Consider the remarriage Risk when doing a Will

When one spouse dies often the surviving spouse remarries. This will mean any inheritance received by the surviving spouse could be at risk of not ending up in the children’s hands.

Example

Homer and Marge are happily married and have 3 kids, they prepare their wills so that if one dies the survivor gets everything, if they both die the kids share everything equally. Sounds good so far.

Homer dies.

Marge inherits Homer’s assets which were 50% of the main residence, 50% of the investment property and 425 pens stolen from his employer over the years.

So far all is well.

A year after Homer’s death Marge gets on tinder and eventually marries a guy called Barney.

Marge’s will is now revoked by the marriage, marge dies and under the intestacy laws of NSW the assets of Marge get shared by Barney and the kids.

Even if Marge didn’t marry Barney, he might still be able to take a share because he is a de facto spouse. If the will was in place still, he could make a family provision claim. There is also the possibility that Marge will knowingly prepare a new will and leave Barney something – or everything.

So, when making a will consider that your spouse could enter a new relationship after your death and plan for it. Assume it will happen.

For a Discussion go to: https://www.propertychat.com.au/community/threads/legal-tip-197-consider-the-remarriage-risk-when-doing-a-will.38888/

Multiple Bucket Companies as an Estate Planning Strategy

A Bucket company is a company set up to receive profits from another entity – usually a discretionary trust. The bucket company usually does nothing else, except receive money and make loans or directly invest perhaps. Over time the value of the bucket company will rise as money is coming in but not going out. Therefore, it will become increasingly important to consider in regards to estate planning and asset protection.

One estate planning strategy is to set up one separate bucket company for each child so that when the controller of the companies dies each company’s control can be passed on rather than having multiple people inherit the control of one company.

Example

Homer has 3 kids. He wants to leave them approximately the same amount of his assets 1/3.

Homer has decided to set up a discretionary trust to use to invest in shares. He seeks legal advice on the difficulties with leaving the control of the trust to more than one person so has that covered. But after a while the dividends of the share investments are building up so Homer sets up 3 bucket companies with 3 separate discretionary trusts with one trust holding the shares in each bucket company.

When the dividends come in, he causes the trustee of the share trust to distribute 1/3 to each company. Over a period of time the companies end up with large amounts of retained earnings which and then lent back to the share trust.

Homer dies.

Each of the bucket companies is then passed to each child – actually nothing is passed but the control of the bucket companies is arranged so that Child A controls Trust A and Bucket Company A.

This way things will be easy to divide. There is no more than one child involved in one company so if they want to cause the company to make loans, invest, pay dividends or close down they can do so without the need to effect or even consult with their siblings.

For a Discussion go to:

https://www.propertychat.com.au/community/threads/legal-tip-195-multiple-bucket-companies-as-an-estate-planning-strategy.38768/

Can Children be Executors under a will?

Children are considered legally ‘disabled’ until they reach 18. They can be appointed as executors under a will, but if the testator dies while the child is under 18 the child cannot act as executor.

So what happens?

Usually their legal guardian will be executor in their place, or the courts can appoint someone else.

Under NSW law this would be s 70 of the Probate and Administration Act 1898

http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/nsw/consol_act/paaa1898259/s70.html

Example

Bart has divorced the mother of his sole child – Junior.

Bart makes a will while Junior is 11 and appoints Junior as the executor of his estate with no backup. Bart has no plans on dying but carks it in a skateboard accident when Junior is 16.

Junior’s guardian at this point is her mother. The mother applies for probate as guardian of the executor and this is granted by the courts.

Bart roles over in his grave when his ex-wife, whom he still hates, takes control of his estate.

Setting Up a Trust When You Have No Family

What is the point, you might ask, in setting up a discretionary trust to hold investment assets when you have no family?

A discretionary trust needs at least one beneficiary with the trustee having the option to retain income, or at least 2 beneficiaries where it doesn’t. However, most discretionary trusts will have hundreds of potential beneficiaries as they will be set up with one or two named persons as the primary beneficiary and then there will be secondary and, possibly, tertiary beneficiaries who are relations of the primary beneficiary.

So even though you are on your own now, you might have cousins or distant relatives who could be beneficiaries – this doesn’t mean they need to be recipients of trust income, but just that they could be. You never know when one of your cousins might invest in shares and lose the money and have carried forward income or capital losses.

There is also the issue that even though you may not have any family now, you may get a spouse at a future date. There may even be children and then grandchildren. All these people could and probably would be beneficiaries of the trust. This is generally the case even if they do not ‘exist’ at the time the trust was created.

Perhaps most importantly, a company could also be a beneficiary of the trust. This may allow for use of the bucket company strategy of diverting income to the company to cap the tax rate at 30%. Later on, the retained earnings in the company could be distributed to future family members (providing the shares of the bucket company are held by a different trust).

There are also the asset protection aspects to consider. Not having a spouse may mean holding all assets yourself and taking a risk of not ending up bankrupt. Where the assets are held on trust, the assets are generally much safer from attack should the controller of the trust become bankrupt at some point.

See the discussion at: https://www.propertychat.com.au/community/threads/legal-tip-190-setting-up-a-trust-when-you-have-no-family.36832/

How to Fund a New Discretionary Trust

Discretionary trusts are generally started with just $10 or $20. Mostly trusts are established for a trustee to hold shares or property for the benefit of a beneficiary, so how does the trustee get the deposit or money to do this?

There are basically just 3 options to consider:

  1. Gift

A gift is an irreversible transfer from one person to another.

It is better than a loan for asset protection against bankruptcy because if the gift giver goes bankrupt generally the gift will not be available to creditors (but the claw back laws need to be considered).

Gifts to discretionary trusts may not be ideal though because when you die the gift will not form part of your assets and cannot be passed via your will.

If the gift giver is borrowing money to gift to a trust the interest will not be deductible.

Gifts should be documented with a deed.

2. Loans with interest

A loan can be made with interest accruing. However, interest is income to the receiver. Interest may be deductible to the trust if it is using the borrowed money invest, s 8-1 ITAA97.

The interest rate could at market, under market rates or higher than market rates. Each has different consequences.

But a person cannot contract with themselves, so you could not lend to yourself if you are the trustee.

Generally, someone borrowing money to lend to the trustee should consider charging interest to the trust. This interest would need to be at least the same interest that the bank is charging you. But the question you should be asking is if the bank has a first mortgage security over real property and charges say 4% to you, if you lend to the trust at 4% without security would this be a market interest rate? Are there any Part IVA consequences?

A loan should be documented with a written loan agreement which would be either a contract or a deed.

3. Interest free loans

Many like to make interest free loans to trusts because there are no direct tax consequences and the loaned money would generally come back to the lender at death and therefore form part of their estate and can then pass into a testamentary discretionary trust.

But a major issue with loans is the various state limitations acts. This could cause a loan to become unenforceable if there has been no activity with a loan for 6 years (NSW law). So, a loan made say 7 years ago which is interest free and no transactions have happened will not be recoverable if the borrower refuses to pay back. You might think that you are not going to sue a related trust, but you must remember that if you set up a trust you are just in control temporarily. If you lose capacity, go bankrupt or die the control of the trust will pass to someone else.

Interest fee loans should be documented in the same way as loans with interest.

Which method should you use?

You should all get specific legal advice from a lawyer, but as a guide:

  1. If you have cash and are concerned about bankruptcy a gift might be worth considering
  2. If you are not concerned about bankruptcy and have cash, then an interest free loan may be worth considering
  3. If you are borrowing and on-lending the money to the trust a loan with interest may be worth considering.

If you do make a loan you must adhere to the terms of the loan for it to be effective.

Transactions to Defeat Family Law Claims

Section 106B of the Family Law Act allows a court to set aside certain transactions designed to defeat an existing or proposed order relating to a party to a marriage or defacto relationship.

This can include transactions that are:

  • Gifts
  • Sales
  • Bankruptcy related
  • Rights attaching to an interest in a company or trust
  • changing Appointor positions in trusts
  • Varying powers under a trust

Example

Bart is about to divorce his wife and resigns as appointor of the family trust and appoints his friend Millhouse. Bart also causes the trust to be varied so that neither Bart nor his wife are beneficiaries of the trust. The trustee is also controlled by Millhouse.

Bart then gifts money to the trustee of the trust. Bart borrows this money back and lets the trustee take a mortgage over his house as security for the loan. Bart sells another property he owns for $1 to the trustee of the trust.

This series of transactions involving Bart could be attacked in several ways. Including:

  1. Court reversing the amendments to the trust
  2. The gift could be clawed back
  3. The loan set aside
  4. The mortgage set aside
  5. The transfer of the property could be set aside.
  6. The court may not do any of the above, but to simply take the value of the assets into account when working out the division of property between the spouses.

Keep in mind that just because a transaction can potentially be attached does not mean that you should not do this.

Legal advice should be sought if seeking asset protection.

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au

Financial Abuse of the Elderly

There are many instances of elderly being abused financially. Often the abusers are adult children or other family members of the elderly person. In many cases the perpetrator believes they are doing no wrong, but at other times their abuse is more blatant.

Some forms of elder abuse

  • Improper dealings under a power of attorney

This might include an adult child drawing on a parent’s bank account to help themselves, make loans or gifts to themselves or other family members. Sometimes they may ‘need’ the money temporarily and intend to give it back.

  • Bank account abuse

A family member may open a joint account with an elderly person to help them. The account may only contain the elderly person’s money. The elderly person’s health may deteriorate and the younger person may start thinking along the lines of ‘they couldn’t spend the money anyway’. This may also be a plan to inherit the money outside of the will as if the elderly person where to die the money may become the asset of the other account owner.

Sometimes the elderly will give their ATM and pin to another family member, who may then start taking extra funds out.

  • Stand over tactics

I have heard of one incident of an elderly great grandfather being stood over to chance his will. He immediately redid the will a few days later with a lawyer, but this sort of thing would make the will invalid – if it could be alleged.

  • Manipulated into being guarantors

There is many a budding developer or business owner who has talked one or both parents into letting the them use their property as security for a loan. Often the business fails, and the guarantee is enforced and the parents property sold. Luckily it is getting more difficult to use guarantees on parents main residences like this.

  • Under market value transfers

Buying a property from the elder person at less than market value – or even receiving property as a gift. Often this is done for Centrelink reasons too, but this usually doesn’t work anyway, or won’t increase the amount of pension received to 5 years after the transaction.

  • Sell and build a Granny Flat, on your land

This is where granny is encouraged to sell her main residence and to move into with one of her adult children. Often there is not enough space, so granny is encouraged to build a granny flat or otherwise improve the property of the child.

The trouble with this is often granny isn’t an owner of the property, yet she is improving the property with her money. If granny dies her estate is diminished. Many other legal issues to consider too such as bankruptcy or divorce of the child or disputes – granny may want to move out at some point but have no funds to do so.

  • Settlement of large amount of funds on trust

Sometimes a parent is encouraged to contribute funds to a trust controlled by someone else. The parent then has lost control of those funds.

 

If you want to do any of the above, legitimately, then you need to make sure you can rebut any potential allegations of elder abuse. This can be done by various methods (for some of the above) in consultation with a lawyer. For example, the ability to make gifts to family members could be built into the enduring power of attorney document if the principal agrees.

Written by Terry Waugh, Solicitor at www.structuringlawyers.com.au

Beneficial Ownership of Private Company Shares on ASIC Records

When registering the ownership of shares in private companies with ASIC trusts are not recorded. You might recall that a trust is not a legal entity, but it is a relationship where someone owns property on behalf of others.

 

This means the trustee is the legal owner of the shares.

 

However, on ASIC forms you can nominate whether the registered owner of the shares is holding the shares in their own right, or as trustee. This is done by a tick boxed labelled ‘beneficially held’.

‘Beneficially held’ means the person is not acting as trustee.

If they were acting as trustee then the shares would not be beneficially held (because the beneficial owners are others).

 

So, check your annual ASIC statements and confirm they are correctly listed on ASIC. If they are recorded incorrectly this could lead to expensive disputes upon your death or incapacity.

 

Written by Terryw of Structuring Lawyers – www.structuringlawyers.com.au

Jointly owned Property and Bankruptcy

Question: What happens when one owner of a property becomes bankrupt?

Answer: The other non-bankrupt owners end up owning the property with the Trustee in Bankruptcy.

Example: Homer and Marge own 123 Smith Street which is their main residence.

Homer becomes bankrupt because his Mr Plough snow removal business failed as summer came. Upon bankruptcy the Trustee in Bankruptcy steps in Homer’s shoes and now becomes the legal owner of all of Homer’s assets. Since Homer only owns half the house and Marg owns the other half, she is not directly affected – Marge will own her 50% with the Trustee.

If the property was held as Joint Tenants in situations like the above, the joint tenancy would be immediately severed and the owners will become Tenants in Common in equal shares. The bankrupt owners interest would then pass to the Trustee in Bankruptcy.

What would happen next will depend on the amount of equity. There are 3 possibilities

a)     Nothing just yet
b)    Marge will be asked to buy out Homer’s share at full market value, or
c)     The property will be sold if Marge could not buy out Homer

The Trustee’s job is to maximise the return for creditors so they would not want to wait. But if the value of the property is the same of less than the loan then it may not be worthwhile selling as there would be nothing to come out for the creditors. Waiting 2 years or so may see some growth in the property and some equity may build up.

Note that the Trustee in Bankruptcy takes the property subject to any equitable interest – such as a constructive trust or a resulting trust. For example if Marge had paid 100% of the purchase price originally she might be able to argue that Homer held his 50% as trustee for her.

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au