Grown up children super risks Peter Bobbin Managing Principal, Argyle Lawyers
Just the tip of the children risk iceberg. Olesen v MacLeod [2011] - Member and father trustees, but member took money out illegally 41 times! Even after an ATO notice!! Triway Superannuation Fund and Commissioner of Taxation [2011 - son had a drug addiction and took almost all of the money from the Fund and spent it or gave it away Grace v Grace [2012] - Deborah has been closely aligned with her mother from the time of separation Children are a financial risk!
Meet Michael (60) & Mary (54) Michael s parents divorced; father died in the 90 s, mother Betty is 87 and shares their home. Mary s parents are living in a retirement village and are in their 80 s; self-funded retirees living off super. Michael s family trust allocates $18,200 to each of them annually. Michael and Mary have three children; Jason (35), Angela (33) and David (18). Angela was adopted by them after difficulties with the birth of Jason. Michael also has a daughter Melissa (42) who recently contacted with him after accessing her birth/adoption records. She has a partner Amy, they have two children Noah and Ava. Jason is in his second marriage, second mortgage and second career; he has two teenage sons, Jacob and Joshua at secondary school. Angela is without a partner, lives in a flat owned by Michael (she pays no rent, but Michael records her as a renter to support his interest tax deduction). She has converted to a new religion (Michael and Mary are concerned) and is pregnant on 12 months maternity leave. Christopher is starting university (on full time HECS) but isn t sure of what to study. He is the only child at home.
Deceased + Betty John + Judith Michael + Mary Melissa + Amy Jason + Heather Angela David Noah Ava Jacob Joshua On-the-way
Michael & Mary s Super Michael and Mary are trustees Standard super fund trust deed Michael member balance is $700k, all concessional Mary member balance is $300k, ½ concessional Intend to retire when Michael attains 65 Currently makes maximum annual concessional contributions Now live on the Gold Coast but whole professional life in Sydney
Why have children in the smsf? Parent is a control freak Ready for parent disability Economies of scale for investments and share costs Maintain a family business asset within the fund Fully absorb tax benefits such as anti-detriment or capital losses Parking child super until ready or whilst overseas
Authorised by who and for what? Do you have two instructing you or one? Your professional duty of care is to both. Does your duty extend to the rest of the family? Hill v Van Erp [1997] HCA 9 Does your duty extend beyond super issues? Calvert v Badenach [2015] TASFC 8
Authorised by who and for what? You report separately but act on the say of only one? Limit your duty of care (and liability) by; Taking instructions from both Be authorised to only take instructions from one Advising that they control the risks for their dependents
Authorised by who and for what?
Natural person trustees Are the assets registered in both names? Are both names recognised authorities? Ownership is to be as joint tenants, not tenant-incommon Right of survivorship Executor of the last takes control, what does the will say?
Natural person trustees Is there an enduring power of attorney But that is not enough, need a trustee appointment process and trigger Will it be possible to transfer asset ownership and control What and when will trigger recognition of a disability and a trustee appointment process?
Change to a Corporate Trustee Does the trust deed allow this? What is the removal and appointment power? Who holds this power? If it is silent, look to the Trustee Act. But which Trustee Act? What is the law of the trust? Often it is a fiduciary power that carries duties
Change to a Corporate Trustee A failure of process is a failure of appointment The process may be correct but is it the right process? Has an earlier trust deed update failed such that the process is an earlier process? Do the successive trust deeds exist and can be found?
Give them member rights? Should the selected alternate trustee / director become a smsf member and have member rights? If voting is controlled or limited will this work in the way it needs to when it is needed?
Corporate Trustee Director Status Issues shares of different voting classes? But if there is a falling out, how do you redeem the shares? What does the constitution allow? Alternate director appointment, but commonly need to adjust the company constitution to enable on death as well as disability "director " means a person who is appointed to the position of an alternate director and is acting in that capacity Corporations Act, Sec 9
Once a Trustee always a Trustee? Removing a trustee is not easy Must firstly follow the trust terms for trustees But a member has a vested in interest entitlement But a Court has inherent jurisdiction and can remove a trustee where it is right to do so Basil Notaras v Brinos Notaras [2012] NSWSC 947 section 70, Trustee Act, NSW, 1925
Once a Trustee always a Trustee? Sometimes it is too hard to eject a Trustee / Member, SISR requires member consent for a transfer Sometimes it is easier for all others to leave
Death benefits: binding or not? Certainty versus adaptability Rigidity versus flexibility Timeliness versus takes time Is a binding death benefit nomination a power of appointment? Is it a mere power, a trust power or something else? If it is right it works, if it is not if fails. There is no sect 32 Succession Act to allow evidence (including evidence of the testator s intention) to assist in the interpretation
Fix to my estate Certainty versus adaptability Rigidity versus flexibility Timeliness versus takes time Is a binding death benefit nomination a power of appointment? Is it a mere power, a trust power or something else? Suggest that it is a quasi-mere power or right to direct my superannuation interest
Fix to my estate Create a testamentary trust need to flow through the estate Exposes the super to an estate challenge What is the law of the trust? Can the NSW 3 year claw back apply? Hitchcock v Pratt [2010] NSWSC 1508
Surviving trustee discretion There is a duty to consider Claims staking is necessary to demonstrate that proper trustee process was followed Supreme Court has inherent review jurisdiction Trustee Act, NSW 1925 Part 3
Succession Claim on Super Although a death benefit super claim and an estate claim could be viewed very broadly as different ways of obtaining access to what is essentially the same money, these are two distinctive approaches H.E.S.T.Australia Ltd v Sykley
Michael s super dependents? Spouse Mary Children Melissa, Jason, Angela and David Inter-dependant Betty? Financially dependant John & Judith Grandchild on-the-way financially dependant
Michael s tax free dependents? Spouse Mary Children Melissa, Jason, Angela? and David Inter-dependant Betty? Financially dependant John & Judith? Grandchild on-the-way financially dependant?
Taxable component Death benefit to a tax free dependent is tax free Is it better to withdraw from the super environment Often approximately 5 year crossover where it would have been better to leave it in super than to have taken it out tax free
Safeguarding Super Sometimes super is not right, despite the tax attraction... Withdraw it, sometimes super (incl. smsf) simply will not work If it is not in a super fund then the trust rules cannot run it Avoid it, the insurance may appear cheaper but the cost is loss of certainty Is it smart to save $17.88 per week on a $2,000 per annum policy and put at risk the $1.5m payout to taxation of 30%? Take the remainder interest of an asset out (after age 60) and gift this or put it in the will, but leave the life interest (income right) in the smsf for the surviving super member pension
Safeguarding Super But some Trust Law reliance is ok, such as... Empower future decisions Slice up beneficiary rights Create real lawful rights Stop transfers Create child/estate gift overs, remainder interests Bind to a class not a person Create true reversionary pension with an upper limit Don t ignore the living too long risk of money running out
Safeguarding Super Promissory estoppel... Commonly exists in the family farm cases where dad promises son the farm if son stays and works the farm instead of leading an independent life. If dad sought to change his will, the Court will estop him from breaching his promise No reason why the concept cannot be built around a superannuation environment but it is essential to show; the promise, consideration of some form passing, reliance on the promise and detriment suffered by the promise The promise of an income stream can fall under this concept Usually completed by deed
Safeguarding Super Paramount Agreement... Combines the best bits of the Mutual Wills Agreement concept and the Promissory Estoppel concept and opens this up to more persons Putting this together with the whole family(i.e.s) can identify problems early Especially useful in multi structure family investments with different mixes of control Usually completed by deed
Safeguarding Super Be practical about asset and investment controls... Create a guardian role, not a trustee but they have signatory rights Use joint but special purpose signatory rights Allow assets to be separately managed
Michael s super wishes are.. Live off his super Ensure that Mary is secure Provide support of their parents Provide support of their children Any remaining to go to his children (Mary only wants her three to benefit)
Michael s super wishes are.. Statutory declaration to declare the status of all family members note that SISR 1.04AAAA provides for this for interdependency Maybe also a deed of release from Melissa & Mary s parents Create conditional super death benefits; Michael/Mary and beyond Ensure Melissa is/is not a capable beneficiary If is not make sure that Michael can t make the change the rule himself otherwise this may be a prescribed transaction if NSW Update the law of the fund to the current domicile
Michael s super wishes are.. Require children to have life insurance in their super to pay for their children if a catastrophe happens to them (and thereby protect the future of Michael & Mary) Create conditional entitlements and make these currently vested in interest Put in place a paramount agreement that all sign up to so as to enforce the super
Michael s super wishes are.. Have a trust deed that empowers Put in place power of attorney with trustee / director mechanism but have a guardian angel that overlooks the operation Check whether the executor has a role in your smsf deed and make this match Quicker to abandon than to perpetuate the continuous trust terms Freshen up the paperwork by exit and re-create
Super solutions for a modern world.. versus
Thank You
Disclaimer SMSF Association 2016 This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.