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/

Forgotten land Tax

I have met some people who have forgotten to claim land tax and/or thought they were exempt but were later caught out. Land tax can only be claimed in the year in which it relates to – not the year in which it was paid. ATO ID 2010/192 (now withdrawn, but law still current).

In some cases it will be too late to amend tax returns and these land tax costs will not be able to be claimed for prior years.

I had a call from an old friend who has a trust which owns 3 rental properties in NSW and has held them for about 10 years – yet they have never paid land tax and didn’t really know about it until I asked him how much he was paying.

The problem is when the property is sold the land tax clearance certificate will not be clear and he will have a large sum payable before settlement. Yet they will probably not be able to claim more than 2 years. As the trustee is liable this will also affect the distributions the trust has made and it will be messy to fix so there would be additional tax agent fees.

So if you haven’t done so already register for land tax and pay it as it is incurred.

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

Stamp Duty Exemptions for fixing Mistakes

Sometimes mistakes happen when registering property ownership. Ownership may be registered in the wrong percentages for joint owners for example. There are exemptions available to fix mistakes such as these without the need to pay duty a second time.

One example seen recently was where the client had owned the property 50/50 with their spouse. They didn’t realise this mistake until refinancing many years later and having a solicitor look over their situation. Evidence was produced that they requested the ownership be 99/1% but their original conveyancing solicitor disregarded or missed this when preparing the transfer and as a result the ownership ended up as tenants in common in equal shares.

This was rectified under section 65(14) of the Duties Act NSW without the need to pay additional stamp duty and the ownership ended up with the originally intended 99/1% split as tenants in common.

Normally changing from 50/50 to 99/1 would have resulted in duty being charged a second time on 49% of the property value.

 

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

 

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

Land Tax Trap when moving into a rental property in NSW

In NSW land tax is assessed on a person’s land holdings as of 31 December each year. The principal place of residence (PPOR) is generally exempt from land tax so it is commonly thought that it might save you land tax if you moved in to a rental property just before 31 Dec as opposed to just after as the taxing date is 31 December each year.

 

However, there is a bit of a trap for young players with this as the legislation is designed to try to prevent people moving in for a brief period and claiming the exemption and moving out again.

 

The legislation for this is found under Part 2 of Schedule 1A of the Land Tax Management Act 1956 (NSW).

Clause 2(2)(a) states that for a property to be the principal place of residence of a person it must be occupied since 1 July.

 

But there can still be a hope because the next subclause (b) gives the commissioner some discretion in applying (a). If you can convince the Commissioner that the land is occupied and used as the PPOR you can still have a chance of getting the exemption.

 

The way to get the discretion exercised is not to try to call up Revenue NSW and ask to speak to the Commissioner, but to submit a private ruling application, outlining your case with the evidence and make your case.

 

Example

Bart has several investment properties in NSW but still lives at home with his dad. Bart wants to avoid land tax on the most expensive property and his tenants are moving out in Dec on 28th. Bart plans to move in on the 30th Dec 2018 and out of the property again on the 2nd of Jan just before his new tenants move in.

Bart won’t be able to get the PPOR land tax exemption because he hasn’t lived there since 1 July 2018.

It is unlikely the Commissioner will accept that this is the PPOR of Bart because Bart is only moving in for a few days.

Written by Terry Waugh, CTA & 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