole for the transfer to be the subject of the proceedings proposed by the applicants because: (1) the deceased had suffered from dementia for some years prior to the transfer; (2) the transfer involved a substantial asset of the estate which had been left on trust under the will for the ultimate benefit of the deceased's children; and (3) if the proposed proceedings were successful, Janice would still be entitled to reside in the property under right of occupation under the will. 18. On the question of costs, Justice Boddice noted the following: (1) if the proposed proceedings were ultimately successful, a substantial asset would be brought back into the estate, to the ultimate benefit of the applicants and their siblings; (2) a depletion of the assets in the estate would reduce the income that could be earned by the estate which was intended for Janice under the terms of the will; and (3) the applicants were adults and were competent to manage their own legal affairs. 19. It was held that it was not appropriate to order that the proceedings be funded by the estate but rather it was fairer to leave the applicants to commence the proceedings at their own risk regarding costs. Conclusion 20. Several important lessons flow from the decision in this case. 21. Where there is doubt as to a person's capacity to enter into a transaction dealing with their property, it is important to obtain legal and/or medical advice to determine whether the transaction is appropriate. 22. Even if the transaction is being instigated in the context of a marriage, it may be prudent for each party to the transaction to have independent legal advice. 23. It is also very important to ensure that when undertaking such a transaction that your estate planning documents are reviewed contemporaneously and amended as necessary to reflect the changes in your circumstances and intentions. 24. Care must also be taken when one spouse is an attorney for the other spouse (the principal) and engages in transactions that may give rise to potential conflicts of interest, undue influence and affect the estate planning intentions of the principal. 25. Legal, accounting, taxation and/or financial planning advice (as appropriate) should be sought if you wish to change or revoke your will, because even simple changes must be made correctly or they may have unintended results. w:\matter\270380\ doc August

9 Tailored trust deeds not just for hipsters 1. Discretionary trust deeds have come a long way since the early 1970s when family trusts began to become prevalent amongst owners of small and medium sized businesses rather than just the estate structures of wealthy families. The modern trust deed is infinitely broader and more flexible than the early trust deeds. 2. As practitioners we take great comfort in the standardisation of many provisions in trust deeds so that we can predict the responses of financiers and other parties in transactions who critically review the trust deeds of our clients. Many trust deeds are now provided by document providers rather than by law firms and most of these deeds have modern drafting and are eminently suitable for the needs of most family businesses or family investments. 3. However, a "one size fits all" approach to trust deeds may not always adequately meet your particular needs so tailored trust deeds still have an important place in estate planning and business structuring. Some examples of where tailored terms can provide an advantage for your next family trust are as follows: (1) Ability to extend vesting date The maximum perpetuity period under statute is 80 years and many trusts have a set perpetuity period of 80 years. However, the South Australian jurisdiction has no maximum perpetuity period and it may be that in the future parliaments in Queensland or New South Wales adopt the same approach. However, if your trust deed does not allow the vesting date to be extended, you will still be limited to the original perpetuity period in your trust deed unless you are successful in an application to the Supreme Court to vary the trust. It is impossible to predict with certainty the circumstances of the beneficiaries of a trust as at the vesting date and there may be a myriad of reasons why deferring the vesting of the trust is of advantage to beneficiaries. Therefore it may be prudent to consider whether your trust deed should include a provision that allows the trustee to extend the perpetuity date, if allowed by law, without incurring a breach of trust or causing other adverse consequences. (2) Trust officers acting through an enduring attorney The Powers of Attorney Act was enacted in Queensland in However, it continues to surprise us how many trust deeds do not anticipate that trust officers (other than the trustee) would not act through their enduring attorney if that trust officer was incapacitated. Trust officers might include a guardian, protector, appointor, principal or some other role. Although it is quite common for trust deeds to include a broad power on the part of the trustee to delegate his or her powers and discretions we would caution against a trust deed allowing a trustee to act through an enduring attorney. This is because on a trustee's incapacity, the trustee loses the ability to hold office as trustee. If the trustee is unable to act in his or her office due to incapacity, the trustee's delegate would not be in any better position to act in place of the incapacitated trustee. The risk of incapacity of an individual trustee is yet another reason you should consider utilising a corporate trustee. w:\matter\270380\ doc August

10 (3) Mediation and confidentiality provisions Family trust disputes are common and increasing. You ought to consider whether you want your trust deed to contain compulsory mediation provisions which prevent beneficiaries from litigating against a trustee until mediation processes have been followed and exhausted. A compulsory mediation process can assist keeping family trust disputes confidential and out of the costly environment of the Court. (4) Tailored succession planning A tailored family trust deed allows the prime movers of the trust to hard wire the future controllers and beneficiaries of the trust. However this must be considered carefully to ensure that such future proofing does not make the trust unworkable or inflexible, or create unavoidable future capital gains tax events by causing the trust to vest on a particular day or event. Please contact our office if we can assist you with a tailored family trust deed. For further information, please contact: Paul Paxton-Hall Director Phone: paul.paxton-hall@paxton-hall.com.au Sharon Winn Special Counsel Phone: sharon.winn@paxton-hall.com.au Cameron Cowley Senior Associate Phone: cameron.cowley@paxton-hall.com.au Emily Simeoni Solicitor Phone: emily.simeoni@paxton-hall.com.au w:\matter\270380\ doc August