Business Succession and Estate Planning Bulletin

Transcription

1 May 2013 Business Succession and Estate Planning Bulletin In this bulletin: Understanding your duties as an attorney and the consequences if duties are breached When executors play up - heads will roll Varying your family trust? Beware of the hidden super power: the appointor Contact Paul Paxton-Hall Director Level 10, 15 Adelaide Street, Brisbane Qld 4000 Telephone: paul.paxton-hall@paxton-hall.com.au

2 Contents Understanding your duties as an attorney and the consequences if duties are breached... 3 Introduction... 3 Brief summary of the facts and history of the cases... 3 The legal position... 3 The decision of Boddice J... 4 What is the lesson?... 5 When executors play up - heads will roll... 6 Duties of an executor... 6 Removal of an executor... 6 Recent decision of the Supreme Court of Queensland... 7 Summary... 8 Varying your family trust? Beware of the hidden super power: the appointor... 9 Case in point: Jenkins v Ellett... 9 Consequences for estate planning... 10

3 Understanding your duties as an attorney and the consequences if duties are breached Introduction 1. In 2012, Justice Boddice in the Supreme Court of Queensland handed down his decision in the case of The Public Trustee of Queensland (as Litigation Guardian for ADF) v Ban & Anor. 1 This is one of a number of cases in the Supreme Court of Queensland arising out of Mrs Ban's management of the affairs of ADF, a longstanding elderly friend of Mrs Ban. 2. The latest decision highlights the importance of understanding the obligations imposed on a person who acts as an attorney under an enduring power of attorney and the potential consequences that flow should those duties be breached, even if the breaches are honest and innocent. Brief summary of the facts and history of the cases 3. On 28 April 2009 Mrs Ban became ADF's attorney. On 21 July 2009 ADF was admitted to hospital in a confused and disoriented state. He was having difficulty communicating. 4. On 28 July 2009, Mrs Ban drove ADF from the hospital to a bank at which time an account in the joint names of Mrs Ban and ADF was opened. Following this transaction, Mrs Ban drove ADF back to the hospital. 5. Mrs Ban then proceeded to sell a property in the name of ADF. The proceeds from the sale of the property were deposited into the joint account on 30 October In 2011 a case came before the Supreme Court of Queensland which discussed the manner in which the joint account was created and the circumstances in which the proceeds of sale of the property came to be deposited into that account. In that 2011 case, the Court held that Mrs Ban held her share of the funds in the joint account on trust for ADF. The Court did not accept Mrs Ban's argument that the funds had been gifted to her by ADF. 7. Mrs Ban made up to 40 withdrawals from the joint account. Some withdrawals were minor but others ranged from $8,000 to $700, In 2012, the Court was asked to order that Mrs Ban account for the funds she had withdrawn. The account was sought on the basis that it was alleged that the funds withdrawn from the joint account were applied by Mrs Ban for her personal use and not for the benefit of ADF in breach of her duties to ADF. The legal position 9. Because Mrs Ban was ADF's attorney at the time of the withdrawals from the bank account, she was in a fiduciary relationship with ADF. As a consequence, she owed ADF fiduciary duties. The fiduciary duties also arose by reason of the fact that Mrs 1 [2012] QSC 255.

4 Ban held the funds in the joint account on trust for ADF (under the Court orders made in 2011). 10. It was these fiduciary duties which governed how Mrs Ban would be entitled to deal with the funds in the joint account. 11. It is important to note that the fiduciary duties are also underscored by statutory duties of an attorney found in the Powers of Attorney Act 1998 (Qld) and the Guardianship and Administration Act 2000 (Qld). 12. The primary fiduciary (and statutory) duties owed by Mrs Ban to ADF were: an overarching duty to act in the best interests of ADF; a duty to avoid conflicts and to not profit from her position; a duty to keep her property separate from ADF's property; and a duty to keep full and proper records and accounts in support of decisions made on behalf of ADF. The consequences of breaching fiduciary duties are significant. In the words of Boddice J: "A fiduciary (ie a person who owes a fiduciary duty) is not entitled to profit out of or by reason of a fiduciary position without the knowledge and assent of the person to whom the fiduciary duty is owed. If the fiduciary made a profit or benefit by reason of the fiduciary position or by reason of taking advantage of an opportunity or knowledge derived therefrom, the fiduciary must account for that profit or benefit. It is no defence that the fiduciary acted honestly and reasonably." 13. The remedies available for breach of fiduciary duty may include the unravelling of transactions, the imposition of trusts to reflect the true ownership of assets, equitable compensation and accounting for benefits. These remedies are in addition to various statutory remedies under the Powers of Attorney Act The decision of Boddice J 14. The issue for Justice Boddice to decide was whether the funds withdrawn from the joint account were applied for the benefit of ADF and not for the profit or benefit of Mrs Ban. 15. Justice Boddice considered 2 principles: (1) That the term "benefit" should have a broad meaning to include not only financial benefit but physical wellbeing, general care and emotional benefit. (2) That the determination of each case must be by reference to the particular facts and circumstances of that case. Some of the relevant facts will be: (a) (b) the nature of the relationship between the parties; the value of the assets and the proportion of the expenditure to that overall asset value; and

5 (c) what past expenditures may have been made to the attorney for the attorney's maintenance and support and whether this was likely to have continued bearing in mind the change in the personal circumstances of a party due to illness and mental deterioration. 16. Mrs Ban argued that the payments were for ADF's emotional benefit, given her close relationship to ADF (it was akin to father/daughter) and that it was likely that ADF would have made those payments to Mrs Ban had he had capacity to do so. 17. In Ban's Case, Justice Boddice concluded that whilst some of the withdrawals of funds by Mrs Ban were for the emotional and financial benefit of ADF, even applying a wide meaning to benefit, a substantial amount was not applied for the benefit of ADF but for the benefit of Mrs Ban and to the detriment of ADF. 18. Mrs Ban was required to repay to ADF all of the funds withdrawn that were not applied for ADF's benefit. What is the lesson? 19. Ban's Case highlights some important considerations: Careful consideration should be given before accepting an appointment as an attorney. It is important that you fully understand the strict fiduciary and statutory duties that are imposed on you and the consequences which flow should those duties be breached. An enduring power of attorney document contains a section called "for the attorney" which sets out information about your duties when acting as an attorney. If you are asked to become an attorney, always read the power of attorney document and seek advice on those duties before accepting the appointment. Seek advice when drafting a power of attorney document. In Ban's Case, problems arose because Mrs Ban assumed, given her close relationship with ADF, that ADF would have wanted her to have the benefits she took. Careful thought should be given as to what benefits or transactions you may wish to authorise in the power of attorney document to avoid future disputes. Future needs and circumstances need to be factored into whatever authorisations are included in a power of attorney. If there is ever doubt as to whether a transaction under a power of attorney is reasonable or open to challenge, legal advice should be taken and in appropriate cases an application can be made to the Court for either authorisation of the transaction or for directions and advice. Failure to do this may lead to difficult litigation which may be at the attorney's personal expense.

6 When executors play up - heads will roll Duties of an executor 1. One of the most important decisions a will-maker must make is who to appoint to act as executor and trustee (executor) of their will, as the executor will be responsible for completing a variety of legal requirements in order to administer the estate. 2. The duties of an executor may include: (1) arranging the funeral and proper disposal of the deceased's body; (2) locating the will; (3) obtaining a grant of probate of the will from the Supreme Court of Queensland; (4) verifying and collecting assets held at the date of death; (5) attending to payment of liabilities owing at the date of death; (6) locating and notifying beneficiaries under the will; (7) distributing assets in accordance with the terms of the will; (8) establishing and administering trusts contained in the will; (9) attending to the finalisation of the deceased's personal tax affairs and the tax affairs of the estate; and (10) defending family provision applications and other claims made against the estate. 3. Generally, a will-maker will appoint a family member or close friend to act as their executor and the majority of estates are administered smoothly. However, problems can arise in situations where an executor fails to fulfil their duties properly, e.g.: (1) by causing unreasonable delay in the administration of the estate; (2) by being uncommunicative/unresponsive in dealings with beneficiaries or third parties or both; (3) general incompetence or unfitness to act as executor or both; or (4) misappropriation of estate assets; 4. Such failure by an executor to fulfil their duties can lead to disputes between coexecutors and between executors and beneficiaries. Removal of an executor 5. In the event of a dispute, an executor is able to renounce their position voluntarily. However, if an executor is not willing to renounce (which is often the case if a dispute has arisen), the only other option for a disgruntled co-executor or beneficiary is to apply to the Court for their removal.

7 6. The removal of an executor is not a step taken lightly by the Court. The Court will not generally order the removal of an executor merely because a personal dispute has arisen. Rather, the overriding objective is to ensure the due and proper administration of the estate. 7. Section 6 of the Succession Act 1981 (Qld) provides that the Court has jurisdiction to grant and revoke probate of the will or letters of administration of the estate of any deceased person. 8. Under section 80 of the Trusts Act 1973 (Qld), the Court may make an order appointing a new trustee either in substitution for or in addition to any existing trustee. In particular, the Court may appoint a new trustee in substitution for a trustee who desires to be discharged or who is convicted of a crime or misdemeanour, is a bankrupt, or for any other reason the Court considers undesirable for a trustee. Recent decision of the Supreme Court of Queensland 9. In the matter of Jee v Jee 2, Justice Atkinson considered an application seeking the removal of an executor in circumstances where it was alleged the executor created undue delay in the administration of the estate. 10. Facts (1) The deceased died in The deceased was survived by 3 sons and 5 daughters. (2) One of the deceased's sons, Thomas, was appointed as executor under her will. (3) Probate of the will was granted to Thomas in (4) Under the terms of her will, the deceased left money in her bank account to her daughters-in-law and her grandchildren in equal shares. The residue of the estate was to be divided into 11 shares to be distributed in varying proportions to her 8 children. (5) In 1999, 3 of the deceased's daughters commenced separate applications seeking further provision from the estate. Only 1 application proceeded to trial and judgment was delivered in (6) Between 6 May 2011 and 7 June 2012, one of the beneficiaries, Dennis (Thomas' brother), through his solicitors sent several letters to Thomas' solicitors seeking answers to specific questions regarding outstanding matters in the estate administration, including the sale of property in Papua New Guinea and Hong Kong and cash held by Thomas on behalf of the estate. However, either no response or inadequate responses were received. (7) On 7 June 2012, Dennis filed an application seeking Thomas' removal as executor on the basis there had been unacceptable delay by Thomas in collecting and distributing the assets of the estate. 11. Decision 2 [2012] QSC 210.

8 (1) At the date of the decision, a number of estate assets still had not been dealt with, including: (a) (b) (c) (d) substantial funds (in excess of $300,000) were still held in the estate and had not been invested; shares held by the deceased had not been realised; probate of the will still had not been granted in Hong Kong and the property in Hong Kong remained to be sold; and the property in Papua New Guinea had not been brought into the estate. Summary (2) After the grant of probate was granted in 2001 (some 11 years earlier), Justice Atkinson did not find any reason the other assets of the estate could not have been collected into the estate. (3) Justice Atkinson referred to the decision of Justice Dixon in Miller v Cameron (1936) 54 CLR 572 regarding the exercise of the Court's discretion to remove a trustee: "The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property, and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised." (4) Justice Atkinson noted weight should be given to the fact that an executor is chosen by the deceased, however, if it is not in the interests of the beneficiaries for an executor to continue, the Court has power under section 6 of the Succession Act 1981 (Qld) to remove that executor and appoint a substitute. (5) It was held that due to Thomas' extraordinary delay in the administration of the estate, the interests of the beneficiaries were not being met and it was ordered that Thomas be removed as executor and an independent administrator be appointed to finalise the administration of the estate. 12. When making a will, it is very important to appoint someone you consider to be trustworthy and competent as executor, having regard to the complexity of your estate and the level of skill that will be required of your executor. It is also important that the executor can devote the required time to undertake the role of executor. 13. It is also a good idea to discuss the appointment with the proposed executor to make sure they are willing and confident to accept the role.

9 14. If you are appointed as an executor, you should ensure you take all reasonable steps and obtain appropriate legal, accounting and financial advice to facilitate the due and proper administration of the estate. Varying your family trust? Beware of the hidden super power: the appointor 1. In our March 2012 bulletin we reported on the High Court's decision in the Commissioner of Taxation v Clarke 3, whereby the High Court confirmed that significant changes to a discretionary trust deed will generally not amount to a resettlement provided there is a continuity of the trust estate. This was a welcome decision because a resettlement of trust is a capital gains tax event for each asset of the trust. 2. This decision has emboldened estate planning practitioners everywhere to set about being as creative as needs dictate in varying family discretionary trust deeds. The practitioner and client now have little to fear of an adverse tax result arising from changes to a family trust deed which are needed for succession planning. 3. However one still needs to be mindful that the trustee can only act within the terms of its power to vary or amend when varying the trust. There is no common law right or statutory empowerment of trustees to vary the terms of a trust. A trustee must receive that power from the trust deed or from an order of the Court. 4. Most discretionary trust deeds contain a power to vary the terms of trust. Modern deeds often contain extremely broad powers of amendment. The powers of variation must be followed strictly because any purported variation which is beyond power will be void. 5. However even with a broad power to vary the terms of the trust there can be an implied limit to the trustee's power to vary the trust terms. 6. This is particularly the case with respect to any attempt to vary the powers or personality of the principal or appointor of a discretionary trust. 7. The principal or appointor, where provided for in a trust, is the person (and can be a company) given the power to appoint and dismiss trustees. This is the "super power" of the family trust. The trustee has power to administer the trust, and is generally not able to be directed by the principal/appointor in how they act. However the trustee still acts at the whim of the principal/appointor who may dismiss them. 8. The most important decision in establishing a discretionary family trust is determining who the appointor will be as it can have important asset protection, control and succession planning consequences. Case in point: Jenkins v Ellett 9. In the case of Jenkins v Ellett 4 the trustee attempted to vary the trust deed to remove a appointor/principal. 3 [2011] HCATrans September [2007] QSC154.

10 10. The ordinary and plain meaning of the terms of the power of variation within the trust deed was extremely broad: "The trustee may by deed revoke, add to, release or vary all or any of the trusts declared or any trust declared by any variation, alteration or addition made from time to time and made by the same or any other deed declare any new or other trust or powers concerning the trust fund " Upon first reading this power seems unlimited. However trustees must always use their powers for a proper purpose. Where a trust deed includes a principal or appointor with power to appoint and dismiss trustees, it is a fraud on the power for the trustee to use their broad powers of variation to subvert the structural power relationship between the appointor and trustee. i.e. the trustee cannot remove the person who is empowered to remove them. 11. In its decision the Supreme Court of Queensland stated: "The principal's ability to remove and replace a trustee seems to me to be one of the fundamental features of the structure of this deed, one setting up a family discretionary trust to allow the power in clause 12 to be subverted by the trustee it was designed to supervise purporting to use clause 11's powers to amend the deed rather than the trusts declared by the deed is not, in my view, permissible. It is akin to destroying the substratum of the deed." The Court held that the purported variation of the trust deed to remove a principal was void. Limited powers of variation 12. Practitioners need to be wary of any changes by a trustee whereby they are achieving a goal which is inconsistent with the objects, purpose or structure of the trust deed. Such a variation may be beyond the power of amendment of the trustee. Whilst a power of variation may be expressed as seemingly unlimited, the power must be read in context of the trust's purpose. 13. This limitation will not just apply to changing the identity of the current principal, but potentially, depending on the circumstances of the trust deed, to changes relating to the: identity of beneficiaries; identity of future principals/appointors; powers of any officer of the trust; and objects or purposes of the trust. 14. It may be the case that a principal/appointor can resign or consent to their removal or a change to their powers, depending upon the terms of trust. Consequences for estate planning 15. The fact that a planned change to a trust deed is no longer regarded as a resettlement of trust with the associated tax liabilities does not mean the change is valid at law.

11 16. Further, it is not uncommon to be surprised at the identity of the principal when dragging the dusty family trust deed out of the cupboard. If that principal is not the same person as the trustee or the person who controls the company which is trustee, you may face a challenge in preparing for the succession of control of the family trust to the next generation. 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