Business Succession and Estate Planning Bulletin

Transcription

1 August 2016 Business Succession and Estate Planning Bulletin In this bulletin: Can my attorney change my binding death benefit nomination? Should my attorney be able to? The "new rising" of trust cloning for estate planning Contact Paul Paxton-Hall Director Level 10, 15 Adelaide Street, Brisbane Qld 4000 Telephone: w:\matter\270380\ doc

2 Contents Can my attorney change my binding death benefit nomination? Should my attorney be able to?... 3 Background... 3 Non-binding DBNs... 3 Binding DBNs... 3 Enduring powers of attorney... 4 Duties of attorneys... 5 Certainty... 5 Is it ever appropriate for an attorney to change a BDBN?... 5 Conclusion... 6 The new "rising" of trust cloning for estate planning... 7 Background... 7 What is trust cloning?... 7 What subdivisions 328-G provides... 8 Conditions for application of the roll-over trust cloning provisions... 9 Some practical implications now for trust cloning Implications w:\matter\270380\ doc

3 Can my attorney change my binding death benefit nomination? Should my attorney be able to? Background 1. In undertaking our estate planning we must consider how we will bequeath our personal assets under our will and also how we will direct our superannuation death benefit. A death benefit is not automatically paid to our estate or our beneficiaries but, instead, we must nominate a beneficiary in a death benefit nomination for the trustee of our superannuation fund. 2. Death benefit nominations (DBNs) may be binding or non-binding. Non-binding DBNs 3. Typically we make a non-binding death benefit nomination when we are comfortable that the trustee of our superannuation fund (be it a self-managed super fund (SMSF) or a public fund), may be able to pay our death benefit to someone other than our intended beneficiary. 4. In an SMSF environment, the flexibility of a non-binding DBN can be useful. It allows your successor trustee to take into account changing life circumstances when choosing how to pay the death benefit. 5. For example, we might nominate our spouse to receive a death benefit directly but between the time of providing the nomination and the date of our death, our spouse becomes a bankrupt. In this circumstance it would be preferable to pay the superannuation instead either to other beneficiaries or perhaps through our will to a trust for the benefit of our spouse. If a binding death benefit nomination is used, the successors do not have the ability to cater for this change to circumstance. Binding DBNs 6. A binding death benefit nomination (BDBN) is preferable when we wish to ensure that there is no chance that the trustee may pay our death benefit in way other than pursuant to the nomination. 7. The purpose of a BDBN is to lock in the testator's choice and to remove uncertainty. 8. There is a litany of examples of surviving spouses and/or children failing to comply with the deceased's intentions in order to pay the superannuation death benefit to themselves in priority to the deceased's intended beneficiaries. Many testators do not consider that their spouse or children would ever do this; but the certainty of a binding death benefit nomination gives comfort that their beneficiary will never be tempted to do so. 9. The common scenario where BDBNs can be useful (and this is by no means the only scenario where they are useful) is: (1) Jane divorces and later remarries John. They both have adult children from their first marriages. Jane wishes to give the majority of her estate and her superannuation to her children. She owns her home jointly with her current

4 spouse John and she is comfortable that upon her death John will receive their home and a cash bequest under her will. (2) Jane wants to ensure her children will receive her super. She likes the certainty a BDBN gives her so that she can allow John to be a member of her superannuation fund yet still nominate her children to receive 100% of her death benefit in a binding manner. (Note: we recommend that as a matter of prudence, any person who is not your intended beneficiary of your superannuation death benefit, should not ever be in sole control of your SMSF after your death. This is controlled by careful SMSF succession planning.) Enduring powers of attorney 10. So how do enduring powers of attorney (EPOAs) fit into this? 11. Jane's estate plan includes her will, her DBN and also her enduring power of attorney. It would not be unusual for Jane to appoint John as her enduring attorney. Spouses are regularly appointed in priority to children including in some second marriages. 12. Pursuant to the Powers of Attorney Act 1998 (Act) John would have power to do anything Jane can legally do, with some express exceptions. The power is broadly stated. One of the exceptions to the powers of an attorney is that an attorney cannot undertake a testamentary act on behalf of the principal i.e. they cannot make the principal's will or amend or revoke their will. However, making a DBN is not a testamentary act. 13. The only other legal principle which may prevent an attorney from making, amending or revoking a DBN is that attorneys may not be able to exercise personal powers of the principal. For example, an attorney cannot exercise the principal's powers as director of a company. However there is no clear legal precedent which states an attorney cannot change a BDBN. There is authority that an attorney of the appointor of a discretionary trust can exercise their powers of appointment, which are personal powers. 14. The Superannuation Complaints Tribunal in determination No. DO7-08\030 made a passing comment which has been widely reported, that the Tribunal believed that an enduring attorney could validly complete a BDBN on behalf of the principal member. It did not directly relate to the outcome of the matter before the Tribunal and so the comments must be treated carefully. 15. The Law Council of Australia has reported that some large public superannuation funds already accept death benefit nominations completed by attorneys. We have seen SMSF deeds produced by large law firms in Brisbane which expressly allow a member's attorney to change that member's BDBN. 16. The Australian Law Reform Commission has commented 1 that legislative change is required to clarify whether BDBNs can be made by attorneys or not. Paxton-Hall Lawyers agrees. Interestingly, the ALRC commented that one reason enduring attorneys ought to be able to make BDBNs is that this would allow persons who have diminished capacity to enter into a BDBN where they otherwise would not be able to do so. This may include allowing a support person to assist in the process rather than delegating decision-making entirely to the attorney. This is an anti-discrimination and human rights approach to powers of attorneys. 1 Quality, Capacity and Disability in Commonwealth Laws published on 22 May 2014 at

5 17. Until a Court determines that an enduring attorney cannot make, revoke or amend BDBNs, it is prudent to assume they have power to do so. Duties of attorneys 18. Under the Act attorneys are required to act in the best interests of the principal at all times, and must avoid conflict transactions unless authorized by the principal. It is likely that changing a BDBN to nominate the attorney is a conflict transaction. However it is risky to rely on these statutory protections, as: (1) many EPOAs are prepared with an authorization from the principal to enter into conflict transactions; (2) an attorney may significantly alter the ultimate beneficiary of a BDBN by revoking the BDBN without nominating a new beneficiary; and (3) suing an attorney after the event for breach of the Act may be akin to closing the gate after the horse has bolted the money may already have been expended. 19. Ideally attorneys would be prevented from mischievously changing the BDBN rather than seeking litigious redress afterwards. Certainty 20. In this environment of legal uncertainty there are 2 ways to ensure your attorney cannot change your BDBN; namely: (1) The enduring power of attorney document whereby you appoint your attorney can expressly prohibit your attorney from changing, revoking or making a BDBN. It would make no reference to non-binding DBNs, thus allowing attorneys to be involved in changing a non-binding DBN on the basis they are designed to allow for flexibility. Paxton-Hall Lawyers has used this approach when appropriate for its clients who have a clear desire that their death benefit nomination be binding in all circumstances. The advantage of this approach is that it does not rely on legislation, a Court order or the wording of the superannuation fund trust deed to limit the attorney's power. Attorneys are required to follow express terms of a power of attorney. (2) The superannuation fund trust deed could prohibit an attorney from making, varying or revoking a DBN. Is it ever appropriate for an attorney to change a BDBN? 21. Why make a binding death benefit nomination if you want someone to be able to change it? A non-binding death benefit nomination would ordinarily be more suitable in such instance. 22. One circumstance where a testator may be comfortable with their attorney changing the death benefit nomination is where the attorney is the sole beneficiary of the BDBN. In such a case, there may be good reasons why the beneficiary does not want to receive a death benefit and with this power can choose not to receive it.

6 Conclusion 23. You must assume your attorney/s can change your binding death benefit nomination. Therefore when you are appointing your attorney it is prudent to consider whether your attorney would have any incentive to alter your death benefit nomination. If so, you may wish to include a provision in your enduring power of attorney preventing your attorney from making any changes to your BDBN. Otherwise your binding death benefit nomination is only binding whilst it suits the desires and aspirations of your attorney.

7 The "new rising" of trust cloning for estate planning Background 1. Discretionary family trusts have been used widely for many years as a small business structure of choice. This has been particularly so for rural-based family businesses. 2. The problem with discretionary trusts as business ownership entities though was that for many families, merely changing control of the discretionary trust on the death of the prime-mover of the trust, was not always an appropriate estate planning solution. For many families, the parents would want to leave different assets to different family members. 3. As a consequence, trust-cloning became a popular tool until changes to the Tax Act made in 2008 meant that the cloning of a trust triggered a CGT exposure. With a stroke of the pen the ATO largely killed off trust cloning as a consequence 2. Whilst trust cloning is still available and continues to be used where CGT consequences do not exist or are modest only, there is no doubt that the tax changes made in 2008 have had a big impact on a trust cloning succession strategy. 4. However, recent amendments to roll-over provisions in the Tax Act by the inclusion of subdivision 328-G with effect from 1 July this year has seen a reappraisal of the use of trust-cloning as an estate planning tool. What is trust cloning? 5. Trust cloning involves the creation of a new trust on virtually identical terms to an existing trust (i.e. a clone of the first) and, relying on specific powers of advancement in the first trust, allows assets to be transferred from the initial trust to the cloned trust. Diagrammatically the cloning of a trust can be shown as follows: A Pty Ltd as trustee for A Pty Ltd as trustee for A Trust B Trust 6. Under the provisions set out by the ATO in its ruling TR (now withdrawn), cloning a trust is available where: (1) the appointor of both trusts is the same person; 2 Repeal of CGT events E1 and E2 with effect from 31 October 2008.

8 (2) the vesting date of both trusts is the same; (3) named beneficiaries are the same; (4) both trusts are governed by the same state jurisdiction; (5) all other terms of the trust are the same which in turn means that there can be no variation at all in the terms of the cloned trust; and (6) if a family trust election had been made for the original trust, then the cloned trust must have made the same election. 7. Under this arrangement what would frequently happen was that the family would establish a cloned trust with the same trustee and then transfer a designated property over to the cloned trust for the benefit of one of the family members. The name of the cloned trust could be different and, overtime, a new trustee would normally be appointed by the family member taking control of the property transferred to the cloned trust. What subdivision 328-G provides now 8. Subdivision 328-G, which took effect from 1 July 2016, has re-established trust cloning as part of the estate planning lawyer's tools of trade. In some way the changes are more restrictive than they used to be before October 2008 but in other ways are in fact much more generous and allow for considerable flexibility in their use. 9. For the new provisions to apply it needs to be understood that trust-cloning is only available for small business owners and then only in relation to active assets of the business. The ability to clone comes as a consequence of the rationale behind the amendments which is to allow small business owners to defer gains or losses that would otherwise arise when business assets are transferred from one entity to another as a consequence of a restructure. As the explanatory memorandum (EM) to the new provisions explains: "1.6 The most appropriate structure for a small business may change over time, or a new small business may choose an initial legal structure that it later finds to be inappropriate. Restructuring into a more appropriate legal structure may help the business to: continue to develop and grow; avoid unnecessary compliance costs; enhance business efficiency; move to a more efficient structure for tax purposes; or adapt to current conditions." So, what the new changes to the tax law allow is the transfer of trading stock, revenue assets, depreciating assets and CGT assets to a new entity without triggering revenue consequences. But there are 3 important conditions that have to be met before a roll-over can occur under these provisions. 3 Tax laws amendment (Small Business Restructure Roll-over) Bill 2016 explanatory memorandum at paragraph 1.6 on page 5

9 Conditions for application of the roll-over trust cloning provisions 11. The first condition a genuine restructure: (1) The roll-over must be as a consequence of a general restructure of an ongoing business. In other words, the transaction can't be an artificial or taxdriven scheme. Whether a transaction is genuine or not will depend on the facts but some examples of factors that indicate a genuine restructure include: it is a bona fide commercial arrangement undertaken to enhance business efficiency; the business continues to operate following the transfer, through a different a entity structure but under the same ultimate economic ownership; the transferred assets continue to be used in the business; the restructure results in a structure likely to have been adopted had the business owners obtained appropriate professional advice when setting up the business; the restructure is not artificial or unduly tax driven; and it is not a divestment or preliminary step to facilitate the economic realisation of assets. 4 (2) The new provisions include a safe harbour rule which mean the genuine restructure condition will have been met for an ongoing business where, for 3 years following the roll-over: there is no change in the ultimate economic ownership of significant assets of the business (other than trading stock) that were transferred under the roll-over; those significant assets continue to be active assets; and there is no significant or material use of those significant assets for private purposes. 12. The second condition entities that can access: (1) To be eligible for the roll-over, each party to the transfer must be either: a small business entity for the income year during which the transfer occurred; an entity that has an affiliate that is a small business entity for that income year; connected with an entity that is a small business entity for that income year; or 4 See explanatory memorandum at paragraph 1.22

10 a partner in a partnership that is a small business entity for that income year. (2) A small business entity is one for whom the combined annual turnover of the entity and other entities affiliated or connected is less than $2M. 13. The third condition no change in ultimate economic ownership: (1) The key here is that the roll-over must not effect a change in ultimate economic ownership of transferred assets. (2) This can be problematical for the cloning of trusts involving the roll-over of assets from the original trust to the cloned trust. However, as paragraph 1.34 of the EM points out, discretionary trusts can meet this requirement on the facts e.g. where there is no practical change in which individuals economically benefit from the assets of the trust both before and after the roll-over. (3) What the new provisions allow for in the case of trusts is every individual who had ultimate economic ownership of the transferred assets before the transfer was identical with those following the roll-over who are members of the same family group relating to the family trust. (4) An example taken from the EM can be depicted diagrammatically below. In this example, a trading company (A Pty Ltd) establishes a trust to which is transferred the premises from which A Pty Ltd carries on business. The trust leases back the property to A Pty Ltd. This structure achieves the advantages of asset protection whilst ensuring that a CGT asset i.e. land is held in a CGT effective tax environment of a discretionary trust as opposed to a company. Chris Victoria B Pty Ltd as trustee for 50% 50% A Pty Ltd B Trust Transfer of property (to the leased back to A Pty Ltd) Under this arrangement, a family trust election is made nominating Victoria as the test individual. Chris and Victoria are husband and wife.

11 Some practical implications now for trust cloning 14. Whilst the roll-over provisions are more restrictive than they used to be prior to 2008 in the sense that they only apply to active assets of a small business entity, if that threshold is achieved, then the implications for use are in fact much wider than they ever used to be. This is because the terms of the new/cloned trust do not have to be identical to the original trust which had been the case prior to 2 October Now, if the threshold requirements are met, the new trust can solve a number of "ills" of the old trust e.g. defective trust provisions (and where variation might have triggered resettlement/revenue implications) and also the potential for extending the term of the trust. Implications 16. The Tax Act changes in October 2008 did not kill off trust cloning entirely, but there is no doubt that those changes have had a big impact on family succession planning. Many commentators have said unnecessarily so because trust cloning was never about saving revenue but about the efficient distribution of assets on death. Now though there are very wide reaching structuring possibilities for small business entities, and not just rural producers, that can be considered. 17. Just how effectively these alternatives can be applied is likely to be influenced by stamp duty concessions. Stamp duty concessions still apply in Queensland to the cloning of a trust but may not have application to broader restructuring alternatives. For further information 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 Senior Associate Phone: emily.simeoni@paxton-hall.com.au

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