Testamentary trusts : strategies and precedents [2nd edition.] 9780409342994, 0409342998, 9780409343038, 040934303X

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For Pip, thank you for all of your love and support and for always believing in me For Doris, thanks for everything For Nicole, always

Testamentary Trusts: Strategies and Precedents Second Edition Vik Sundar MTax (USyd) JD (ANU), BCom (UOW), GDLP (ANU) Admitted as a Barrister and Solicitor of the ACT Supreme Court Certified Trust and Estates Practitioner (TEP) Director, Chamberlains Law Firm

Charles Rowland BA (Natal), LLB (Natal) Formerly Adjunct Professor, James Cook University and Formerly Adjunct Reader, Australian National University

Phillip Bailey BA (ANU), LLB (ANU), GDLP (ANU) Admitted as a Barrister and Solicitor of the ACT Supreme Court Certified Trust and Estates Practitioner (TEP)

LexisNexis Butterworths

Australia 2016

LexisNexis AUSTRALIA LexisNexis Butterworths 475–495 Victoria Avenue, Chatswood NSW 2067 On the internet at: www.lexisnexis.com.au ARGENTINA LexisNexis Argentina, BUENOS AIRES AUSTRIA LexisNexis Verlag ARD Orac GmbH & Co KG, VIENNA BRAZIL LexisNexis Latin America, SAO PAULO CANADA LexisNexis Canada, Markham, ONTARIO CHILE LexisNexis Chile, SANTIAGO CHINA LexisNexis China, BEIJING, SHANGHAI CZECH REPUBLIC Nakladatelství Orac sro, PRAGUE FRANCE LexisNexis SA, PARIS GERMANY LexisNexis Germany, FRANKFURT HONG KONG LexisNexis Hong Kong, HONG KONG HUNGARY HVG-Orac, BUDAPEST INDIA LexisNexis, NEW DELHI ITALY Dott A Giuffrè Editore SpA, MILAN JAPAN LexisNexis Japan KK, TOKYO KOREA LexisNexis, SEOUL MALAYSIA LexisNexis Malaysia Sdn Bhd, PETALING JAYA, SELANGOR NEW ZEALAND LexisNexis, WELLINGTON POLAND Wydawnictwo Prawnicze LexisNexis, WARSAW SINGAPORE LexisNexis, SINGAPORE SOUTH AFRICA LexisNexis Butterworths, DURBAN SWITZERLAND Staempfli Verlag AG, BERNE TAIWAN LexisNexis, TAIWAN UNITED KINGDOM LexisNexis UK, LONDON, EDINBURGH USA LexisNexis Group, New York, NEW YORK LexisNexis, Miamisburg, OHIO

National Library of Australia Cataloguing-in-Publication entry Author: Title: Edition: ISBN: Notes: Subjects:

Sundar, Vik. Testamentary Trusts: Strategies and Precedents. 2nd edition. 9780409342994 (hbk). 9780409343038 (ebk). Includes index. Testamentary trusts — Australia. Inheritance and succession — Australia. Trusts and trustees — Australia. Estates (Law) — Australia.

Other Authors/Contributors: Dewey Number:

Self-settled trusts — Australia. Estate planning — Australia. Rowland, Charles. Bailey, Phillip Edwin. 346.94052

© 2016 Reed International Books Australia Pty Limited trading as LexisNexis. First edition, 2013 (Discretionary Testamentary Trusts Precedents). This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in ITC Stone Sans and ITC Stone Serif. Printed in China. Visit LexisNexis Butterworths at www.lexisnexis.com.au

PUBLISHER’S NOTE The publisher, authors, contributors and endorsers of this publication each excludes liability for loss suffered by any person resulting in any way from the use of, or reliance on, this publication. © LexisNexis. Any legislation reproduced in this work does not purport to be an official or authorised version.

ACKNOWLEDGMENTS Many people have given generously of their time and expert knowledge to make this text possible. We would like to acknowledge the following contributing authors who wrote chapters or contributed significantly to the text. Errors are, of course, the sole responsibility of the authors. Stipe Vuleta BCom (UOW), LLB (Hons) (UOW), GDLP (UOW) Adjunct Associate Professor at University of Canberra Admitted as a Solicitor of the NSW Supreme Court Director, Chamberlains Law Firm Catherine Coles BA (Hons) (ANU), LLB (ANU), GDLP (ANU) Admitted as a Solicitor of the NSW Supreme Court Accredited Specialist in Family Law (NSW) Senior Associate, Watts McCray Lawyers John Ioannou BA (UQ), LLB (UQ), LLM (QUT), CTA Admitted as a Solicitor of the Qld Supreme Court Queensland State Councillor of The Tax Institute Partner, McCullough Robertson Mark Lowis BCom, LLB, CA, CTA Senior Associate, McCullough Robertson

Kate Timmerman LLB (Hons) (Bond), BSocSc (Bond) GDLP (College of Law) Admitted as a Solicitor of the Qld Supreme Court and High Court Scott Farmer CFP Managing Director, Bravium Mark North LLB (ANU), GDLP (College of Law) Admitted as a Barrister and Solicitor of the ACT Supreme Court Director, Chamberlains Law Firm

Other Acknowledgements We are also very grateful to Rod Cunich, Stephen Bourke and Brian Tetlow who provided invaluable comments and feedback on both early and current versions of the precedent. The contribution made by Allan Swan of Moores Legal to the drafting of testamentary trusts is legendary, and his work has suffused and pervaded all the work presently being done in this area. The same is true of Michael Perkins of Michael J Perkins Lawyer Practice. We are deeply indebted to them both for the broad contribution they have made. We have found great help in the following works: • R F D Barlow, C H Sherrin, R A Wallington, S Meadway and M Waterworth, Williams on Wills, 9th ed, LexisNexis Butterworths, UK, 2008. • C Birtles and R Neal, Hutley’s Australian Wills Precedents, 8th ed, LexisNexis Butterworths, Sydney, 2014. • S Bourke, Super Splitting for Family Lawyers, Certus Law Pty Ltd, Canberra, 2010.

M Flynn and M Stewart, Death & Taxes: Tax-Effective Estate Planning, 5th ed, Thomson Reuters, Australia, 2012. D M Haines, Succession Law in South Australia, LexisNexis Butterworths, Sydney, 2003. • Halsbury’s Laws of Australia, online, LexisNexis, Sydney. • Harwood Andrews Lawyers, Trust Structures Guide 2012, Taxation Institute of Australia, 2012. • J Kessler and M Flynn, Drafting Trusts and Will Trusts in Australia, Lawbook Co, Australia, 2012. • B Marks, Trusts and Estates: Taxation and Practice, 2nd ed, Taxation Institute of Australia, 2009. • L Mason and R Neal, Mason and Handler Succession Law and Practice New South Wales, Online, LexisNexis, Sydney. • B O’Sullivan, Estate & Business Succession Planning, 5th ed, Taxation Institute of Australia, 2012. • M Perkins and R Monahan, Estate Planning: A Practical Guide for Estate and Financial Service Professionals, LexisNexis, 2011. • A Preece, Lee’s Manual of Queensland Succession Law, 7th ed, Lawbook Co, Australia, 2012. The authors are very grateful to LexisNexis Butterworths for undertaking to publish this as a second edition to the text, Discretionary Testamentary Trusts: Precedents and Commentary. We are especially grateful for their professionalism, their efficiency and their support. In particular, our editor Jennifer Burrows has been most kind, helpful, thoughtful, considerate, prompt and accurate. Thank you, Jennifer. • •

Vik Sundar Charles Rowland Phil Bailey Canberra, 2016

PREFACE The central purpose of this text is to provide a flexible and easy-touse system for drafting discretionary testamentary trusts. The system is intended to allow the will drafter to deal with what has always been a very complicated and difficult problem: modifying a discretionary testamentary trust precedent to accommodate the widely different family circumstances and testamentary wishes which testators present to the drafter. One testator will want a common option: to provide for a spouse; and if the spouse predeceases the testator, the testator’s children. If a child predeceases the testator, the children of that child will represent that child and take what the predeceased child would have taken. All beneficiaries are to take their inheritance through a discretionary testamentary trust. So far, so good; this is what the usual discretionary testamentary trust precedent provides for. However, other testators have different and more challenging requirements. To this end, Chapter 8 contains the Model Testamentary Trust precedent, as well as a clause-by-clause commentary on it. The precedent forms the foundation of every variation of the discretionary testamentary trust, and it is on this foundation that the variations are built by inserting clauses from Chapter 9. Chapter 10 contains a representative sample of widely different family situations for which a testator may wish to provide, as well as including flexible alternative clauses. Chapter 1 sets out the basics of estate planning and discretionary testamentary trusts, and Chapter 2 provides an introduction to the taxation of testamentary trusts, and shows their tax effectiveness. Chapter 3 discusses asset protection in relation to both bankruptcy and family law and describes how

discretionary testamentary trusts offer a way for testators to protect the gifts they are making to their beneficiaries from erosion by the beneficiaries themselves (for example, by being young or irresponsible), or from attacks from creditors or spouses or partners in a family breakdown. The text can be viewed as an advanced estate planning strategy text because in addition to providing a modular drafting precedent, it also covers unique strategies that have not previously featured in an estate planning text. This includes superannuation strategies (Chapter 6), family provision (Chapter 11) and blended family strategies (Chapter 12). A discretionary testamentary trust will is in every respect a complete will, and every provision to be included in a will to meet an individual testator’s needs must equally be in a discretionary testamentary trust will. While this work is intended to enable the drafter to produce the discretionary testamentary trust elements in a will, it does not offer a comprehensive manual on will drafting. This text is a companion volume to C J Rowland, Hutley’s Australian Wills Precedents, 7th ed, LexisNexis Butterworths, Sydney, 2009 and C Birtles and R Neal, Hutley’s Australian Wills Precedents, 8th ed, LexisNexis Butterworths, Sydney 2014, and it is expected that practitioners will turn to that work and to other works on will drafting for further guidance. By using the text, it is intended that the will drafter will not only be able to draft both simple and complex discretionary testamentary trust wills, but they will also be able to develop, plan and implement advanced estate planning strategies that can be used in tandem with the Model Testamentary Trust will.

TABLE OF CASES References are to paragraphs numbers A Andco Nominees Pty Ltd v Lestato Pty Ltd (1995) 17 ACSR 239 .… 3.39 Ascot Investments Pty Ltd v Harper (1981) 148 CLR 337; 6 Fam LR 591; [1981] HCA 1 .… 3.35, 3.36 Ashton, In the Marriage of (1986) FLC 91-777; [1986] FamCA 20 . … 3.30, 3.32, 3.38, 3.39, 3.40, 3.41, 3.47 Atia v Nusbaum [2011] QSC 044 .… 11.18 Australian Securities and Investments Commission v Burnard [2007] NSWSC 1217 .… 3.20 — v Groves (2009) 73 ACSR 466 .… 3.22 B B Pty Ltd and K (2008) 219 FLR 107 .… 3.43 Baglio v Baglio [2013] FamCA 105 .… 3.32 Baldwin & Baldwin [2010] FamCAFC 227 .… 3.45 Barns v Barns (2003) 214 CLR 169 .… 11.22 Best & Best (1993) FLC 92-418 .… 3.33 Bevan & Bevan [2014] FamCAFC 19 .… 3.32 Bigg v Queensland Trustees Ltd [1990] 2 Qd R 11 .… 11.22 Biltoft & Biltoft (1995) FLC 92-614 .… 3.32 Black & Kellner (1992) FLC 92-287 .… 3.32 BP and KS (2003) FLC 9 .… 3.37 Burton, Re: Wily v Burton (1994) 126 ALR 557 .… 3.3, 3.17

C Campbell v Kuskey (1998) FLC 92-795 .… 3.32 Ceborah SNC v SIP (Industrial Products) Ltd [1976] 1 Lloyd’s Rep 271 .… 11.19 Chang & Su (2002) FLC 93-117 .… 3.32 Clauson and Clauson (1995) FLC 92-595 .… 3.32, 3.33 Commissioner of Stamp Duties (Qld) v Livingston (1964) 112 CLR 12; [1965] AC 694 .… 1.8, 3.14 Coventry v Smith [2004] FamCA 249 .… 3.37 Crawshay (dec’d), Re; Hore-Ruthven v Public Trustee [1948] Ch 123 .… 3.39 D Darveniza v Darveniza & Drakos as Executors of the Estate of Bojan Darveniza [2014] QSC 37 .… 11.23 Davidson, In the Marriage of (1990) 101 FLR 373; (1991) FLC 92197 .… 3.30, 3.32, 3.39, 3.40, 3.41 Davidson, In the Marriage of (1991) FLC 92-207 .… 3.39, 3.47 Davidson, In the Marriage of (No 2) (1994) FLC 92-469 .… 3.34, 3.39 Dawson v Joyner [2011] QSC 385 .… 11.23 Donovan v Donovan [2009] QSC 26 .… 6.24 Duff & Duff (1977) FLC 90-217 .… 3.32 Dwyer v Ross (1992) 34 FCR 463 .… 3.16, 3.17 E Elliott v Secretary, Department of Education Employment and Workplace Relations (2008) 249 ALR 182; [2008] FCA 1293 .… 3.22, 4.5 Essex v Essex (2009) FLC 93-423; [2009] FAMCAFC 236 .… 3.44, 3.45

Evans v Friemann (1981) 53 FLR 229 .… 2.12 Executor Trustee Australia Ltd v Henderson [2005] SASC 446 .… 1.8 F Federal Commissioner of Taxation v Bamford (2010) 240 CLR 481 .… 2.1, 2.19, 2.20, 2.27, 2.28 — v Vegners (1989) 90 ALR 547 .… 3.18 Ferraro & Ferraro (1993) FLC 92-335 .… 3.32 Florance, Re Ex parte: Andrew v Florance [1983] FCA 357 .… 11.20 Fryer, Estate of; Stokes v Churchill (NSWSC Eq D, Santow J, 16 December 1993, unreported) .… 1.8 G Gartside v Inland Revenue Commissioners [1968] AC 553 .… 1.13, 3.16, 3.18, 3.19 Gelley, In the Marriage of (No 2) (1992) 107 FLR 160 .… 3.30 Goodchild, Re [1997] 3 All ER 63 .… 11.22 Goodwin, In the Marriage of (1990) 101 FLR 386 .… 3.30 Gray v Perpetual Trustee Co Ltd (1928) 40 CLR 558 .… 11.22 H Harmony and Montague Tin & Copper Mining, Re (1873) LR 8 Ch App 407 .… 11.19 Harris, In the Marriage of (1991) 104 FLR 458; 15 Fam LR 26 .… 3.30, 3.40, 3.47 Hatch v Harlekin Pty Ltd [2008] WASC 167 .… 3.22 Hickey & Hickey (2003) FLC 93-143 .… 3.32 Higgins v Higgins [2005] QSC 110 .… 11.23 Hussey v Bauer [2011] QCA 91 .… 11.22 I

Inland Revenue Commissioners v Broadway Cottages Trust [1955] Ch 20 .… 3.36 Ioppolo & Hesford v Conti [2013] WASC 389 .… 6.27 J Just, Estate of (No 2) (1974) 7 SASR 515 .… 1.8 K Katz v Grossman [2005] NSWSC 934 .… 6.28 Keach v Keach [2011] FamCA 192 .… 3.36, 3.45 Kelly & Kelly (No 2) (1981) FLC 91-108 .… 3.33 Kembrey v Cuskelly [2008] NSWSC 262 .… 11.7, 11.11 Kennon v Spry (2008) 238 CLR 366; [2008] HCA 56 .… 3.30, 3.34, 3.41, 3.43, 3.47, 3.48 L Lamond v Public Trustee of Queensland [2009] QSC 247 .… 11.23 Lee Steere & Lee Steere (1985) FLC 91-626 .… 3.32 Lovine & Connor [2011] FamCA 432 .… 3.46 M Milankov v Milankov [2002] FamCA 195 .… 3.37 Moss Super Pty Ltd v Hayne [2008] VSC 158 .… 6.21 Munro v Munro [2015] QSC 61 .… 6.24 N Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713 .… 11.19 O Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 .… 3.14

Ogden v Ogden [2010] FMCAfam 865 .… 3.37, 3.41 P Page & Page (1978) FLC 90-525 .… 3.34 Peldan v Anderson (2006) 227 CLR 471 .… 3.28 Pevsner, Re; Ex parte Trustee in Bankruptcy (1983) 68 FLR 254 .… 3.14 Pflugraft & Pflugraft (1981) FLC 91-052 .… 3.34 Pittman v Pittman (2010) 43 Fam LR 121 .… 3.39 Prentice (trustee of the property of Cummins, a Bankrupt) v Cummins (No 5) [2002] FCA 1503 .… 3.28 Public Trustee v Smith [2008] NSWSC 397 .… 3.21 R Rafferty v Time 2000 West Pty Ltd (No 2) [2008] FCA 1931 .… 3.22 Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 96 ATC 4550; 33 ATR 97 .… 3.36 Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 .… 3.18, 3.19, 3.20, 3.21, 3.22, 3.23 S Saunders v Vautier (1841) 4 Beav 115; 49 ER 282 .… 3.6, 6.18 Schaefer v Schuhmann [1972] AC 572 .… 11.22 Schmierer v Horan [2004] FMCA 16 .… 3.27 Scott v Commission of Taxation (Cth) (No 2) (1966) 40 ALJR 265; 10 AITR 290; 14 ATD 333 .… 3.36 Sebastian & Sebastian No 5 [2013] FamCA 191 .… 3.32 Secretary, Department of Families, Housing, Community Services and Indigenous Affairs v Elliott (2009) 254 ALR 223; [2009] FCAFC 37 .… 4.5 Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 82 ALR

530 .… 11.17, 11.18 Silvia v Thomson (1989) 87 ALR 695 .… 3.14 Simmons v Simmons (2008) 232 FLR 73; [2008] FamCA 1088 .… 3.35, 3.43, 3.47 Sindel & Milton [2010] FamFC 232 .… 3.33 Skeats’ Settlement, Re; Skeats v Evans (1889) 42 Ch D 522 .… 3.3, 3.39 Stanford v Stanford [2012] HCA 52 .… 3.32 Stein, In the Marriage of (1986) FLC 91-779 .… 3.32, 3.48 Stephens and Stephens [2005] FamCA 1181 .… 3.34 Stephens and Stephens (2007) 212 FLR 362 .… 3.41 Stephens and Stephens [2009] FAMCAFC 240 .… 3.41 T Tate v Tate (2000) FLC 93-047 .… 3.32 Thomas v Tyler (No 2) [2005] FMCA 342 .… 3.27 Thurlstane (Aust) Pty Ltd v Andco Nominees Pty Ltd [1997] NSWCA 317 .… 3.39 Townsend & Townsend (1995) FLC 92-569 .… 3.32 Trustee for the Estate of the Late A W Furse No 5 Will Trust v FCT [1990] 91 ATC 4007 .… 2.7 Trustees of the Property of Cummins (a bankrupt) v Cummins [2006] HCA 6 .… 3.28, 11.20 V Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 .… 3.36 Vegners v Federal Commissioner of Taxation (1991) 21 ATR 1347 . … 4.4 Verge v Devere Holdings Pty Ltd (No 5) [2010] FCA 1452 .… 3.27 Victorian Producers’ Co-Operative Co Ltd v Kenneth [1999] FCA

1488 .… 3.27 W Ward v Ward [2004] FMCAfam 193 .… 3.42 Weir & Weir (1993) FLC 92-338 .… 3.32 Whitaker & Whitaker (1980) FLC 90-813 .… 3.34 White and Tulloch v White (1995) FLC 92-640 .… 3.33 Williams v Lloyd (1934) 50 CLR 341 .… 11.20

TABLE OF STATUTES References are to paragraphs numbers Commonwealth Bankruptcy Act 1966 .… 3.15, 3.16, 3.25, 3.26, 3.29, 11.20 Pt XI .… 3.25 s 5 .… 3.12 s 58 .… 3.12, 3.14, 3.25 s 116 .… 3.13, 3.14 s 116(2) .… 3.13 s 116(2)(a) .… 3.15 s 120 .… 3.26, 3.27, 3.29, 11.20 s 121 .… 3.26, 3.28, 3.29, 11.20 s 121(1)(a) .… 11.20 s 121(1)(b) .… 11.20 s 122 .… 3.26, 11.20 s 123 .… 3.26 s 139D .… 3.13 s 139E .… 3.13 s 152 .… 3.14 s 244 .… 3.25 s 245 .… 3.25 s 246 .… 3.25 s 247(1)(b) .… 3.25 s 247A .… 3.25

s 247A(1) .… 3.25 s 247A(2) .… 3.25 s 249A .… 3.25 s 302B .… 3.10, 3.24, 7.28 Constitution s 109 .… 11.11 Corporations Act 2001 s 9 .… 3.19 Disability Services Act 1986 s 8 .… 6.11 Family Law Act 1975 .… 3.32, 3.35, 3.36, 3.41, 3.43 Pt VIIIAA .… 3.30, 3.31, 3.35, 3.41, 3.43 s 4(1) .… 3.32 s 75(2) .… 3.32 s 75(2)(b) .… 3.33 s 75(2)(o) .… 3.33 s 79 .… 3.32, 3.33, 3.35, 3.36, 3.38, 3.40, 3.41, 3.43 s 79(1) .… 3.32 s 79(2) .… 3.32 s 79(4) .… 3.32 s 79(4)(a) .… 3.32 s 79(4)(b) .… 3.32 s 79(4)(c) .… 3.32 s 79(4)(d) .… 3.32 s 79(4)(e) .… 3.32 s 79(4)(f) .… 3.32 s 80(1) .… 3.39 s 80(1)(d) .… 3.39 s 80(1)(e) .… 3.39

s 80(1)(f) .… 3.39 s 80(1)(k) .… 3.39 s 85 .… 3.39 s 85A .… 3.41 s 90AA .… 3.35 s 90AC .… 3.35 s 90SF(3) .… 3.32 s 90SF(3)(b) .… 3.33 s 90SF(3)(r) .… 3.33 s 90SM .… 3.32, 3.35 s 90SM(1) .… 3.32 s 90SM(3) .… 3.33 s 90SM(4)(a) .… 3.32 s 90SM(4)(b) .… 3.32 s 90SM(4)(c) .… 3.32 s 90SM(4)(d) .… 3.32 s 90SM(4)(e) .… 3.32 s 90SM(4)(f) .… 3.32 s 90SS .… 3.35 s 90TA .… 3.35 s 106B .… 3.31, 3.34, 3.39, 3.41, 7.28 s 106B(1) .… 3.34 s 114 .… 3.35 Family Law Rules 2004 r 13 .… 3.32 Income Tax Assessment Act 1936 .… 2.18 Pt III Div 6 .… 2.2, 2.18, 2.28 Pt III Div 6AA .… 2.6, 2.7

Pt III Div 7A .… 11.16 s 95 .… 2.18, 2.21, 2.27, 2.28, 2.29, 8.29, 8.36, 8.38, 10.10, 10.13, 10.16, 10.19 s 95(1) .… 2.2, 2.25, 2.27 s 97 .… 2.3, 2.18, 2.19, 2.20, 2.22, 2.23, 2.25, 2.26, 2.27 s 98 .… 2.4 s 99 .… 2.5 s 99A .… 2.5, 2.8 s 100A .… 2.8 s 102AG .… 2.7, 6.18 s 102AG(2)(a) .… 2.6, 2.7 s 102AG(2)(a)(i) .… 6.18 s 102AG(2)(c)(v) .… 6.18 s 102AG(2A) .… 6.18 s 102AG(3) .… 2.7 s 102AG(4) .… 2.7 Income Tax Assessment Act 1997 .… 2.20, 2.29, 6.7 Div 36 .… 2.18 Div 128 .… 2.10, 2.11 Div 302 .… 6.7, 6.12 Div 393 .… 2.18 Subdiv 115-C .… 2.29 Subdiv 207-B .… 2.29 s 104-215 .… 2.11 s 118-115 .… 2.12 s 118-195(1) .… 2.12 s 128-10 .… 2.11 s 128-15 .… 2.10 s 128-15(3) .… 2.10

s 128-20 .… 2.10 s 302-10 .… 6.13 s 302-60 .… 6.17 s 302-145 .… 6.12 s 307-5 .… 8.31, 8.38, 10.10, 10.13, 10.16, 10.19 s 307-210 .… 6.12 s 307-215 .… 6.12 s 320-195 .… 8.31, 8.38, 10.10, 10.13, 10.16, 10.19 Social Security Act 1991 .… 4.3, 4.5 Pt 3.10 .… 4.2 Pt 3.12 .… 4.2 Pt 3.18 .… 4.5 Pt 3.18A .… 4.6, 4.8, 9.29, 10.13, 10.19 s 1118 .… 4.2 s 1123 .… 4.3 s 1207A .… 4.5 s 1207C .… 4.5 s 1207V .… 4.5 s 1207V(2) .… 4.5 s 1207V(2)(d) .… 4.5 s 1207V(3) .… 4.5 s 1207X .… 4.5 s 1209M .… 4.6, 4.9 s 1209R .… 4.6 Superannuation Industry (Supervision) Act 1993 .… 6.4, 6.7, 6.8, 11.11 s 10A .… 6.6, 6.8 s 17A .… 6.26, 6.27 s 59(1A) .… 6.6

s 62 .… 6.6 Superannuation Industry (Supervision) Regulations 1994 .… 6.4 reg 6.17A .… 6.4, 6.6, 6.24, 6.25 reg 6.22 .… 6.6, 6.24, 6.25 Superannuation (Resolution of Complaints) Act 1993 .… 6.21 s 5 .… 6.4, 6.20 Tax Laws Amendment (2011 Measures No 5) Act 2011 .… 2.28, 2.29 Trade Practices Act 1974 .… 11.23 Veterans’ Entitlements Act 1986 Div 11B .… 4.6, 4.8 s 52ZZZWA .… 4.6, 4.9 s 52ZZZWE .… 4.6 Australian Capital Territory Duties Act 1999 s 72 .… 11.10 Family Provision Act 1969 .… 11.2 s 7 .… 6.20 s 8 .… 6.20 Guardianship and Management of Property Act 1991 s 4 .… 9.63 Perpetuities and Accumulations Act 1985 .… 1.9 Trustee Act 1925 .… 9.64 s 14A(2) .… 8.38, 9.40, 10.10, 10.13, 10.19 s 14C(1) .… 8.38, 9.40, 10.10, 10.13, 10.19 Wills Act 1968 s 8 .… 6.18 s 8A .… 6.18

New South Wales Duties Act 1997 Div 4 .… 12.15 Perpetuities Act 1984 .… 1.9 Succession Act 2006 .… 11.2 Ch 3 .… 6.20 Pt 3.3 .… 6.20, 11.7, 11.10, 11.11 s 5 .… 6.18 s 16 .… 6.18 s 57 .… 11.4 s 59 .… 11.6 s 60 .… 11.6 s 63 .… 6.20, 11.7 s 75 .… 11.21 s 75(1) .… 11.7 s 80(1) .… 11.7 s 80(2) .… 11.7 Trustee Act 1925 .… 9.40, 9.64 s 6(4)(b) .… 6.28 s 14A(2) .… 8.26, 9.40, 9.61, 10.16, 12.13 s 14C(1) .… 8.26, 9.40, 9.61, 10.16, 12.13 Northern Territory Family Provision Act 1970 .… 11.2 s 7 .… 6.20 s 8 .… 6.20 Law of Property Act s 187 .… 1.9 Trustee Act .… 9.64

s 6(1) .… 9.40 s 8(2) .… 9.40 Wills Act s 7 .… 6.18 s 18 .… 6.18 Queensland Property Law Act 1974 Pt 14 .… 1.9 Succession Act 1981 .… 11.2 s 9 .… 6.18 s 19 .… 6.18 s 40 .… 6.20 s 40A .… 6.20 s 41 .… 6.20, 11.23 s 41(12) .… 11.22 Trusts Act 1973 .… 9.64 s 22(1) .… 9.40 s 24(1) .… 9.40 South Australia Inheritance (Family Provision) Act 1972 .… 11.2, 11.22 s 3 .… 6.20 s 3A .… 6.20 Law of Property Act 1936 s 61 .… 1.9 Trustee Act 1936 .… 9.64 s 7(1) .… 9.40 s 9(1) .… 9.40

Wills Act 1936 s 5 .… 6.18 s 6 .… 6.18 Tasmania Perpetuities and Accumulations Act 1992 .… 1.9 Testator’s Family Maintenance Act 1912 .… 11.2 s 91 .… 6.20 Trustee Act 1898 .… 9.64 s 7(1) .… 9.40 s 8(1) .… 9.40 Wills Act 2008 s 7 .… 6.18 Victoria Administration and Probate Act 1958 .… 11.2, 11.5 s 90 .… 11.5 s 91 .… 6.20 Perpetuities and Accumulations Act 1968 .… 1.9 Trustee Act 1958 .… 9.64 s 6(1) .… 9.40 s 8(1) .… 9.40 Wills Act 1997 s 5 .… 6.18 s 6 .… 6.18 s 20 .… 6.18 Western Australia Family Provision Act 1972 .… 11.2

Inheritance (Family and Dependants Provision) Act 1972 s 6 .… 6.20 s 7 .… 6.20 Property Law Act 1969 Pt XI .… 1.9 Trustees Act 1962 .… 9.64 s 18(1) .… 9.40 s 20(1) .… 9.40 Wills Act 1970 s 7 .… 6.18

CONTENTS Publisher’s note Acknowledgements Preface Table of Cases Table of Statutes Chapter 1

Introduction to Estate Planning and Testamentary Trusts

Chapter 2

Tax and Testamentary Trusts

Chapter 3

Asset Protection and Testamentary Trusts

Chapter 4

Social Security, Testamentary and Special Disability Trusts

Chapter 5

Insurance and Estate Planning

Chapter 6

Superannuation and Succession Planning

Chapter 7

A System for Drafting Testamentary Trusts

Chapter 8

Model Discretionary Testamentary Trust Precedent

Chapter 9

Variations to the Model Testamentary Trust and a Trust for a Disabled Person

Chapter 10 Examples of Precedents Applied Chapter 11 Family Provision Strategies Chapter 12 Blended Family Strategies Index

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1 INTRODUCTION TO ESTATE PLANNING AND TESTAMENTARY TRUSTS

Introduction Introduction to estate planning What is estate planning? Estate and non-estate assets Key Issues in Drafting Wills Simple wills as against testamentary trust wills The difference between a testamentary trust and a deceased estate: the testamentary trust The difference between a testamentary trust and a deceased estate: the deceased estate The role of the trustee of a testamentary trust and the legal personal representative Common elements of a testamentary trust Why are testamentary trusts used? When should a testamentary trust be used? Bare trusts, and fixed versus discretionary testamentary trusts Mandatory versus optional testamentary trusts Matters to consider before drafting a testamentary trust

INTRODUCTION Introduction to estate planning 1.1

A common concern for parents is that after they die their

child will become separated from their spouse or partner or fall into financial misadventure and lose a substantial part of their inheritance. Similarly, where there are minor or otherwise vulnerable beneficiaries (such as those with a disability or addiction), there is a need to ensure that those beneficiaries are protected from their own lack of judgment and are not taken advantage of by others. [page 2] This fear among clients is not surprising as most people would not be comfortable with the possibility and even the thought that a stranger may run off with their family’s hard-earned wealth. The taxation implications of a transfer of assets from one generation to another is also becoming increasingly important. Previously, a simple will may have been sufficient for most client needs; however clients are now holding greater amounts of wealth and utilising more sophisticated structures than ever before. When you consider that Australia is experiencing one of the most significant inter-generational transfers of wealth that we have ever seen, tax-effective and asset-protective estate planning will be a high priority for many clients.

What is estate planning? 1.2 Estate planning is the development and implementation of a strategy to: • ensure that assets pass to the intended beneficiaries of the testator; • minimise the tax implications of death and the passing of assets to beneficiaries; • ensure that beneficiaries receive their inheritance in a tax-

• •

effective and asset-protective manner; provide certainty for the testator and their beneficiaries; and ensure that any potential risks to the estate such as a family provision claim are managed and, where appropriate, strategies implemented to avoid any such contestation of the will.

As each client is different, there is no ‘one size fits all’ strategy for estate planning. Each plan must be individually tailored to the objectives of the client, their asset structure and the particular needs and circumstances of the beneficiaries. Broadly speaking, a comprehensive estate planning strategy should involve: • •

• • • •

• •

collaboration between the accountant, financial advisor and lawyer; a detailed overview of the client’s assets (domestic and overseas), including an analysis of the manner in which these assets are held; an overview of the likely size of the estate, including any creditors and liabilities that will need to be dealt with; an analysis of the client’s family structure and any potential changes that may occur over time; the client’s goals and objectives; insight into the circumstances of the beneficiaries, including their age, occupation and any disability, addiction or spendthrift tendencies; determining the financial needs of beneficiaries; evaluating any potential contestation risks to the estate that may arise as a result of the intended distribution; and [page 3]

•

distinguishing between estate and non-estate assets and any additional structures that the client may have which will

require specific succession planning mechanisms and strategies. Although many practitioners draft wills for their clients, an effective estate planning lawyer must have a solid foundation in succession law, property law, tax, superannuation and business structures, and will understand the need to develop an effective estate plan through collaboration with the client’s accountant and financial planner.

Estate and non-estate assets 1.3 The key to understanding estate planning is to understand the distinction between estate and non-estate assets because the different classes of assets require different estate planning treatment. Unfortunately, the distinction between estate assets and nonestate assets is one which clients do not always appreciate, and a client’s assurance that a particular asset is ‘theirs’ cannot always be accepted at face value. Careful inquiry may be needed. If a person has become used to dealing with a particular non-estate asset as if it were her or his own, the person may find it difficult to appreciate the fact that its devolution cannot be governed by their will. Estate assets are those assets that will be distributed in accordance with the terms of the testator’s will. These are assets held by the testator in their personal name alone, or as tenants in common with another person (as opposed to assets owned as joint tenants with another person). Examples of estate assets are property, shares, motor vehicles and other property owned exclusively or as a tenant in common by the testator. It should be noted that estate assets may include the proceeds of some non-estate assets such as superannuation benefits which have been paid to the estate.

Non-estate assets are assets that a client may exercise a degree of control over during their lifetime, but which will not or may not pass in accordance with their will when they die. Some examples of non-estate assets are: • • • •

jointly held assets; assets which have been paid directly to a superannuation dependant in the event of the client’s death; assets held by a company (noting that the shares may be an estate asset if they are personally held); and assets in a family trust.

Table 1 sets out a range of assets and control aspects that may not be dealt with under an individual’s will. [page 4] Table 1: How assets pass Asset type/control aspect

Person assuming control or ownership

Assets held by joint tenants (as opposed to tenants in common)

Surviving joint tenants

Superannuation entitlements (under a binding nomination)

Member’s nominated dependants

Member’s dependant selected by the fund’s trustee Appointor/trustee’s legal personal representative or nominee may assume Assets held by a discretionary trust control, depending on the terms of the trust deed Assumption of control Assets held by a unit trust depends on the terms of the trust deed Surviving directors retain control. Additional Superannuation entitlements (no binding nomination)

Source of entitlement The common law ‘rule of survivorship’ Valid binding nomination created in accordance with trust deed Trust deed or terms of pension

Trust deed or relevant Trusts Act

Ultimate benefit in trust regulated by trust deed and unit holdings

Private company

Loan to company or trust Business interests Life insurance

directors may be appointed by shareholders. Existing shareholders retain ownership

Constitution or shareholders agreement (shareholder’s will may be relevant)

Lender or legal personal representative of lender Surviving business owners/remaining trustees of a trading trust Policy owner or nominated beneficiary

Loan agreement may override will Business succession agreement or trust deed Insurance policy

Where a testator holds an asset as a joint tenant with one or more other persons, the testator’s interest in the jointly held asset does not pass by the testator’s will, but passes by survivorship to the remaining joint tenant or tenants. It follows that if the other joint tenant or tenants have all died before the testator, the interests of the predeceasing joint tenant or tenants will have passed to the testator by survivorship, and the asset can pass by the testator’s will. [page 5]

Superannuation 1.4 Superannuation is a non-estate asset and as such does not automatically pass in accordance with the testator’s will. How superannuation benefits will pass on death is determined by either: • • •

a binding death benefit nomination (the ‘will’ superannuation); the discretion of the superannuation fund’s trustee; or the rules of the superannuation fund.

for

Because the superannuation benefits of a testator are considered

to be non-estate assets, a testator will need to decide whether superannuation is to pass directly to a beneficiary or into the testator’s estate — and whether or not a binding death benefit nomination should be used to give effect to the decision: see Chapter 6. Where testamentary trusts are being included in a will because the testator wishes to provide for a vulnerable beneficiary such as a disabled child, the question of whether superannuation is best held in the trust created in the will, or excluded from the estate so that the benefits are paid as an income stream from superannuation will depend at least partly on taxation issues: see Chapter 6 which contains specific concepts and strategies related to superannuation.

Digital assets 1.5 With the emergence of social media platforms and online services, the nature of client assets has significantly changed. These assets require detailed consideration by the client and their advisor as to the nature of the asset and who in fact retains ownership and access. The issues related to ownership of these assets have been further complicated by the fact that laws relating to property ownership have not adapted to advances in technology. Examples of digital assets include an Apple iTunes Library, Facebook, Twitter and Instagram accounts. While not being a detailed survey, comments on some common types of digital assets follow. Apple iTunes Given the prevalence of internet streaming, many people will die having held digital libraries of music and videos which arguably have considerable value. While in the past, it would have been relatively simple for someone to bequeath their CD or DVD

collection, the ownership and succession of a digital library is not as clear cut. At a fundamental level, the complexity arises because unlike a CD, which gives you a physical item that you can pass on, a digital library usually gives the ‘owner’ a limited licence to use but not own or pass on those rights. According to the Apple iTunes Licensed Application End User License Agreement, ‘you may not rent, lease, lend, sell, transfer redistribute, or sublicense the Licensed Application and, if you sell your Apple Device to a third party, you must remove the Licensed Application from the Apple Device before doing so’. [page 6] Although death is not specifically referred to in the Terms of Service, it is arguable that such provisions would enable Apple to cancel an account and delete any library on the death of the initial user. Facebook Facebook will ordinarily not know whether a user has died and as such it is the responsibility of family members and the executor to deal with a Facebook account that the deceased may have had. Facebook offers a memorialisation feature which according to their policy ‘allows friends and family to post remembrances and honour a deceased user’s memory, while protecting the account and respecting the privacy of the deceased’. Immediate family members and friends can make a request to memorialise a Facebook account; however, they will be required to provide details of the date of death, proof of death and where possible a link to the deceased’s obituary. As an alternative to memorialisation of a Facebook account, a

family member or executor may petition Facebook to remove an account. It should be noted, however, that under the terms of Facebook, even if an account is ‘removed’, Facebook retains the content of the account. From a practical point of view, given the different treatment in digital assets and social media accounts by various providers, it is advisable that clients consider leaving their social media account details and passwords somewhere that will be accessible to their executors such as in a sealed envelope with their will, noting that to do so, may in itself be a breach of the particular terms of an account and its associated user agreement.

KEY ISSUES IN DRAFTING WILLS Simple wills as against testamentary trust wills 1.6 A simple will is the most common type of will prepared by lawyers and is what all ‘newsagent’ or ‘form’ type wills are. Although these types of wills do not prevent complicated provisions from being made, the expectation is that the testator will make ‘absolute’ or ‘simple’ gifts to beneficiaries — that is, gifts which are intended to be received by beneficiaries absolutely — in their personal names and capacities. While these types of wills may often be cheap and quick to implement, they can give rise to serious problems, and they offer no tax effectiveness or asset protection for the recipient beneficiaries. If a testator were to die with a simple will in place, their beneficiaries would have no choice but to take their inheritance in their personal names, and any income generated by those beneficiaries on their inheritance (such as rental returns on property, interest or dividends) would be taxable in the hands of those beneficiaries at their marginal rate. Depending on the size of the estate, this could result in beneficiaries going from low rates of tax to the top rate of tax.

[page 7] Example: Tax implications of a simple will John is single and has two adult children, Sam and Ben. John’s estate consists of his principal place of residence worth $1.5 million, an investment property worth $500,000, a portfolio of shares valued at $600,000 and various term deposits and cash saving accounts. The estate generates a total income of $80,000, made up of rental income on the properties, dividends and interest on the term deposits and bank accounts. John has a simple will which divides his estate equally between his children Sam and Ben. When John drafted his will his solicitor did not consider that Sam and Ben each earn $140,000. John dies and his executor obtains a grant of probate. Sam and Ben share the estate; each takes the $40,000 income generated by their shares. Given that Sam and Ben each earn $140,000, the $40,000 in earnings on their inheritance is added to their income and they pay tax on $180,000. In addition to this, if Sam or Ben were to marry and subsequently get divorced, under a simple will their inheritances would be vulnerable to and available for any divorce settlement. John’s will could have included testamentary trusts, which would have addressed both of these issues by offering beneficiaries tax effectiveness and increased asset protection over their inheritance. It is convenient at this point to distinguish briefly between a testamentary trust and a deceased estate. The distinction is fundamental.

The difference between a testamentary trust and a deceased estate: the testamentary trust 1.7 A testamentary trust is a trust established by will, or in some circumstances, by law. By contrast, an express inter vivos trust is one created while the creator of the trust, the ‘settlor’, is still alive. The terms of an inter vivos trust are set out in the trust deed. The terms of a testamentary trust are set out in the will, with the testator being the equivalent of the settlor of the inter vivos trust. Whereas an inter vivos trust will usually be created at the time when the deed is executed, a testamentary trust comes into existence not when the testator signs the will, but when the testator dies, though some or all of the trust property may not be transferred to the trust until later.

The difference between a testamentary trust and a deceased estate: the deceased estate 1.8 The ‘deceased estate’, or, more fully, the estate of the deceased person, is the entire complex of the testator’s rights and liabilities. Upon death a person loses all property rights, and the deceased estate vests in the deceased person’s legal personal representative (or simply ‘personal representative’), that is, the [page 8] executor or the administrator of the estate of the deceased person. A person appointed by will to administer the deceased estate is the executor; a person appointed by the court to administer the estate if there is no executor willing and able to administer the estate is an administrator.1

The legal personal representative’s executorial duties are to carry out the administration of the deceased estate. This involves calling in all assets of the deceased, paying all of the deceased’s liabilities, paying all specific legacies, ascertaining the net estate ready for distribution and being ready to transfer the assets either to those entitled to them absolutely, or to trustees, as the case may be. (Trustees include the trustees of any testamentary trusts created by the will.) An estate can be partly administered if the executorial duties have been completed in respect of some assets and not others. Before these executorial duties are carried out, the estate is considered to be wholly or partly unadministered. Where a testator declares that property in her or his estate is to be trust property in a testamentary trust set up by the testator, that property actually becomes trust property in the testamentary trust only when that property has been administered by the personal representative. At that point, the property ceases to be property in the deceased estate, and the personal representative holds the property as trustee. The property becomes trust property, and is available to be transferred to the trustee of the testamentary trust at this point. If the executor is also the trustee of the testamentary trust, the executor will cease to hold the property as executor, and will instead hold the property as trustee of the testamentary trust.2 It is therefore important to fix the moment when the estate is administered. Identifying the point at which an estate is administered has been stated to be: … when the assets have been set aside for the beneficiary by the personal representative, or when the personal representative has assented to the trusts of the will, or when the personal representative has become trustee of the estate assets. This is usually when the personal representative has paid the debts (in practice, the last debt to be paid is normally the income tax), or has set aside particular assets for particular beneficiaries and decided that the assets concerned are not required for the payment of debts.3

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The role of the trustee of a testamentary trust and the legal personal representative 1.9 The roles of trustee of a testamentary trust and the legal personal representative of a deceased estate must be distinguished.4 Even where the offices of legal personal representative of a deceased estate and trustee of a testamentary trust happen to be held by the same person, the two roles are distinct. The functions and duties of an executor are different from the functions and duties of the same person who becomes trustee when the estate is administered. So in a complex estate it is possible for an executor to hold executorial functions in relation to some assets, and at the same time be trustee for different assets and for different beneficiaries. This is important in practice, because where an executor of an estate incurs gains or losses, these will be attributed to the estate, but upon becoming trustee of a trust, such gains or losses will ordinarily be attributed to the specific beneficiaries of the trust.5 Another reason it is important to be able to accurately identify the time at which the testamentary trust has come into existence, is to be able to accurately identify the point at which the testamentary trust must end. In South Australia, the rule against perpetuities has been abolished, and so a trust may operate in perpetuity. However, in all other Australian jurisdictions, the rule against perpetuities operates, and the maximum length of time for which a testamentary trust can possibly operate is 80 years.6 The position of the Commissioner of Taxation on when a testamentary trust commences has been expressed as being upon completion of the administration of the estate or when the trustee has first paid income: … where it is apparent to the executor that part of the net income of the estate will not be required to either pay or provide for debts, etc. The executor in this situation might in exercise of the executor’s discretion, in fact, pay some of the income to, or on behalf of, the beneficiaries. The beneficiaries in this situation will be presently entitled to the income to the extent of the amounts actually paid to them or actually paid on

[page 10] their behalf. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to, or on behalf of, the beneficiaries.7

It should also be noted that although the creation of a trust would usually cause capital gains tax (CGT) event E1 to occur, in the case of a testamentary trust being created by a will (even where the trustee of the testamentary trust is a party other than the executor), a CGT event does not occur.8

Common elements of a testamentary trust 1.10 For present purposes, the only essential elements in a testamentary trust are the existence of trust property, a trustee, a purpose and a beneficiary (a person for whose benefit the trustee holds the trust property). However, as with modern inter vivos trusts, a testamentary trust will usually have other elements and offices to allow the various rights, interests, functions and obligations to be effectively separated and defined in accordance with the wishes of the testator. In common with many modern testamentary trusts, the following positions are present in all the precedents used in this text: • the trustee — this may or may not be the executor, and might be a natural person or a company; • the primary beneficiary — this will be the person to whom the trust property would have passed had the estate assets been given absolutely by the testator rather than made the subject of a testamentary trust; • the Appointor — this is the person who holds the power to appoint the trustee of the trust. The usual practice is for the office of Appointor to be transferable to another person or persons by deed or will; and • the Protector — this person holds consent powers to which

some powers of the trustee are subject. In particular, the trustee must obtain the Protector’s written consent to make a distribution of capital, or to end the trust. While not always used in testamentary trusts, this office is present in all precedents offered in this text. The reason for including an office of Protector in the precedents in this text is to ensure that if the Primary Beneficiary is under the preservation age (or is otherwise unable to hold the Power of Appointment — eg by virtue of having lost capacity), the Appointor’s powers are then curtailed or counterbalanced by the need for the Appointor to obtain the Protector’s permission to exercise certain powers (such as making distributions of capital or ending the trust). In these cases the Protector will ordinarily be the guardian or attorney of the Primary Beneficiary. [page 11]

Why are testamentary trusts used? 1.11 There are two main reasons why a testator will include a testamentary trust in their will. These are to take advantage of the potentially significant tax effectiveness that a testamentary trust can offer (see Chapter 2) and to give asset protection to a beneficiary. This asset protection may be to protect a beneficiary from their own lack of judgment, or from being taken advantage of or litigated against by a third party (see Chapter 3). Where a testator desires primarily the tax effectiveness offered by a testamentary trust, it is more likely that the trust will be optional — the executor will be given a discretion whether or not to set up the trust. Where asset protection is being sought for a vulnerable beneficiary, the trust will usually be mandatory and the executor (and beneficiary) will be given no discretion in the matter.

When should a testamentary trust be used? 1.12 In discussing the appropriateness of a testamentary trust, clients and advisors often ask, when is it appropriate to use a testamentary trust rather than a simple will? Sometimes the specific question is: what quantum and value of assets are required to make a testamentary trust worthwhile? The answer to these questions need not be complicated or involve a complicated analysis. A testamentary trust should be used in any estate plan where beneficiaries: • • • •

will inherit an amount that will generate income; are already earning or likely to earn significant amounts of income; are in need of or desire asset protection; or will require protection from themselves and or third parties.

It is hard to specify a quantum of estate gift that warrants a testamentary trust because it will depend (among other things) on the marginal tax rate of the primary beneficiary and what he or she intends to do with the inheritance. The authors are reluctant to put a dollar threshold on the size of gift that would justify the inclusion of a testamentary trust. However, given the costs of administering a trust and the likely income that will be generated, where a beneficiary will inherit $200,000 or more, the will should offer an optional testamentary trust for the beneficiary. The beneficiary will be able to decide at the time of the testator’s death whether or not to use the trust. Optional testamentary trusts are discussed in 1.16.

Bare trusts, and fixed versus discretionary testamentary trusts 1.13

A will may simply state that an executor is to hold certain

estate assets on trust for a beneficiary until a particular time, and say nothing more. The trust created then is a bare testamentary trust, and is to be distinguished [page 12] from a testamentary trust that sets out the specific terms of the trust. As with inter vivos trusts, testamentary trusts which set out the specific terms of the trust can be categorised as being fixed or discretionary (ie non-fixed). A fixed testamentary trust will mandate how the trustee is to distribute income or capital to certain beneficiaries. A discretionary testamentary trust will give either absolute or fettered discretion to the trustee to determine which beneficiary receives capital and/or income of the trust, at what time and in what amounts. For practical purposes, identifying whether a trust is fixed or discretionary is important in identifying the type of interest that a beneficiary holds. In the case of a fixed trust, the beneficiary’s interest is an equitable proprietary interest, in the form of a right in personam. This means that the beneficiary has an indefeasible right against everyone else except a bona fide purchaser for value without notice. In the case of a discretionary trust, the beneficiary holds no specific interest in the assets of the trust, only the right to due administration of the trust. The right to due administration of the trust is the right to call upon the trustee to consider the beneficiary in making any distribution and to deal appropriately with the income and capital of the trust.9

Mandatory versus optional testamentary trusts 1.14 Mandatory and optional testamentary trusts must be distinguished. A mandatory trust is a trust which the executor must set up as part of the executorial duties in administering the

estate, while an optional trust is a trust which the executor may or may not, in the executor’s discretion, establish.

Mandatory testamentary trusts 1.15 If a beneficiary is a minor or is otherwise vulnerable, the testator will naturally want to protect her or his inheritance from loss or waste. A mandatory testamentary trust will usually be set up for the vulnerable beneficiary. Making the trust mandatory will limit the vulnerable beneficiary’s access to the estate assets by removing from the beneficiary the power to control the assets and giving the power to a trustee who can distribute income or capital (or both) to the beneficiary (or other people) in the amounts and at the times that the trustee, in the trustee’s discretion, sees fit. A mandatory trust can take various forms, depending on the nature of the vulnerability as well as the degree of asset protection required. If the vulnerability is due to youth, the trust will be mandatory until the primary beneficiary reaches a preservation age. If the vulnerability is due to inability of the primary beneficiary to manage estate assets reliably or effectively, perhaps through immaturity, substance abuse or spendthrift tendencies, the trust will be mandatory for a shorter or longer time, even [page 13] a very long time. If the vulnerability is to a creditor or a divorcing spouse, a high degree of asset protection will be required. In all these cases, a Schedule 1 Trust — a Discretionary Testamentary Trust— will be suitable. On the other hand, a testator may require a mandatory trust to provide for and protect a severely disabled beneficiary. In this case a Schedule 2 Trust would be used.

Optional testamentary trusts

1.16 If the testator merely wants to offer a beneficiary the opportunity to take advantage of the benefits of a testamentary trust, but does not wish to force the arrangement on the beneficiary, the testator can make the trust optional. The trust is made optional by giving a choice whether the primary beneficiary takes the gift absolutely, or takes advantage of the trust structure. The power to decide is given to the executor rather than to the primary beneficiary: see clause Primary beneficiary may request special distribution of the precedent: see 8.14. The reason for taking the decision away from the primary beneficiary and giving it to the executor is to ensure the asset protection offered to the beneficiary by the trust structure is not put at risk: see Chapter 3. If the primary beneficiary were in a state of crisis at the time of the testator’s death and were to have control and the ability to decide whether or not to take advantage of the trust structure, the court in a family property dispute, or the primary beneficiary’s trustee in bankruptcy, could direct the executor to pass the estate assets absolutely to the primary beneficiary, for the benefit of the claimants, and any asset protection provided by the testamentary trust would be lost. The Model Testamentary Trust precedent in this text (see Chapter 8) can be varied to allow a primary beneficiary who is not going through a crisis event (ie they are not an Ineligible Officebearer), to direct that the executor transfer their share to them absolutely. The default clause allows the decision to be made at the executor’s discretion. Placing the discretion in the hands of the executor does not in practice reduce the discretion of a non-vulnerable primary beneficiary, because if an executor were to force the trust on to the primary beneficiary, the primary beneficiary would be able, through her or his ability to control the trustee of the trust (via the fact that the primary beneficiary is the appointor), simply to distribute all capital to themselves and wind up the trust.

Matters to consider before drafting a testamentary trust 1.17 A testamentary trust will is in all respects a will, and all the important decisions that must be made when drafting a will must be made for a will creating testamentary trusts. Furthermore, where a will is to include testamentary trusts, several additional issues require special consideration. [page 14]

Choice of executor 1.18 The choice of executor is always an important decision when drafting a will; however, where a will contains testamentary trusts, this decision can be especially important. This is because most testamentary trust wills — and this applies to all the testamentary trust precedents in this text — place an important range of powers and discretions in the hands of the executor. The executor will have to administer the estate, and, in addition, will have an ongoing relationship with the beneficiaries of the trusts created by the will. This ongoing relationship between the executor and the primary beneficiary flows from the following: • Numerous powers in relation to the trusts created in the precedents are held by the executor at the time of the trust being created (or not created). • Some powers revert back to the executor, for instance, if a trustee or Appointor of the trust becomes an ‘Ineligible Officebearer’: see the clause Automatic disqualification of an Ineligible Officebearer (see 8.24).

Choice of legal guardian for minor children 1.19

As with the choice of executor, the choice of legal guardian

for the minor children of a testator is especially important when the testamentary trust precedents in this text are used, because the terms of the trusts give the legal guardian of a minor primary beneficiary the position and powers of ‘Protector’. This is relevant because the trustee requires the Protector’s consent to make distributions from the trust or to end the trust.

Preservation ages for minor, young, vulnerable or disabled beneficiaries 1.20 The trust precedents in this text are based on the presumption that the testator will want to establish a preservation age for minor or young primary beneficiaries (perhaps primary beneficiaries who are, in the testator’s view, ‘immature’). The ‘preservation age’ is the age, chosen by the testator and expressed in the will, at which the primary beneficiary will gain control over the trust. Where the primary beneficiary is under the preservation age, the primary beneficiary will be disqualified from holding the position of Appointor and trustee over the trust, and as a result will be unable to appoint the trustee of the trust or be the trustee. Hence, the primary beneficiary will not be able to control the trust or access the assets of the trust until he or she reaches the specified preservation age. The precedents in this text suggest the age of 25, but a testator may lower or raise this age if, for example, the primary beneficiary is vulnerable or suffering from a disability.

Who is the Appointor? 1.21 Subject to the expressed intentions of the testator, unless the primary beneficiary is under the preservation age the precedents in this text make the [page 15]

primary beneficiary of each trust the Appointor, who can appoint another Appointor to act with or instead of the primary beneficiary. If the primary beneficiary is under the preservation age, the executor holds the office of Appointor until the primary beneficiary reaches the preservation age. Again, subject to the expressed wishes of the testator, the precedents provide that if a primary beneficiary becomes an Ineligible Officebearer, the primary beneficiary ceases to be Appointor, and the appointorship reverts to the executor: see the clause Automatic disqualification of an Ineligible Officebearer (see 8.24).

Choice of Protector 1.22 The Protector does not have the power to control the trusteeship itself. Subject to the expressed intentions of the testator, the precedents in this text presume that the primary beneficiary, having capacity and having reached the preservation age, will hold the office of Protector over her or his trust. If the primary beneficiary is below the preservation age or lacks capacity, that person’s legal guardian or legal personal representative will be Protector.

1.

2. 3.

The detailed rules vary as between jurisdictions and are described in standard works on administration of estates. See, for instance, B Marks, Trusts and Estates: Taxation and Practice, 2nd ed, Taxation Institute of Australia, Sydney, 2009, Ch 36. A most helpful document on administration of deceased estates generally is Administration of Estates of Deceased Persons: Report of the National Committee for Uniform Succession Laws to the Standing Committee of Attorneys General, Queensland Law Reform Commission Report No 65, April 2009, Vols 1–4 (available online at , and on CD from the Queensland Law Reform Commission). Commissioner of Stamp Duties (Qld) v Livingston (1964) 112 CLR 12 at 18. See Marks, note 1 above, para 36-110 for further cases. R S Geddes, C J Rowland and P Studdert, Wills, Probate and Administration Law in New South Wales, LBC, Sydney, 1996, para [48.08], citing Estate of Just (No 2) (1974)

4. 5. 6.

7.

8. 9.

7 SASR 515; (see too, Executor Trustee Australia Ltd v Henderson [2005] SASC 446) for the proposition in the first sentence, and Estate of Fryer; Stokes v Churchill (NSWSC Eq D, Santow J, 16 December 1993, unreported) at 12 for the proposition in the second sentence. For a discussion of the differences between the two roles, see Marks, note 1 above, para 36-110. See Marks, note 1 above, para 36-275. The provisions are not uniform. For a good discussion see J Kessler and M Flynn, Drafting Trusts and Will Trusts in Australia, Law Book Co, 2008, Ch 8. The relevant legislation is: Perpetuities and Accumulations Act 1985 (ACT); Perpetuities Act 1984 (NSW); s 187 of the Law of Property Act (NT); Pt 14 of the Property Law Act 1974 (Qld); Perpetuities and Accumulations Act 1992 (Tas); Perpetuities and Accumulations Act 1968 (Vic); Pt XI of the Property Law Act 1969 (WA). The Law of Property Act 1936 (SA) s 61 abolishes the rule against perpetuities. Taxation Ruling No. IT 262; see also A Macdonald, ‘Testamentary Trusts: Not Just “Another” Trust?’ (2006) 4(2) eJournal of Tax Research 153 (available online at: ). See Practice Statement PS LA 2003/12. Gartside v Inland Revenue Commissioners [1968] AC 553.

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2 TAX AND TESTAMENTARY TRUSTS

Introduction How Testamentary Trusts Are Taxed The general approach of trust taxation Testamentary trusts and income tax Anti-avoidance provisions Family trust election Testamentary trusts and capital gains tax CGT rollover and tax-advantaged entities Principal residence exemption: will should give right of residence Capital gains tax discount How Testamentary Trusts Can Be Tax Effective Tax effectiveness in relation to income tax Tax effectiveness in relation to CGT Income and Streaming Powers — the Importance of Trust Terms Bamford: The Problems, and the Solutions Issue 1: Focusing on the ambiguity in ‘income of the trust’ in s 97: could ‘income of the trust’ include a capital gain? Issue 2: What is the meaning of ‘that share’ in s 97? Commonwealth Government concerns and actions Trust Streaming Streaming powers amended by statute

INTRODUCTION

2.1 This chapter considers the tax issues related to testamentary trusts and explains how they can be tax effective. Topics include: • how testamentary trusts are taxed; • how testamentary trusts can be tax effective; • income and streaming powers — the importance of trust terms; • Bamford: the problems and the solutions; and • trust streaming. [page 18]

HOW TESTAMENTARY TRUSTS ARE TAXED The general approach of trust taxation 2.2 A trust is not a separate legal person like a company, but is a relationship consisting of legal rights, obligations and trust property. The taxation of trusts is set out mainly in Div 6 of Pt III of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The ‘net income’ of a trust is defined as being the assessable income of the trust, calculated as if the trustee were a resident individual taxpayer, less allowable deductions.1 Tax liability in relation to a trust is based on the actual or the deemed allocation of the ‘net income’ of the trust. To the extent that a beneficiary is presently entitled to part of the net income of the trust, it is the beneficiary who will be assessed as having received that net income.

Section 97 of the ITAA 1936 2.3 Section 97 of the ITAA 1936 provides that where a beneficiary of a trust estate who is not under a legal disability is

presently entitled to a share of net income of a trust estate, the assessable income of the beneficiary shall include so much of that share of the net income of the trust estate attributable to a period when the beneficiary was a resident, and so much of the share of net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

Section 98 of the ITAA 1936 2.4 Since minors and beneficiaries with a legal disability are unable to demand and receive payment or provide a trustee with a discharge of her or his duties, they are unable to hold a present entitlement to trust income.2 Section 98 of the ITAA 1936 operates where a beneficiary is presently entitled but is subject to a legal disability (for example they are a minor) and imposes liability for taxation on the trustee. It should, however, be noted that s 98 income is taxed separately to other income of the trustee and is taxed according to progressive rates.

Section 99 of the ITAA 1936 2.5 Net income of the trust to which no one is presently entitled arises if, for instance, the trustee does not make a distribution of part or all of the net income of the trust in a given year. The executor or trustee as the case may be, must file a tax return accounting for all undistributed income. To the degree to which there is net [page 19] income of the trust to which no beneficiary is presently entitled,

that income will be assessed in the hands of the trustee at the highest marginal tax rate (currently 45%).3 The Commissioner has a discretion in s 99A of the ITAA 1936 to not apply this penalty rate of tax, and to apply the more concessional rates in s 99.

Testamentary trusts and income tax 2.6 The ability to distribute net income of a trust to minor beneficiaries and other beneficiaries who have lower taxable incomes contributes greatly to the trustee’s capacity to administer the trust in a tax-effective manner. While the net income of a trust will be taxed in the hands of any presently entitled beneficiary, the way in which these beneficiaries are taxed on that income differs considerably according to whether the trust is an inter vivos trust (a trust created during lifetime) or a testamentary trust. Where the trustee of an inter vivos trust makes a distribution to a minor beneficiary (who has no other income), the tax applicable will be no tax on the first $416 pa, and the highest rate of tax on any amount in excess of that.4 This penal rate of tax applies to all investment income for minors. Prior to 1 July 2011, it was possible for a minor beneficiary of an inter vivos trust to access the low income offset where available, making the effective tax-free threshold $3333; however, since 1 July 2011, the low income rebate is no longer available for minor beneficiaries of inter vivos trusts, and the tax-free amount is limited to only $416 pa. This has significantly reduced the tax effectiveness of inter vivos trusts in terms of the ability to distribute to minor beneficiaries. This penal rate of tax for distributions to minor beneficiaries does not apply to testamentary trusts, which are specifically exempted from the operation of Div 6AA of the ITAA 1936 by the

effect of s 102AG(2)(a). Section 102AG(2)(a) provides that the assessable income of a trust resulting from the will, codicil or an order of a court that varied or modified the provisions of a will or codicil, will be taxed at ordinary rates notwithstanding that a beneficiary is a minor. This is because such income is excepted income. The effect of s 102AG(2)(a) is that a trustee of a testamentary trust can distribute trust income to a minor beneficiary, and the first $18,200 will be tax free.5 If the low income tax offset is available, the effective tax-free threshold for distributions from a testamentary trust to a minor beneficiary becomes $20,452. For any additional amounts, the ordinary marginal adult tax rates will apply. [page 20]

Anti-avoidance provisions Section 102(AG) anti-avoidance provisions 2.7 There are two main anti-avoidance rules which operate to stop taxpayers misusing the exception granted by s 102AG(2)(a). The first rule provides that where the persons connected with the derivation of income of the trust are not dealing with each other on an entirely arm’s length basis, the concession will be limited only to such income produced from where they were dealing at arm’s length.6 The second rule is a wider and more general rule, similar to the general anti-avoidance provisions relating to income tax. This wider rule removes the availability of the exception if the income was the result of an agreement entered into for the purpose of making the income excepted from the penalty child tax rate.7 Taxation Ruling TR 98/4 provides a useful illustration of the way in which the avoidance provisions in s 102AG may apply:

One illustration is provided by Case 44/95; AAT Case 10,321 where income from an existing discretionary trust was to be routed through new CMT [Child Maintenance Trust] arrangements to a child. As the discretionary trust already existed, it could have distributed income directly to the child or the trustee for the child; but had it done so, the income would not have been even arguably excepted and would have been taxed at the higher rates applicable under Division 6AA. In those circumstances, the agreements under which the child’s trustee took units in a unit trust, the unit trust was made a contingent beneficiary of the discretionary trust, and distributions were made by the discretionary trust to the unit trust, all had the purpose of securing that income flowing from the discretionary trust, through the unit trust, to the child’s trustee would be excepted income.8

The concessional tax treatment of income distributed to minors also applies where the income is derived from assets acquired by the trustee of a testamentary trust. In the case of Trustee for the Estate of the Late A W Furse No 5 Will Trust v FCT (1990) ATC 4007, a trust was established with $1 from the estate of Mr Furse, for the primary benefit of Mr Furse’s son, who was a solicitor. The trustee of the trust then borrowed money to acquire units in a unit trust which was a service entity for the solicitor’s practice owned by the primary beneficiary. The issue before the court was whether the income from the unit trust, which was distributed by the trustee of the testamentary trust to minor beneficiaries, was excepted income. The Australian Taxation Office’s (ATO’s) argument was that the income derived from the unit trust was not excepted income on the basis that it was not income of a trust estate that ‘resulted from a will’. Hill J rejected the Commissioner’s argument on two fundamental points. Firstly, it was not necessary that the parties were at arm’s length, but only [page 21] that they were dealing on an arm’s length basis. Accordingly, if the trust was created by a will (or codicil), then the income received by the trustee through the units would be excepted trust income. His Honour also noted that s 102AG(2)(a) applies where

the trustee of a testamentary trust borrows funds in order to acquire an asset which then derives assessable income. Importantly, it was not restricted to property left through a will or codicil. It should be noted that the court did not go as far as to confirm whether the same rule would apply where assets were gifted to the trustee of a testamentary trust in circumstances where the trustee had a specific power to make and receive gifts. Although some commentators have suggested that assets can be added to the corpus of a testamentary trust, it is our view that income derived from those additional amounts would lose the concessional tax treatment. This is because pursuant to s 102AG(3), parties must be dealing with each other at arm’s length. The prevailing view is that: Minors who are beneficiaries of the trust can receive income from assets transferred into the trust and from any substituted or grown assets eg by borrowing, investment, sale and purchase etc. The original assets given to the trust may be viewed as the “seed assets” and they can vary. The benefit of the testamentary trust is not confined to the assets owned by the deceased or by the deceased estate during administration but that does not mean that other added assets will give rise to income that can be treated concessionally.9

Both anti-avoidance provisions exist to stop taxpayers from abusing the exception available to testamentary trusts. The exemption from Div 6AA that is available to testamentary trusts operates not only in relation to income from assets owned by the deceased at the time of death, but also to income produced by assets acquired by the trustee after the testator has died. This creates an obvious temptation to artificially manipulate how income of the trust is produced, and to engage in arrangements prior to death that take advantage of the exception (an example might be to transfer non-estate or other parties’ assets to the testator shortly before death, in order to maximise the benefit of the exception). The anti-avoidance provisions are aimed at stopping such actions. It is noted that the anti-avoidance provisions in subss 102AG(3)

and (4) do not prevent a testator using a testamentary trust as part of estate planning, in a way that will ultimately be tax effective for her or his beneficiaries.

Trust stripping and s 100A of the ITAA 1936 2.8 The rules relating to trust stripping apply to all forms of trusts and need to be considered in the context of testamentary trusts. Trust stripping [page 22] can generally be described as arrangements that are designed to shelter trust income from tax by diverting the income to the promoter of the arrangement in exchange for the trust or an associate receiving a financial benefit (usually tax free) from the promoter. In these circumstances, s 100A of the ITAA 1936 will usually apply. Where s 100A does apply, the beneficiary is deemed not to be presently entitled to the income and such income will be undistributed income under s 99A. An illustration is provided below. Example: Trust stripping arrangements John dies leaving his wife Jane and three children. In addition to substantial non-estate assets, John leaves an investment property and a significant share portfolio to Jane in the form of a testamentary trust which generates approximately $30,000 pa in income. The oldest child attends a private boarding school in Sydney at the cost of $30,000 each year. Under the advice of her accountant, Jane resolves to distribute

the net income of the trust for the year ended 30 June 2015 to the school on the basis that this will satisfy any liability for school fees. Section 100A may apply in these circumstances where there is found to be a ‘reimbursement agreement’, whether written or not. In these circumstances, that agreement may arise out of an understanding with the school that in exchange for Jane distributing income from the trust to the school, the liability to pay school fees will be waived or the child will be provided with ‘free’ education. As noted above, where s 100A does apply, the top marginal rate of tax will apply on the $30,000.

Family trust election 2.9 A testamentary trust, like any other type of trust, may also elect to be a family trust for tax purposes. Importantly, franking credits received by the trustee of a testamentary trust may only be passed through to the beneficiaries of the trust if a family trust election has been made. Where a family trust election is not made, franking credits may be forfeited. Beneficiaries should, therefore, seek appropriate taxation and accounting advice as to whether a family trust election should be made.

Testamentary trusts and capital gains tax 2.10 Where an asset passes from a deceased person to a beneficiary in accordance with the terms of the deceased’s will, the capital gains tax (CGT) event that would normally occur from such a transfer is disregarded.10 This is [page 23]

sometimes referred to as ‘CGT rollover’, because the CGT liability is effectively deferred until the beneficiary subsequently sells or transfers that asset. Section 128-15 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) provides that where a beneficiary inherits a pre-CGT asset (ie one acquired by the deceased prior to 20 September 1985) from a deceased person under the terms of a will, the cost base is reset to market value at the time of the deceased’s death. If the asset is a post-CGT asset (acquired by the deceased after 20 September 1985), the beneficiary effectively stands in the place of the deceased; that is, when the beneficiary later sells or transfers the asset, the beneficiary has the same cost base that the deceased had. While this does not avoid the CGT that will eventually be payable, it has the advantage of allowing the beneficiary to choose when the CGT event occurs, by timing the sale or transfer of the asset. Pursuant to s 128-20 of the ITAA 1997, an asset will pass to a beneficiary of the estate and be eligible for the rollover where the beneficiary becomes the owner of the estate: • • •

•

under the will, or the will as varied by a court order; or by operation of an intestacy law, or such a law as varied by a court order; or because it is appropriated to the beneficiary by the legal personal representative in satisfaction of a pecuniary legacy or some other interest or share in the estate; or under a deed of arrangement if: the beneficiary entered into the deed to settle a claim to participate in the distribution of the estate; and any consideration given by the beneficiary for the asset consisted only of the variation or waiver of a claim to one or more other CGT assets that formed part of the estate.

There is no doubt that the Div 128 CGT rollover applies to assets owned by the deceased when transferred either to the legal personal representative, or directly to a beneficiary in accordance

with the terms of the will. However, it has been questioned whether the Div 128 CGT rollover applies where the trustee of a testamentary trust makes a capital distribution of a CGT asset owned by the deceased to a beneficiary of the testamentary trust.11 The doubt arises because s 128-15(3) refers to the ‘legal personal representative’ of the deceased (which technically the testamentary trustee either is not or — if the executor and testamentary trustee are the same person — has ceased to act in the capacity of). This doubt seems to be misplaced. The practice of the ATO is to recognise that the rollover is available where the trustee of a testamentary trust transfers a CGT asset owned by the deceased to a beneficiary, and this is set out in the Practice Statement PS LA 2003/12. [page 24] PS LA 2003/12 states: This practice statement confirms the Commissioner’s longstanding administrative practice of treating the trustee of a testamentary trust in the same way as a legal personal representative for the purposes of Division 128 of the Income Tax Assessment Act 1997 (ITAA 1997), in particular subsection 128-15(3).

In order for Div 128 to apply to a distribution of a CGT asset from the trustee of a testamentary trust to a beneficiary, the following criteria must be satisfied: • •

The relevant trust must be a testamentary trust, that is, it must be created by a will. The CGT asset must pass to a beneficiary of the estate. In the context of a testamentary trust, this includes the potential beneficiaries (capital beneficiaries in the Model Testamentary Trust precedent in this text) provided for under the terms of the will establishing the trust. Depending on the beneficiaries eligible to receive capital, this may also include the trustee of an inter vivos trust. The authors note

that they are aware of private rulings which have been issued confirming that the trustee of an inter vivos trust receiving an in-specie distribution from a testamentary trust will also be eligible for the rollover. There may of course be circumstances where the transfer of an asset is not made in conformity with a will or the rules of intestacy. An example of such circumstances is where a will is challenged under a family provision application and an award is made to the applicant. Fortunately, s 128-20 of the ITAA 1997 provides that the rollover will apply where assets are distributed in accordance with a court order varying the will.

CGT rollover and tax-advantaged entities 2.11 It should be noted that the CGT rollover in Div 128 does not apply in all circumstances. The note in s 128-10 of the ITAA 1997 states that s 104-215 sets out an exception to this rule if the CGT asset passes to a beneficiary in the estate who is an exempt entity, the trustee of a complying superannuation fund or is a foreign resident. In these circumstances, CGT event K3 may apply and a capital gain (or loss) is taken to have occurred just before the death of the deceased.

Principal residence exemption: will should give right of residence 2.12 Section 118-115 of the ITAA 1997 defines a dwelling to include a unit of residential accommodation that is a building or is contained in a building, a caravan, houseboat or mobile home and any land immediately under the unit of accommodation. An executor of a deceased estate or a beneficiary who inherits a dwelling or an ownership interest in a dwelling is eligible for the

main residence exemption if the conditions in s 118-195(1) of the ITAA 1997 are satisfied. [page 25] These are: • the deceased acquired the ownership interest on or after 20 September 1985: the dwelling was the deceased’s main residence just before the deceased’s death; and was not then being used for the purpose of producing assessable income; and the ownership interest ended within two years of the deceased’s death (or within a longer period if permitted by the Commissioner); OR • the deceased acquired the ownership interest before 20 September 1985 and either: the ownership interest of the executor or the beneficiary ends within two years of death; or the dwelling was, from the date of death until the time of the CGT event, the main residence of: ■ the spouse (including married, de facto and same sex) of the deceased (other than a spouse who was living permanently separately and apart from the deceased); or ■ an individual who had a right to occupy the dwelling under the deceased’s will; or ■ a beneficiary who received the dwelling under the terms of the will. Pursuant to the above, a deceased’s principal residence will be exempt from CGT if it is sold by the executor within two years of death. Additionally, if the property is transferred to a beneficiary

in accordance with the will, and the beneficiary then makes the residence their own principal residence, there will be CGT rollover, and, further, the principal residence exemption will continue. However, if the property were to be transferred to a testamentary trust instead of the beneficiary, the principal residence exemption would not necessarily be available to the beneficiary, even if the beneficiary were to use the property as her or his principal residence. The reason is that since the property is trust property, the beneficiary is not the legal owner. It is not, however, impossible to continue the CGT principal residence exemption while the property remains trust property. One strategy flows from the fact that if the beneficiary is exercising a right of residence granted by the will (and between the death and disposal by the trustee the residence was not used to gain or produce income), the exemption can be continued until the trustee disposes of the residence.12 ATO ID 2003/109 states: An individual would be considered to occupy a dwelling under the deceased’s will if it was in accordance with the terms of the will. This would also be the case if it was in pursuance of the will or under the authority of the will.13

[page 26] Accordingly, the Model Testamentary Trust precedent in this text grants each beneficiary a qualified right of residence in relation to any property (the clause provides that while each beneficiary holds the right, the executor or trustee can void the right at any time): see clause Certain beneficiaries to hold right of residence over properties of estate and trusts in Chapter 9.14

Capital gains tax discount

2.13 If an executor or trustee of a testamentary trust as the case may be, realises a capital gain from the sale of a CGT asset as a result of a CGT event occurring after 11.45am on 21 September 1999, he or she will be entitled to the 50% CGT discount where the asset was held for at least 12 months.

HOW TESTAMENTARY TRUSTS CAN BE TAX EFFECTIVE Tax effectiveness in relation to income tax 2.14 Discretionary testamentary trusts give the trustee the discretion to distribute income and capital among any one or more of the potential beneficiaries in a tax-effective manner.

Distributions to minors 2.15 The power to make distributions to minor beneficiaries at concessional rates of tax provides significant opportunity to save tax. A minor beneficiary of a testamentary trust is taxed as if he or she was an adult, and so the trustee can take advantage of the significant tax-free thresholds available to the minor, particularly if the minor beneficiary does not have any other income. Example: Tax effectiveness of a discretionary testamentary trust Suppose that a widow Winnie has term deposits worth $1,000,000 available to benefit her son John and his two young children. Scenario 1: Winnie leaves the term deposits to John absolutely. For the year after being transferred to John, the term deposits yield a 4% return, giving John an income of $40,000. John is on the top marginal rate (47%), and hence will pay $18,800. Scenario 2: Winnie’s will offers John the option of taking his inheritance in a discretionary testamentary trust. John is able to

have the trust income distributed equally between his two children, distributing $20,000 to each of them. If the low income tax offset is available, no tax is payable because $20,000 is below the effective tax-free threshold. John can continue doing this every year so long as there is an available beneficiary with a more attractive tax rate than his own. It should be noted that if John were to do this, he [page 27] technically will be giving his children a present entitlement to those amounts, and will either need to apply the amounts for the children’s benefit or, if he is going to accumulate the amounts, set them aside in trust for the children.

Distributions among adults as well as minors 2.16 The ability to save tax is not limited to distributions among minor beneficiaries. The trustee can distribute income tax effectively among all beneficiaries including adult beneficiaries. The freedom to make unequal distributions, or to withhold distributions, can generate income tax savings by enabling the trustee to favour those with the lowest rates of tax. Furthermore, a discretionary testamentary trust can also allow the trustee to distribute different types of income between beneficiaries in an optimal way. For example, the trustee may choose to stream fully franked dividends to the beneficiary whose level of taxable income will cause them to derive the greatest benefit from the franking credits.15 It should be noted that in order to stream fully franked dividends between beneficiaries, there are certain powers that need to be included in the terms of the trust. It will also be

necessary that the trustee has made a family trust election in order to stream franked dividends in this way.

Tax effectiveness in relation to CGT 2.17 There are several ways in which discretionary testamentary trusts offer better tax effectiveness in relation to CGT than do absolute testamentary gifts: • In contrast with an absolute testamentary gift, the discretionary testamentary trust appoints a large class of potential capital beneficiaries. The ultimate beneficiary of the CGT asset can be selected from this class after the deceased has died, and this flexibility allows highly tax-effective use of the CGT rollover that applies to assets transferred in accordance with a will on death. • The testamentary trust allows the trustee to distribute any capital gain that is generated following death (to the extent it is considered ‘income of the trust’) among beneficiaries with the most concessional marginal tax rates. • While the transfer of a CGT asset from a deceased person to an absolute testamentary beneficiary attracts the benefit of a CGT rollover, when the beneficiary subsequently transfers the asset to a third party, a CGT event then occurs and CGT is assessable to the beneficiary. A discretionary testamentary trust offers more flexibility than this. If the intended final recipient is a potential beneficiary of a discretionary testamentary trust, the trustee would have the discretion to transfer the asset to them in their capacity as a potential beneficiary of the trust, and the CGT rollover would be exercised on that transfer. For example, if a testator [page 28]

•

left an investment property to a child as an absolute gift, the child would enjoy CGT rollover; however, if the child then transferred the property to their own child (the grandchild of the testator), then CGT would apply on the transfer. However, if a discretionary testamentary trust were in use, the child (or trustee of the trust) could transfer the property to the grandchild as a potential beneficiary of the trust (being a lineal descendant of the primary beneficiary), and enjoy CGT rollover. Some commentators have raised doubt over the availability of the CGT rollover for such transfers, but as noted in 2.10, it is the ATO’s practice to recognise rollover for such transfers. Where the CGT asset is property in a discretionary testamentary trust and is sold (in contrast to being appointed to a beneficiary of the trust), the capital gain that is generated can be distributed optimally or ‘streamed’ to the beneficiaries.16

A couple of aspects of the practical use and flexibility offered by the discretionary testamentary trust are illustrated below. Example: Tax flexibility of a discretionary testamentary trust Mary, aged 80, dies with a simple will giving her whole estate absolutely to her son John, aged 60, a doctor who pays tax at the highest marginal rate of 47% (including the Medicare levy). Part of the estate he receives is Mary’s terrace house in the city which she bought in 2005 for investment purposes with a cost base of $500,000. It is now worth $800,000. John would like to give the property to his daughter, Jenny, for her and her three young children to live in. Although CGT rollover will mean that John receives the property with Mary’s cost base, and without a CGT event having occurred, when he transfers the property to his daughter Jenny he will be assessed for CGT with Mary’s cost base, as if he had sold it.

This will mean that the capital gain is $300,000. John will be assessed with the taxable gain of $150,000 (taking into account the 50% discount). Assessed at his marginal rate of 47%, his tax liability will be $70,500. By contrast, Mary could have created a discretionary testamentary trust with John as primary beneficiary and with Jenny as one of the potential beneficiaries (as John’s child, Jenny would by default be a potential beneficiary under the precedents in this text). As John would also be eligible to appoint himself as trustee of his trust, he would be able to extend the CGT rollover to any potential beneficiary of the testamentary trust, and so would have the discretion to distribute the property to his daughter Jenny, attracting no CGT. Although Jenny will take on Mary’s cost base, and potentially face that CGT at some point, she will also be able to take advantage of the principal residence exemption as it is to be her home. [page 29] By contrast, say John simply wishes to sell the property. If he receives the property absolutely and then sells it, he will be liable for the $70,500 of CGT as previously outlined. If he is able to sell the property as the property of a discretionary testamentary trust, he can have the assessable gain of $150,000 distributed among his grandchildren and daughter and (presuming they earn no other excepted income) they will each have an available tax-free threshold of $20,452.

INCOME AND STREAMING POWERS — THE IMPORTANCE OF TRUST TERMS

2.18 This chapter started with a basic description of the seemingly simple approach to the taxation of trusts taken in Div 6 of the ITAA 1936 (see 2.2). However, the application of that seemingly simple approach has long been subject to two major issues, both of which arise out of s 97 of the ITAA 1936. In general terms the effect of this section is that income distributed by a trustee to a beneficiary is assessed in the hands of the beneficiary rather than in the hands of the trustee. Section 97 states that where a beneficiary of the trust is presently entitled to a share of the ‘income of the trust’ (which is not defined in the ITAA 1936), that beneficiary will be assessed as having received ‘that share’ of the ‘net income of the trust’ (which is defined in s 95, and is effectively the taxable income of the trust).17 The problem in interpreting s 97 is twofold. First, the (undefined) meaning of ‘income of the trust’ must be determined. Second, once that meaning is settled, what does the section mean by ‘that share’ when it provides that when a person becomes presently entitled to a share of ‘income of the trust’ (as now interpreted), that person will be assessed as having received ‘that share’ of the ‘net income of the trust’ (ie the taxable income of the trust)?

BAMFORD: THE PROBLEMS, AND THE SOLUTIONS 2.19 The leading case in relation to the meaning of s 97 is Federal Commissioner of Taxation v Bamford.18 The case has important practical implications for the taxation of trusts and has received much publicity and commentary, not only from lawyers but also from tax professionals in the field. The decision in [page 30]

Bamford solved some problems and left others unresolved. The difficulties may be approached by way of a hypothetical fact situation: assume that a trust document empowers a trustee to categorise a capital gain as income, that the trustee categorises a capital gain as income, and allocates income to beneficiaries of the trust.

Issue 1: Focusing on the ambiguity in ‘income of the trust’ in s 97: could ‘income of the trust’ include a capital gain? 2.20 Does s 97 allow the capital gain to be assessed in the hands of the beneficiary (as trust income that has been distributed), or is it not income even though the trustee categorised it as income, and therefore to be assessed in the hands of the trustee? This depends on the meaning of ‘income of the trust’ in the section. Section 97 does not define ‘income of the trust’. First principles must therefore be applied to determine the meaning of the phrase. ‘Income of the trust’ in s 97 could mean: • Income according to ‘ordinary concepts’. Under ‘ordinary concepts’, income does not include capital gains, because by ordinary concepts there is a basic distinction between capital and income. Only by statute and for the purposes of the statute does income include capital gain. (Thus, a capital gain is treated by the ITAA 1997 as being income for the purposes of taxing capital gains.) If the meaning of ‘income of the trust’ in s 97 is the meaning according to ‘ordinary concepts’, then s 97 does not apply to the capital gain in the hypothetical; or • Income under ‘trust concepts’. Under ‘trust concepts’ income is what the trustee, acting in accordance with the terms of the trust document, declares it to be. If this is the correct meaning of ‘income of the trust’ in s 97, then s 97 does apply

to the capital gain in the hypothetical. Summarising the issue arising from the concept of ‘income’: does ‘income of the trust’ mean income according to ordinary concepts which excludes capital gains from being income; or does ‘income of the trust’ mean whatever the trustee acting within the terms and powers of the trust says it is, so allowing capital gains to be treated as income? This issue arose in the High Court in Federal Commissioner of Taxation v Bamford.

The Commissioner’s argument 2.21 The Commissioner argued that ‘income of the trust’ had to be construed according to ordinary concepts, and according to ordinary concepts income does not include capital gains. This would have meant, for example, that where a trust had no ordinary income but had a capital gain, the capital gain would have to be assessed in the hands of the trustee at the top rate. [page 31] The Commissioner’s argument seems odd. It follows from the Commissioner’s argument that ‘income of the trust’ is limited to income according to ordinary concepts, and so capital gains cannot be income. It is therefore impossible for a trustee to distribute capital gains to a beneficiary. However, capital gains are deemed to be income for the purposes of capital gains tax and form part of the ‘net income of the trust’ (under s 95) for the purpose of assessing income tax.

The taxpayer’s argument 2.22 The taxpayer argued that ‘income of the trust’ in s 97 was income according to trust concepts, and so income was whatever

the trustee, acting in accordance with the terms of the trust, lawfully determined income to be. The taxpayer’s trust deed empowered the trustee to treat a capital gain as income, and if the trustee did so, the capital gain was income.

The High Court’s decision 2.23 The High Court held that the taxpayer was right: ‘income of the trust’ in s 97 meant income according to trust concepts, which was whatever the trustee lawfully determined income to be, in accordance with the terms of the trust. ‘Income according to trust concepts’ has sometimes been referred to as ‘distributable income’, in the sense that it is income which the trustee is empowered to distribute as income, according to trust law and the terms of the trust in question.

Consequences of the High Court decision on Issue 1 2.24 It is important for the administration of the trust that the trustee should be able to determine what receipts are ‘income of the trust’. In particular, the trustee should be able to determine that capital gains are income. Under the High Court’s ruling, the trustee will be able to do this effectively only if the trust document (here, the will) expressly empowers the trustee to make such a determination. The clause Streaming of income and capital in fact does give the trustee this power. The first part of subclause (1) reads: (1) My trustees or my executor, as the case may be, may treat a capital receipt as if it were income for the purposes of determining trust income in a particular income year…

Issue 2: What is the meaning of ‘that share’ in s 97?

2.25 Section 97 provides that where a beneficiary is presently entitled to ‘income of the trust’ (which the High Court determined to be ‘distributable income’ or income as determined by the trustee in accordance with the terms of the trust), the beneficiary is assessed as having received ‘that share’ of the ‘net income of the trust’. [page 32] Issue 2 cannot be made more specific unless the meaning of ‘net income of the trust’ (which appears in s 97) is understood. ‘Net income of the trust’ is defined in s 95(1) as the assessable income of the trust, calculated as if the trustee were a resident individual taxpayer, less allowable deductions.19 Issue 2 can now be made more specific: •

•

Does ‘that share’ (of the net income of the trust in s 97) mean the actual amount of the ‘distributable income’ to which the beneficiary is presently entitled (often referred to as the ‘quantum approach’); or Does ‘that share’ (of the net income of the trust in s 97) mean the proportion of the distributable income to which the beneficiary is presently entitled (often referred to as the ‘proportionate approach’)?

The High Court’s decision on Issue 2 2.26 The High Court adopted the ‘proportionate’ approach. The court held: ‘that share’ (of the ‘net income of the trust’ in s 97) means the proportion of the distributable income of the trust to which the beneficiary is made presently entitled.

Consequences of the High Court decision in Bamford

2.27 The High Court’s decision creates an anomaly. The High Court’s decision on the first issue was that ‘income of the trust’ in s 97 meant income according to trust concepts, and according to trust concepts income was whatever the trustee lawfully determined income to be, in accordance with the terms of the trust. However, ‘net income of the trust’ is defined in s 95(1) as effectively being the assessable income of the trust, and this is ultimately determined by the Commissioner at a later stage. Accordingly, if the trustee makes a beneficiary presently entitled to all of the income (according to the trustee’s definition of income), which turns out to be a lesser amount than the assessable income turns out to be, ‘income of the trust’ can, depending on the relative determinations of the trustee and the Commissioner, be less than the assessable income. In the result, if a beneficiary is given a small allocation by the trustee, and the Commissioner determines the tax at a much greater level, the beneficiary could receive an assessment greater than the whole amount allocated to her or his. This could cause hardship. The anomaly resulting from the High Court’s decision on the first issue is particularly serious in view of the fact that the High Court adopted the ‘proportionate’ approach on the second issue. A beneficiary might in fact receive a small actual amount of the income, but because of the proportionate approach, might be assessed as having received much more than the actual receipt. The beneficiary would be assessed on the basis of the proportion, rather than the actual amount. [page 33] The anomaly can be avoided if the terms of the trust define ‘income of the trust’ and similar terms as having the same meaning as ‘net income’ under s 95 of ITAA 1936, unless the trustee determines otherwise. This means that unless the trustee determines otherwise, the income determined by the trustee will

actually be the taxable income. The clause Streaming of income and capital in fact does this. The second part of subsection (1) reads: (1) … and in the absence of such a determination ‘trust income’, ‘income of the trust’ and ‘income of the trust estate’ have the same meaning as ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (or a provision of similar import).

Commonwealth Government concerns and actions 2.28 Bamford caused some concern to the Commonwealth Government by creating a potential for the possible difference between ‘income of the trust’ as determined by the trustee, and ‘net income of the trust’ for the purposes of s 95, to be exploited. Acting on this concern, the government on 4 March 2011 released a discussion paper20 which canvassed options to implement recommendations made by the Board of Taxation to: • align better the concepts ‘income of the trust’ and ‘net income of the trust’; and • enable streaming of capital gains and franked dividends. The government set about introducing reforms which would have improved the alignment of the two meanings of trust income. However, concerned about challenges to the reforms, the government deferred implementation until a planned broader update and rewrite of Div 6 could be prepared. Instead the government introduced interim measures designed to confirm how streaming could be done by a trustee, and to prevent tax avoidance based on the currently ‘unaligned’ nature of the two types of trust income. These measures were put into effect by the Tax Laws Amendment (2011 Measures No 5) Act 2011(Cth).

TRUST STREAMING

Streaming powers amended by statute 2.29 The Tax Laws Amendment (2011 Measures No 5) Act 2011 amended the ITAA 1997, specifically Subdiv 115-C (relating to rules for trusts with capital gains) and Subdiv 207-B (relating to rules for franked distributions received from a trust). The effect of the changes is to allow capital gains and [page 34] franked distributions to be streamed to beneficiaries for tax purposes to the extent that the trust documents empower the trustee to do so and provided that the beneficiaries have been made ‘specifically entitled’ (a new statutory concept introduced by the legislation). The issue of ‘streaming’ in relation to trusts is complex.21 A full discussion is beyond the scope of this text, and so the following comments are intended to give a very brief overview of the changes, purely as they relate to the streaming provisions in the Model Testamentary Trust precedent in Chapter 8. Under the legislation, a beneficiary can be made ‘specifically entitled’ only if two conditions are met: • •

the entitlement condition; and the recording condition.

Under the entitlement condition, the beneficiary must have received, or reasonably be expected to receive, financial benefits that are referable to the capital gain (reduced by any losses consistent with the application of capital losses for tax purposes) or franked distribution (reduced by directly relevant expenses). Under the recording condition, the beneficiary’s entitlement to the amount must be recorded in its character as an amount referable to the capital gain or franked distribution in the accounts or records of the trust.

For the purposes of drafting testamentary trusts, these changes have made it essential for the drafter of a testamentary trust to ensure that the document: •

• •

includes a definition of ‘income of the trust’, which allows the trustee to determine what constitutes income, but by default makes it the same as ‘net income of the trust’ for the purposes of s 95 of the ITAA 1936; empowers the trustee to determine what are income and capital receipts; and specifically empowers the trustee to record and account for income and capital according to their different types, and to distribute such different types of income and capital between beneficiaries.

The clause Streaming of income and capital complies with these requirements. It is essential that this clause be included when drafting a discretionary testamentary trust. It is also important for the drafter to be aware that the clause is a response to recent legislative change, and that streaming is potentially the subject of further change. Accordingly, any streaming clause should be updated in accordance with future legislative changes as they occur.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Section 95(1) of the ITAA 1936. For further discussion, see M Stewart and M Flynn, Death & Taxes: Tax-Effective Estate Planning, 5th ed, Thomson Reuters, 2012, [8-130]. Section 99A of the ITAA 1936. For further discussion, see M Stewart and M Flynn, Death & Taxes: Tax-Effective Estate Planning, 5th ed, Thomson Reuters, 2012, [8-170]. Division 6AA of the ITAA 1936. 2015/2016 tax-free threshold. Section 102AG(3). Section 102AG(4) of the ITAA 1936. Taxation Ruling 98/4. A Macdonald, ‘Testamentary Trusts: Not Just “Another” Trust’ (2006) 4(2) eJournal of Tax Research 153. Section 128-15 of the ITAA 1997. See C Bevan, ‘Delegation of Testamentary Power’ (2012) 50(6), Law Society Journal,

12. 13. 14. 15. 16. 17.

18. 19. 20.

21.

July, p 70. Section 118-195(1) of the ITAA 1997; see also ATO ID 2003/109. Citing Evans v Friemann (1981) 53 FLR 229 at 238 per Fox ACJ (a judicial review decision). For further discussion, see M Stewart and M Flynn, Death & Taxes: Tax-Effective Estate Planning, 5th ed, Thomson Reuters, 2012, [11-060]. See 2.25. ‘Income of the trust’ and streaming capital gains between beneficiaries are discussed in 2.18. ‘Net income of the trust’ is defined in s 95 as: ‘the total assessable income of the trust estate calculated under this Act as if the trustee were a taxpayer in respect of that income and were a resident, less all allowable deductions, except deductions under Division 393 of the Income Tax Assessment Act 1997 (farm management deposits) and except also, in respect of any beneficiary who has no beneficial interest in the corpus of the trust estate, or in respect of any life tenant, the deductions allowable under Division 36 of the Income Tax Assessment Act 1997 in respect of such of the tax losses of previous years as are required to be met out of corpus.’ (2010) 240 CLR 481. See definition, note 17 above. See The Treasury, Improving the Taxation of Trust Income, Australian Government, Canberra, March 2012, . Harwood Andrews Lawyers Pty Ltd, Trust Structures Guide 2012, The Tax Institute, Sydney, NSW, 2012 — Chapter 6 contains an excellent discussion of the developments in case law, the changing positions of the Tax Commissioner and the 2011 streaming legislation.

[page 35]

3 ASSET PROTECTION AND TESTAMENTARY TRUSTS

Introduction How a Discretionary Testamentary Trust Can Offer Asset Protection Background The offices of appointor and protector help protect the beneficiaries Protecting a primary beneficiary from themselves Protecting a primary beneficiary from third parties Limits of Asset Protection Offered by Discretionary Testamentary Trusts Part I — Bankruptcy and Asset Protection Introduction to Bankruptcy Background Bankruptcy and Asset Protection Property available to a trustee in bankruptcy Divisible property The implications of a beneficiary of a deceased estate becoming bankrupt The implications of a trustee of a trust going bankrupt The treatment of an interest in a discretionary trust for bankruptcy purposes The implications of an appointor of a trust going bankrupt The implications of a beneficiary who controls a trust becoming bankrupt The effect of s 302B of the Bankruptcy Act on automatic disqualification clauses Bankruptcy Issues for a Deceased Estate The treatment of an estate of an insolvent deceased debtor Transactions voidable on application of the trustee in bankruptcy Transfers for less than market value

Transfers made with an intention to defeat creditors Asset Protection Considerations for Bankruptcy Protection Part II — Family Law and Asset Protection Limits of asset protection in relation to family law property settlements

[page 36] ‘Trust Busting’ Powers of the Family Court Introduction 1. The power to treat trust assets as property of the parties to the marriage or de facto relationship 2. Are a family trust of the parties to the marriage/de facto relationship and its assets financial resources of the parties or a mere expectancy? 3. The power to set aside transactions pursuant to s 106B of the Family Law Act 1975 4. The power to alter the ownership of property of a third party under Pt VIIIAA of the Family Law Act 1975 5. The power to treat the trust as a sham Cases Where the Family Court has Looked Through Discretionary Trusts Background Implications to be Drawn from the Family Law Cases Key issues in drafting and administration Solicitor’s advice on asset protection Separate trusts for each child Family law and automatic disqualification clauses

INTRODUCTION 3.1 This chapter considers the asset protection that a discretionary testamentary trust can offer a beneficiary. The topics covered are: • •

how a discretionary testamentary trust can offer asset protection; the limits of asset protection offered by a discretionary testamentary trust in relation to bankruptcy and family law; and

•

implications to be drawn from the cases.

HOW A DISCRETIONARY TESTAMENTARY TRUST CAN OFFER ASSET PROTECTION Background 3.2 Discretionary testamentary trusts not only offer significant tax advantages, they can also protect beneficiaries from losing inherited assets through crises such as divorce or bankruptcy. For some clients the asset protection which discretionary testamentary trusts offer their beneficiaries is more attractive than the tax effectiveness. The basic mechanism by which both testamentary and inter vivos trusts achieve asset protection is by separating ownership of the trust assets from the objects of the trust (referred to in this text as ‘beneficiaries’) and giving [page 37] it to the trustee. The beneficiaries have only the personal right — a chose in action — to due administration of the trust — the right to call upon the trustee to deal appropriately with the income and capital of the trust. The following comments on the unique nature of discretionary trusts apply to discretionary testamentary trusts, which are the central concern of this text: It is the discretionary characteristic, in particular, which makes the trust attractive. Strange things happen to property when it becomes subject to discretions. Ownership interests disappear. Nobody is entitled to the income or capital gains derived from the property of discretionary trusts. And because nobody has beneficial title to the assets of these trusts, many obligations lose their point of reference. Interests in property are replaced with powers to dispose of property to persons among a group of eligible takers … Trustees with the power to dispose of

the property of discretionary trusts have no interests in that property which can be divided between rival claimants. Nor can property subject to discretionary trusts be reached simply by commanding the exercise of a power-holder’s discretions. Fiduciary duties stand in the way with the effect of rules of law. As yet in Australia, no part of the law of fiduciary duties has been repealed or overruled.1

Two separate aspects of asset protection motivate a testator to draft a will with a testamentary discretionary trust: protecting a beneficiary from losing or wasting a testamentary gift through the beneficiary’s own inability to manage that gift (due to youth, immaturity or disability); and protecting the beneficiary from litigation by other parties (usually bankruptcy or the claims of an ex-spouse in a family law claim).

The offices of appointor and protector help protect the beneficiaries 3.3 The Appointor has the ultimate power to choose and appoint the trustee (the power of appointment). The testator sets out in the will who is to be the Appointor. The power to choose and appoint the trustee gives indirect yet ultimate control over how the trust is operated; however, even this power of appointment does not itself constitute property.2 The power of appointment is subject to fiduciary obligations and its operation must be exercised for the benefit of the beneficiaries of the trust.3 The Model Testamentary Trust precedent in Chapter 8 gives further protection to the interests of the beneficiaries by including an office of Protector (in other precedents, this position is sometimes referred to as ‘guardian’). The Protector’s role is to exercise some control over the trustee [page 38] by exercising a power to grant or refuse the trustee permission to

take certain fundamental actions which will bear significantly on the primary beneficiary. Those actions include making distributions of capital and the ending of the trust.

Protecting a primary beneficiary from themselves 3.4 A common reason why a testator will want to use a discretionary testamentary trust structure is to protect immature or youthful beneficiaries ‘from themselves’; that is, to ensure that on the death of the testator those beneficiaries will not receive control of their inherited assets until they have attained an age of maturity. The testator chooses and specifies this age, referred to as the ‘preservation age’, as the age by which the beneficiary will likely be responsible enough to manage their inheritance fruitfully. Many testators set a preservation age of 25, although some testators choose some other age. The precedents set this age at the age of 25 by default. The decision is a very personal one and the drafter should discuss it with the testator. Accordingly, the Model Testamentary Trust precedent in Chapter 8 in its basic form provides that when the primary beneficiary reaches the preservation age he or she will gain full control over the trust by gaining the power of appointment. This carries with it the crucial power to choose and appoint the trustee — and generally the Appointor can choose to appoint as trustee herself or himself. Youth or immaturity is not the only reason why a testator might wish to protect a beneficiary from herself or himself: the beneficiary might have a spendthrift tendency, an addiction of some kind or a disability.

Permanently withholding control from the primary

beneficiary 3.5 Where the beneficiary is seriously disabled, it will usually not be appropriate for the primary beneficiary ever to gain control over the trust by becoming Appointor. If this is the case, the testator could set the preservation age very high; say, at 95 years. If the testator wishes to ensure that the trust ends on the death of the seriously disabled beneficiary and for the trust property to pass to other residuary beneficiaries, the testator could use the precedents in Chapter 9 to set up a trust designed specifically for the disabled person.

Death of the primary beneficiary before attaining the preservation age 3.6 In the precedents, care is taken that if the primary beneficiary dies before attaining the preservation age the control of the trust will not pass to the primary beneficiary’s legal personal representative. This is for three reasons: first, the primary beneficiary may well die intestate; second, if the trust terms did provide that on death of the primary beneficiary the trust assets vest in the estate of the primary beneficiary, the interest of the primary beneficiary would be elevated beyond a mere chose in action, and the rule [page 39] in Saunders v Vautier4 would enable the primary beneficiary (having attained majority) to call upon the trustee to vest the trust assets in herself or himself; and third, the testator may wish to design special provisions for vesting on the ending of the trust, for instance on the death of a primary beneficiary who is severely disabled or unable to have children. Where a testator is using a discretionary testamentary trust to

restrict a primary beneficiary’s access to the inheritance until a particular age, it may be tempting to adopt a provision used in some precedents to give the beneficiary a staggered right, as he or she reaches specified ages, to call progressively on parts of the trust assets. It is suggested that this temptation should be avoided. For those assets in respect of which a primary beneficiary is given the right to call upon the trustee to distribute, even where the right is not exercised, the primary beneficiary’s interest will have become elevated from the general right of a beneficiary of a discretionary trust, to being one of present entitlement, and to that extent asset protection will be compromised.

Protecting a primary beneficiary from third parties 3.7 Another common reason for seeking asset protection is to protect a primary beneficiary from litigation by other parties. The attacks on the inherited assets may come from creditors, or more usually, from a divorcing spouse following separation. It is a genuine concern, particularly among elderly testators who have been responsible for generating the major wealth of a family that, in the event of their death, their spouse or more particularly their child be protected from losing inherited assets to an exspouse in the event of a family law settlement. Where a testator expects that the asset protection offered by the discretionary testamentary trust will be tested, the trust must be carefully structured to give sufficient asset protection. It is true as a general principle that the primary beneficiary of a testamentary trust will, as beneficiary, hold no more than a personal right against the trustee, and this in itself gives some, though not complete, asset protection. However, if the primary beneficiary is given other offices or powers such as those of Appointor or trustee and the control that goes with them, the interest held by the primary beneficiary can become elevated both

in relation to bankruptcy and family law matters, and the asset protection is lost. This is particularly true if the primary beneficiary is made Appointor or trustee without limitations or conditions. The testator will usually want to give a primary beneficiary who is for example a mature adult child access to and the ability to enjoy their inheritance freely, and at the same time will want to protect the beneficiary from losing their inheritance through bankruptcy or divorce. This places the testator and their advisor in a difficult predicament. On one hand the testator [page 40] wants the primary beneficiary to have total flexibility and control over how the trust is operated, and at the same time wants to secure total protection from creditors and ex-spouses. These two goals are simply irreconcilable, because the greater the freedom and control that the primary beneficiary is given, the less asset protection the primary beneficiary will enjoy, and vice versa. The best possible outcome can only be a compromise between control and asset protection.

Mandatory or optional testamentary trusts 3.8 A similar issue arises in relation to the discretion as to whether the trust comes into existence in the first place. The testator may decide not to make the trust mandatory, but rather to give the primary beneficiary a choice whether to take the assets absolutely or to become a trust beneficiary in relation to the assets. In giving the primary beneficiary this choice, the testator may be tempted to give the beneficiary an unfettered freedom to choose whether to take the inheritance directly and absolutely or to leave it in trust, but this temptation should be resisted.

The Model Testamentary Trust precedent in Chapter 8 provides that if the primary beneficiary has reached the preservation age and is not otherwise an ‘Ineligible Officebearer’, they may request that the executor dispense with the use of the trust and pass the substantive inheritance directly to the primary beneficiary absolutely, but the precedent leaves the ultimate discretion to the executor. The reason for doing so is to increase the asset protection for the primary beneficiary. If the primary beneficiary were to be given the ability to force the executor to pass their inheritance to them absolutely, then if he or she were in the midst of (for example) bankruptcy at the time of the estate being administered, the trustee in bankruptcy could seek to demand on behalf of the primary beneficiary that the assets be passed to the primary beneficiary and so expose the assets to creditors. Leaving the discretion to the executor means that the trustee in bankruptcy cannot compel the transfer of the assets to the primary beneficiary. If the testator is worried that even where there were no asset protection concerns, a difficult executor might unnecessarily force the primary beneficiary into an unwanted trust (that is, the automatic disqualification clause did not apply), the primary beneficiary could simply exercise the powers of appointment and trusteeship to wind up the trust as and when they chose.

LIMITS OF ASSET PROTECTION OFFERED BY DISCRETIONARY TESTAMENTARY TRUSTS 3.9 At a basic level, a testamentary trust provides for property to be held by a trustee for the benefit of a beneficiary of the will. In this basic form, the trust does not achieve any kind of asset protection as the beneficiary upon attaining legal capacity will have a present entitlement to the asset and a right to call for it.

[page 41] In contrast, a discretionary trust (whether inter vivos or testamentary) provides asset protection because since the trustee holds legal ownership of trust assets for the beneficiaries of the trust, the beneficiaries having no legal ownership or interest in the trust property have traditionally been protected from losing assets to a third party. This is because the trustee will in most cases have complete discretion as to who can benefit from the income and capital of the trust, while the beneficiaries having no legal or equitable interest in the assets of the trust only have a mere expectancy and hope that the discretion will be exercised in their favour.5 The nature of a beneficiary’s interest in a trust has been further described as follows: In effect, all a discretionary beneficiary can usually claim is: a right to be considered in the exercise of the trustee’s discretion; certain rights to information about the trust; and what is commonly referred to as a mere expectancy of receiving a benefit from the trust.6

It is a misconception to believe that merely because assets are held in a trust, they will be safe. Another misconception is that, in the context of contemporary bankruptcy and family law, assets that are held in trust receive no asset protection. The fact is that the asset protection offered by any trust will depend on the applicable law, the administration of the trust, the particular terms of the trust and the specific ways that the powers and rights of trustee, Appointor, Protector and beneficiary are divided up and allocated within the trust. The asset protection of discretionary testamentary trusts will be discussed below: • •

Part I — Bankruptcy and Asset Protection Part II — Family Law and Asset Protection.

Part I — Bankruptcy and Asset Protection INTRODUCTION TO BANKRUPTCY Background 3.10 Australian insolvency law has its foundations in British statute and common law7 and centres on the relationships of debtors to their creditors. Though insolvency law broadly encompasses both personal and corporate [page 42] insolvency, this chapter looks only at personal insolvency or bankruptcy due to its unique relationship to the mechanics of discretionary testamentary trusts. The modern bankruptcy regime plays a critical role not only in the commercial realities of the day-to-day lives of testators and beneficiaries, but more specifically the bankruptcy regime affects the implementation of the testator’s wishes and the asset protection plans of beneficiaries. Bankruptcy raises a number of issues including: • • • • •

the treatment of an interest in a discretionary trust for bankruptcy purposes; the implications of a trustee of a trust going bankrupt; the implications of an appointor of a trust going bankrupt; the effect of s 302B of the Bankruptcy Act 1966 (Cth); and finally and more broadly, the asset protection afforded by discretionary testamentary trusts and how creditors might seek to reach through a trust to recover assets.

BANKRUPTCY AND ASSET PROTECTION 3.11 It is important to understand the mechanics of bankruptcy when considering the asset protection afforded by a discretionary testamentary trust or when seeking to protect the ‘assets’ of a beneficiary who becomes bankrupt from attack. Recent statistics published by the Australia Financial Security Authority (‘AFSA’) demonstrate that personal insolvencies, predominantly consisting of bankruptcies, have increased from 25,000 annually to about 30,000 annually in the last 15 years.8 Simultaneously, as the population has aged the statistics have reflected an increase in bankruptcies for persons aged 45 years and older. This makes the bankruptcy implications of estate planning strategies ever more important as time progresses. As the law currently stands, the asset protection offered by a discretionary testamentary trust is stronger in relation to bankruptcy than in relation to family law. This is certainly the case where the primary beneficiary is merely a beneficiary. It is perhaps true even where the primary beneficiary is Appointor as well as being a beneficiary. However, the asset protection might well be lost if the primary beneficiary is also a trustee. There are two fundamental ways in which assets come under attack in the administration of a bankrupt estate. Assets may be attacked as being property in the bankrupt estate divisible among creditors (that is, ‘divisible property’), or through the voidance provisions which allow a trustee in bankruptcy to void certain transactions as against the bankrupt, and recover assets from the bankrupt’s associates and third parties. [page 43]

Property available to a trustee in bankruptcy

3.12 The asset protection afforded by a discretionary testamentary trust is predominantly centred on the first line of attack mentioned in the previous paragraph: the definition and treatment of ‘divisible property’. Section 5 of the Bankruptcy Act 1966 defines ‘property’ as: … real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.

Generally, any property that is owned by the bankrupt at the time of the bankruptcy or acquired during the bankruptcy becomes the legal property of the trustee in bankruptcy, that is, it vests in the trustee pursuant to s 58 of the Bankruptcy Act on the date of bankruptcy.

Divisible property 3.13 Section 116 sets out an exhaustive list of assets which will be divisible among the creditors of a bankrupt (‘divisible property’). Divisible property includes: • • • •

•

all property owned at the time of bankruptcy or acquired during the bankruptcy; any rights or powers over property that existed at the date of bankruptcy or during the bankruptcy; any rights to exercise powers over property; any property that vests because an associated entity received the property as a result of personal services supplied by the bankrupt;9 and monies recovered from an associated entity due to an increase in the net worth of the entity as a result of personal services supplied by the bankrupt.10

In practical terms this means that any houses, land or motor vehicles worth over a certain threshold amount are divisible property, which the trustee is under a duty to sell so that the

proceeds can be distributed to creditors. The trustee will also sell any part share which the bankrupt has in jointly owned or mortgaged property, if it is commercially practicable to do so. This definition of ‘divisible property’ also means that the capacity of beneficiaries to exercise certain rights or to obtain certain benefits, including those provided by related party discretionary testamentary trusts, may be affected in circumstances where the beneficiary themselves are bankrupt (see below for further examination). Section 116(2) provides that certain assets are not included in divisible property and are therefore not subject to attack by creditors. Among excluded [page 44] assets are property that is ‘held on trust by the bankrupt for another person’, superannuation, compensation payments for personal injury and divisions of property and payment arrangements under the family law regime.

The implications of a beneficiary of a deceased estate becoming bankrupt 3.14 If following the death of a testator, her or his estate is administered and the property is transferred to a beneficiary who is bankrupt, the property becomes divisible property pursuant to s 58 of the Bankruptcy Act 1966. More commonly, though, the executor will be reluctant to finalise the administration of a deceased estate when a potential beneficiary of the estate is bankrupt, so the estate assets themselves are not transferred to the beneficiary’s trustee in bankruptcy. Usually, therefore, it is the right to compel the due administration of a deceased estate which

is deemed to be ‘divisible property’ for the purposes of s 116 of the Bankruptcy Act 1966. This is particularly relevant for estates which have not been afforded the protection of a discretionary testamentary trust, where a beneficiary under a simple will or in an estate without a will becomes bankrupt.11 In Commissioner of Stamp Duties (Qld) v Livingston,12 a testator died leaving property in Queensland to his widow. The widow died intestate before the administration of her husband’s deceased estate was finalised. The question was whether the widow’s interest in the Queensland portion of her husband’s estate was subject to succession duties. It was ultimately found that: [the widow beneficiary] … was not entitled to any beneficial interest in any property in Queensland at the date of her death. What she was entitled to in respect of her rights under her deceased husband’s will was a chose in action, capable of being invoked for any purpose connected with the proper administration of his estate.13

These principles were affirmed in Official Receiver in Bankruptcy v Schultz14 where the Official Receiver was required to establish that certain property which had vested in a beneficiary prior to her discharge from bankruptcy, in fact vested in the Receiver. The court followed Commissioner of Stamp Duties (Qld) v Livingston15 and held that the interest of a beneficiary in an unadministered estate, being a right to have the estate properly administered, attached to the Official Receiver by virtue of bankruptcy. This means that, following the ordinary construction of s 152 of the Bankruptcy Act 1966, even if a beneficiary is subsequently discharged from bankruptcy, the beneficiary’s trustee in bankruptcy can still enforce the right [page 45] to administer and the bankrupt is not discharged from the obligation to give all due assistance to the trustee in having the

estate so administered.16 This principle also follows the operation of s 152, which requires a bankrupt, even after being discharged, to assist the trustee, as reasonably required, in the realisation and distribution of estate assets.17

The implications of a trustee of a trust going bankrupt 3.15 Because the Act excludes property that is ‘held on trust by the bankrupt for another person’ from divisible property,18 the assets held for a beneficiary by a bankrupt trustee are not vulnerable to the trustee’s creditors. Other issues can, however, arise if a trustee of a trust is made bankrupt. For example, a trustee is entitled to indemnity out of trust assets for costs and liabilities incurred in furthering the objects of the trust. In this case, this right may vest in the trustee in bankruptcy who might seek to recover an indemnity against trust assets for the liabilities incurred by the bankrupt trustee in their personal capacity. Similarly, a trustee may have failed to keep adequate records and it may be very difficult to distinguish which assets were bona fide trust assets and which were not, leaving some assets open to attack from the trustee’s trustee in bankruptcy.

The treatment of an interest in a discretionary trust for bankruptcy purposes 3.16 It has been recognised that in the ordinary case, a bankrupt’s status as a beneficiary of a discretionary trust is a mere expectancy and is not property of the bankrupt; hence it is not available to the beneficiary’s trustee in bankruptcy.19 It follows

that if a beneficiary becomes bankrupt, there is no immediate impact on the trust assets available to other beneficiaries.20 In the context of a discretionary trust, the court in Dwyer v Ross21 said: … is difficult to see that the right to enforce the due administration of the trust can be property which passes to the trustee in bankruptcy. The interest in the trust would seem to be a personal right which remains with the bankrupt. Of course, if a distribution of money or property is made to the bankrupt during the period of the bankruptcy, the trustee will be entitled to it as after-acquired property …

The question whether the right to due administration of a trust is ‘property’ for the purposes of the Bankruptcy Act 1966 seems to hinge on whether the beneficiary has more than a ‘mere discretionary entitlement’ and is more [page 46] than a ‘mere discretionary object’ as outlined in Gartside v Inland Revenue Commissioners.22 Where a trustee can in the trustee’s full discretion distribute trust proceeds, then beneficiaries do not have interests in anything more than the right to the due administration of the trust; that is, their actions in ensuring the trust is properly administered do not give them any entitlement to draw on the assets of the trust.23

The implications of an appointor of a trust going bankrupt 3.17 The appointor can appoint and remove the trustee of a trust. It has been held that the power of appointment (alone) held by a bankrupt appointor over a discretionary trust is not property for division among creditors.24 The position of appointor is a personal appointment which in bankruptcy continues to vest in the bankrupt appointor not the trustee in bankruptcy, and on the

appointor’s death vests in the representative, not in their estate.25

appointor’s

legal

personal

Even if a bankrupt beneficiary was the appointor, any trustee of the trust would have to administer the trust for the purposes of the objects of the trust, not just the creditors of one of the discretionary beneficiaries who may be bankrupt.26 Even if the power of appointment did vest in a trustee in bankruptcy, the trustee in bankruptcy would not be entitled to use this power for anything other than the indirect benefit of the trust objects. It may in this regard (particularly if this position is eroded), also be useful to draft a discretionary testamentary trust with two or more joint appointors so as to mitigate the risk of one appointor of the trust going bankrupt and in a worst case scenario that power of appointment being unilaterally controlled by a trustee in bankruptcy.

The implications of a beneficiary who controls a trust becoming bankrupt 3.18 As noted above, much of the asset protection offered by a discretionary testamentary trust arises from the principle that the primary beneficiary of the trust has the right to ensure that the trust is properly administered by the trustee, but has no proprietary interest in the trust assets themselves. It was held in Gartside v Inland Revenue Commissioners27 that the beneficiary of a discretionary trust has a mere expectancy and a right to be considered for a distribution, but no right to actual property of the trust.28 The only other right [page 47] the beneficiary can be said to have is a right to have the trust

administered properly and in accordance with the terms of the trust. It should be noted that Gartside was a case dealing with the question whether an expectancy under an unadministered estate was a sufficient ‘interest’ for estate duties, and in the case itself the trustees were independent trustees that could not actually benefit from the trust. Over time, however, the principle in Gartside has been eroded. Where courts have found that the degree of control a beneficiary has in a discretionary trust makes the trust merely an ‘alter ego’ of the beneficiary, they have held that the interests of the beneficiary amount to something approaching ‘property’, though the degree to which this has occurred usually relates to specific meanings of the term ‘property’ in different areas of law. In Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547, Gummow J held that: … a power exercisable in favour of any person including the donee of the power would be a general power and thus would be tantamount to ownership of the property concerned.29

This comment provided support for the decision in Australian Securities and Investments Commission In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) (‘Richstar’).30 In the Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) (‘Richstar’) 3.19 Richstar31 was a notable case where the interest of a beneficiary under a discretionary trust was elevated to the status of being ‘property’ because the trust was found to be the ‘alter ego’ of a beneficiary. French J in Richstar found that where a beneficiary effectively controls the trustee’s power of selection (as to distributions), this power is akin to a property interest held by the beneficiary.32 In the context of Richstar, ‘property’ bore the meaning in s 9 of the Corporations Act 2001 (Cth):

… any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action.

Prior to Richstar, an interest in property held under a discretionary trust was mostly confined to a sole beneficiary of an exhaustive trust. An exhaustive trust in this context is a trust where the terms of the trust require the trustee to distribute the whole of the income at the end of each defined period. In Richstar, however, French J accepted the argument submitted by the Australian Securities and Investments Commission (ASIC) that the defendants had ‘effective control’ over the trust in all practical terms to the extent that they [page 48] had a contingent or expectant interest in the discretionary trust assets, thereby assuming effective ownership of the trust property. French J said (at [29]): … in my opinion, in the ordinary case the beneficiary of a discretionary trust, other than perhaps the sole beneficiary of an exhaustive trust, does not have an equitable interest in the trust income or property which would fall within even the most generous definition of ‘property’ in s 9 of the Act … I distinguish the ‘ordinary case’ from the case in which the beneficiary effectively controls the trustee’s power of selection. Then there is something which is akin to a proprietary interest in the beneficiary.

In his decision, French J highlighted that it was important to distinguish between cases where there was an independent and arm’s-length trustee and cases where the beneficiary was the trustee or effectively controlled the trustee. In the former, French J considered that the beneficiary of a trust does not have a ‘contingent interest’ in the trust but a mere expectancy of a distribution in line with the principle in Gartside. On the other hand, where the beneficiary controls the trustee, then at the very least a contingent interest may be identified because ‘it is as good as certain’ as French J put it, ‘that the beneficiary will receive the benefits of distributions of either income or capital or both’.33 In

these circumstances, the trust may be viewed as the ‘alter ego’ of the beneficiary. French J went on to propose three scenarios where the court could consider an ‘expectant interest’ or ‘contingent interest’ in a trust to be property for the purposes of the definition under s 9 of the Corporations Act 2001: •

•

•

where the defendant is both the beneficiary as well as director and secretary of the corporate trustee of a discretionary trust; where the defendant is a trustee and beneficiary and has discretion over 39% of income or capital to a targeted beneficiary; and where the defendant is the beneficiary and appointor of the trust.

Based on these three scenarios, the court went on to grant liberty for the plaintiff to apply for additional orders regarding receivers being appointed over trust assets in which the relevant defendant enjoyed a ‘contingent interest’, that is, an effective control and ownership over the trust property as a beneficiary. The effect of the Richstar decision appears to be that the assets of a discretionary trust will not be viewed as the ‘property’ of a person simply because that person is a beneficiary, trustee, director or shareholder of a trustee company, or an appointor of the trust. However, certain combinations of these roles and powers may be sufficient for there to be a finding of effective control and hence an interest in ‘property’. Australian Securities and Investments Commission v Burnard 3.20 Richstar was distinguished in Australian Securities and Investments Commission v Burnard.34 ASIC sought orders similar to those in Richstar in relation to assets owned by the corporate trustee of a discretionary trust, being

[page 49] owned and controlled by the defendant. Barrett J held that the trustee of a discretionary trust has an equitable interest in the assets of the trust with respect to its right of indemnity as trustee and thus the whole of the trust assets could not have been ‘property’ of the defendant.35 Public Trustee v Smith 3.21 In Public Trustee v Smith,36 the Supreme Court of New South Wales considered Richstar in the context of a matter involving the disposition of real property by will wherein: • • • •

the real property was owned by the trustee of a discretionary trust; the deceased was a beneficiary of the trust; the deceased was the appointor of the trust; and the deceased owned all of the shares in the trustee and was the sole director of the trustee.

White J considered the statement by French J in Richstar that a beneficiary who controls the trustee of a discretionary trust may have what approaches a general power and thus a proprietary interest in the income and capital of the trust and held that: Where, as in the usual case, the trustee of a discretionary trust has a special power to appoint trust property to objects of a designated class (or a hybrid power), I respectively doubt that it is correct to say that a beneficiary who controls the trustee has what approaches a general power of appointment. In the usual case, as in this case, the power vests in the trustee and is a special power. It does not become a general power of appointment merely because the beneficiary can compel its exercise in favour of himself.37

White J distinguished Richstar saying that he did not consider Richstar established that a beneficiary of a discretionary trust who controlled the trustee was the beneficial owner of the trust property irrespective of the terms of the trust deed.38 The court went on to conclude that the deceased beneficiary was not the

beneficial owner of the property of the trust, but merely a beneficiary entitled to a power of appointment.39 Further cases considering Richstar 3.22 Richstar has subsequently been considered in numerous cases by the Australian courts including, but not limited to, Elliott v Secretary of the Department of Education Employment and Workplace Relations,40 Rafferty v Time [page 50] 2000 West Pty Ltd (No 2),41 Hatch v Harlekin Pty Ltd42 and Australian Securities and Investments Commission v Groves.43 Considerations in light of Richstar 3.23 The outcome of the Richstar line of cases has been that a trust which is merely the ‘alter ego’ of a beneficiary will be subject to attack by a trustee in bankruptcy if that beneficiary is placed into bankruptcy. Any effective estate planning strategy using a discretionary testamentary trust for asset protection from bankruptcy should therefore address a number of questions: • • • • • • •

Who should be the trustee? Should there be an Appointor? If so who? What are the extents of the Appointor’s powers? Who should the beneficiaries be? Should there be multiple separate trusts? Should or can a company be a beneficiary? How can a testator separate divisible property from at-risk prospective beneficiaries?

These questions are addressed in greater detail later in this chapter.

The effect of s 302B of the Bankruptcy Act on automatic disqualification clauses 3.24 It should be noted that s 302B of the Bankruptcy Act 1966 specifically voids provisions in trust deeds that seek to cancel, reduce or qualify a beneficiary’s interest in a trust. Section 302B provides: (1)

A provision of a trust deed is void to the extent that it has the effect of: (a) cancelling, reducing or qualifying a beneficiary’s interest under the trust; or (b) allowing the trustee to exercise a discretion to the detriment of a beneficiary’s interest;

if the beneficiary becomes a bankrupt, commits an act of bankruptcy or executes a personal insolvency agreement under this Act.

A beneficiary should therefore not rely completely on automatic disqualification provisions in a trust deed for bankruptcy protection, but [page 51] rather should avoid from the outset being the trustee of the trust (at least on a sole individual basis).

BANKRUPTCY ISSUES FOR A DECEASED ESTATE The treatment of an estate of an insolvent deceased debtor 3.25 When considering the estate planning strategy for any client, not just those with the benefit of a discretionary testamentary trust, it is important to be aware of the operation of

Pt XI of the Bankruptcy Act 1966 which deals with the administration of the estate of deceased persons in bankruptcy.44 As mentioned above, a deceased estate, like any estate, can be placed into bankruptcy either voluntarily by the executor or administrators of that deceased person’s estate,45 or involuntarily on presentation of a creditor’s petition.46 The commencement of a bankruptcy under Pt XI is deemed to commence on the following dates under s 247A(1) of the Bankruptcy Act 1966: •

•

•

if the deceased person was on the day of her or his death unable to pay her or his debts as they became due from her or his own moneys and had committed any act or acts of bankruptcy within the period of six months immediately preceding the day on which he or she died — the time of the commission of that act, or the first of those acts, as the case may be; if the deceased person was on the day of her or his death unable to pay her or his debts as they became due from her or his own moneys, but had not committed any act of bankruptcy within the period of six months immediately preceding the day on which he or she died — the time of her or his death; or if the deceased person was on the day of her or his death able to pay her or his debts as they became due from her or his own moneys — the time of the presentation of the petition on which the order was made.

An estate can also be placed into administration on a creditor’s petition commenced before death, where the debtor has died after the date of commencement but before the making of an order of sequestration placing the debtor’s estate into bankruptcy.47 In these circumstances, s 247A(2) of the Bankruptcy Act 1966 provides: Administration of the estate of a deceased person under this Part by virtue of an order made by the Court under section 245 on a creditor’s petition shall be deemed

to have relation back, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the

[page 52] deceased person within the period of 6 months immediately preceding the date on which the petition was presented.

The operation of s 247A regarding commencement of bankruptcy in deceased estates, and s 58 regarding vesting of property, have a peculiar effect on the certainty of ownership associated with the passing of joint property from a testator to a joint owner or joint tenant upon death. Example 1: Debtor commits act of bankruptcy before death A debtor who is a joint tenant is unable to pay certain debts as and when they fall due and is served with a bankruptcy notice prior to their death. The person dies and the estate is subsequently placed into bankruptcy, say by a creditor pursuant to s 244 of the Bankruptcy Act 1966. The bankruptcy of the deceased estate would be deemed to commence as at the date of the expiry of the bankruptcy notice.48 Such a circumstance might have the effect of overcoming the joint tenancy on the basis that the bankruptcy is deemed to commence prior to death, as at the date of bankruptcy. Joint tenancies are severed at the date of bankruptcy in favour of the trustee in bankruptcy and there is a charge created against the divisible property securing the interests of the bankrupt estate against the joint tenant under s 249A of the Bankruptcy Act 1966.49 Example 2: Debtor is insolvent but does not commit act of bankruptcy before death A deceased debtor is insolvent before death but has not committed an act of bankruptcy. The bankruptcy of their deceased estate is

deemed to commence as at the date of death.50 Which right would prevail: the severing of the joint tenancy by operation of the Bankruptcy Act 1966 or the other joint tenant’s right of survivorship? The answer is unclear. Why this particular question is not dealt with directly by the Bankruptcy Act 1966 is not clear. Given the discord and lack of clear case law in this area, it is unsafe for high-risk testators to rely solely on joint tenancy as a method of testamentary property transfer.

Transactions voidable on application of the trustee in bankruptcy 3.26 Under the Bankruptcy Act 1966, the two main provisions that will allow a trustee in bankruptcy to void transactions in connection with transfers of property are the voidance of the transfer of property for less than market value pursuant to s 120 and the voidance of transfers made with the intention to defeat creditors pursuant to s 121 of the Bankruptcy Act 1966. [page 53] Transactions voidable under s 122 being unfair preferences or orders against other entities under s 123 of the Act are less common in the context of discretionary testamentary trusts and will not be covered by this chapter.

Transfers for less than market value 3.27 Certain types of transfers of property which occur in the five years before the commencement of bankruptcy are void

against a trustee in bankruptcy if the transferee gave no consideration or less than market value for the property to the now bankrupt transferor pursuant to s 120 of the Bankruptcy Act 1966. There are, however, no distinct principles for determining market value and this can leave participants quite uncertain when attending to restructuring their affairs or the affairs of their clients.51 In Thomas v Tyler (No 2),52 the court found that though there is always the usual argument between valuation methodologies and valuations figures, ultimately if it is found that a transaction was less than market value, then the transaction is voidable and the property is to be reconveyed to the trustee, unless it is an exceptional case.53 Though there are a plethora of prospective transactions, which are considered to fall within the ambit of s 120, the takeaway point with respect to s 120 is that there may be certain assets which appear at face value not to be the property of the testator which may be subject to this voidance regime. In those circumstances it is important to consider that even if those assets were validly transferred to a beneficiary prior to the death of the testator, equity may prevail and assist the trustee in bankruptcy in recovering such assets, either through constructive trusts or through principles of tracing.54

Transfers made with an intention to defeat creditors 3.28 Section 121 of the Bankruptcy Act 1966 applies to property transferred to others for the purpose of defeating creditors. The section provides that a transfer is void against a trustee in bankruptcy if the transferor’s main purpose was to prevent the transferred property from becoming divisible among the transferor’s creditors (or to hinder or delay that process) and the property would probably have become part of the transferor’s

estate or would probably have been available to creditors if the property had not been transferred. This provision is mainly irrelevant in circumstances where a testator is seeking to implement testamentary trusts into their estate plan. However, the provision may operate where a testator seeks to implement one or more of the strategies in Chapter 11. In Peldan v Anderson,55 the court considered whether a unilateral severance of a joint tenancy by a person who subsequently became bankrupt, constituted [page 54] a ‘transfer of property’ for the purposes of s 121. The court ultimately found that as the interest being disposed of was one which was never going to form part of the bankrupt’s estate, in that bankruptcy severs joint tenancies in any event, there was no transfer to defeat creditors. In Prentice (trustee of the property of Cummins, a Bankrupt) v Cummins (No 5)56 (affectionately known as Cummins’ case), the court considered whether general dispositions of property for asset protection purposes, say for high-risk individuals such as directors, should be subject to voidance under s 121. Cummins’ case and the High Court decision57 are discussed in Chapter 11.

ASSET PROTECTION CONSIDERATIONS FOR BANKRUPTCY PROTECTION 3.29 As discussed in this chapter, a discretionary testamentary trust cannot offer absolute asset protection. Asset protection is a compromise. If the primary beneficiary of a trust is given other offices or powers such as those of appointor or trustee and the control that

goes with them, the interest held by the primary beneficiary can become elevated to a point at which the asset protection is lost. This is particularly true if the primary beneficiary is made appointor or trustee without limitations or conditions. When attending to estate planning and the drafting and implementation of discretionary testamentary trusts purely for asset protection purposes, it is vital that the legal practitioner always be mindful of a number of factors: • • • • • •

the growing definition of ‘property’ under the Bankruptcy Act 1966; the need to separate the roles of Appointor, Protector, trustee and beneficiary; the relevance of pre-testamentary transactions on an estate; the effect of the voidance provisions under ss 120 and 121 of the Bankruptcy Act 1966; the risks associated with relying on joint tenancies for testamentary property transfer; and the risks associated with severances of joint tenancies to defeat creditors.

Part II — Family Law and Asset Protection Limits of asset protection in relation to family law property settlements 3.30 A combination of increased powers given to the Family Court by legislation,58 and an evolving readiness on the part of the Family Court to ‘look [page 55] through’ or ‘bust’ a trust where the Family Court considers the trust to be the ‘alter ego’ of a party to a marriage or de facto relationship,59 has significantly eroded the protection offered to beneficiaries of discretionary trusts in family law property settlements. The Family Court nowadays robustly exercises a power to ‘bust’ a trust in ways that courts in other areas of law have not come close to. A discretionary trust for the vast majority of families is a means of managing assets and distributing income. It is an effective tool to minimise income tax. It enables control to be maintained and allows the property to be used and distributed for the benefit of family members. When parties separate, the legal form by which assets are held and managed has great significance in family law property settlements. An analysis of whether the trust forms part of the property pool or is a financial resource available to one of the parties or is a mere expectancy may have great bearing on the overall outcome and the distribution of assets between the parties. Although most of the decided cases relate to inter vivos discretionary trusts (‘family discretionary trusts’ or simply ‘family trusts’), most of the principles and reasoning applied by the courts

to those trusts could apply equally to discretionary testamentary trusts. This would particularly be the case where the testamentary trusts and the inter vivos ‘family trusts’ are structured similarly. Undoubtedly, as the popularity and use of discretionary testamentary trusts increase, we will see the jurisprudence relating to family trusts and testamentary trusts developing in tandem. As noted earlier, a vexing and unresolvable dilemma faces a testator who is considering how to structure testamentary trusts to protect assets from being included in the property pool, in the event the beneficiary’s relationship with their spouse or de facto partner breaks down. For example, the testator wants to give each of their adult independent children complete freedom and control over their own inheritance. Usually this will mean that the testator wants each child to have her or his own share of the estate in their own separate trust; it will also mean that the testator wants the degree of control which the adult beneficiary has over her or his own trust to be complete at all times. As in the case of asset protection from bankruptcy, unfortunately these wishes are simply irreconcilable with, and fatal to, the testator’s desire that the discretionary testamentary trust offers asset protection in the event of their child’s separation from their de facto partner or spouse. In the past, a beneficiary who was a party to property proceedings between themselves and their former partner/spouse might have been able to repel a claim that the trust assets be included in the property pool by relying on the fact that he or she had no proprietary interest in the trust assets. That is [page 56] simply no longer true. Unless the testator is willing to impose strict controls, exclusions and fetters, all of which will greatly limit the beneficiary’s freedom to enjoy or use her or his trust, any

protection the trust appears to offer against a relationship breakdown will be illusory.

‘TRUST BUSTING’ POWERS OF THE FAMILY COURT Introduction 3.31 There are many ways that the Family Court can effectively ‘bust’ discretionary trusts or at the very least render them ineffective for the purposes of asset protection. For the purposes of discretionary testamentary trusts, the five powers that this chapter will look at are: 1. the power to treat trust assets as property of the parties to the marriage; 2. the power to treat trust assets as a financial resource for a party to the marriage; 3. the power to set aside transactions under s 106B of the Family Law Act 1975 (Cth) (‘Family Law Act 1975’); 4. the power to alter the ownership of property of a third party under Pt VIIIAA of the Family Law Act 1975; and 5. the power to treat the trust as a sham.

1. The power to treat trust assets as property of the parties to the marriage or de facto relationship 3.32 In determining property disputes, the Family Court or Federal Circuit Court has power to alter the property interests of parties pursuant to s 79 (married couples) or s 90SM (de facto couples) of the Family Law Act 1975.

The case law identifies a preferred four-step approach to altering property interests:60 1) Identify and value all property, liabilities and financial resources of the parties as at the date of the hearing: ss 79(1)/90SM(1). 2) Identify and assess the contributions of the parties and determine the contribution-based entitlement of the parties expressed as a percentage of net value: ss 79(4)(a), (b), (c)/90SM(4)(a), (b), (c). 3) Identify and assess relevant matters referred to in ss 79(4)(d)(3) (f)/90SM(4)(d), (e), (f), including matters in ss 75(2)/90SF(3) as far as relevant, and determine any adjustments that should be made (frequently called ‘future needs factors’). [page 57] 4) Consider the effect of findings and resolve what order is just and equitable in all the circumstances of the case: ss 79(2)/90SM(3). The case law, including the High Court decision in Stanford v Stanford61 and the Full Court of the Family Court decision in Bevan & Bevan,62 suggests that as a preliminary step, the focus should be on whether it is just and equitable to make any order at all altering the property interests of parties: In many cases where an application is made for a property settlement order, the just and equitable requirement is readily satisfied by observing that, as the result of a choice made by one or both of the parties, the husband and wife are no longer living in a marital relationship. It will be just and equitable to make a property settlement order in such a case because there is not and will not thereafter be the common use of property by the husband and wife. No less importantly, the express and implicit assumptions that underpinned the existing property arrangements have been brought to an end by the voluntary severance of the mutuality of the marital relationship. That is, any express or implicit assumption that the parties may have made to the effect that existing arrangements of marital property interests were sufficient or appropriate during the continuance of their marital relationship is brought to an end with the ending of the marital relationship. And

the assumption that any adjustment to those interests could be effected consensually as needed or desired is also brought to an end. Hence it will be just and equitable that the court make a property settlement order. What order, if any, should then be made is determined by applying s 79(4).63

As outlined above in the four-step process, the court requires that the property of the parties, either in sole names, or jointly owned or controlled by the parties together, or with anyone else, be identified. There is a duty on all parties to provide full and frank financial disclosure of their financial circumstances.64 This is critical to ensure parties have an understanding of the machinery of complex structures, if any. It is not unusual for one party in a relationship to assume the role of chief operator of the family finances and for the other party to have little to no understanding of the details. A failure to disclose all relevant documentation may result in the court making orders in favour of the innocent party.65 Under the Family Law Act 1975, property in relation to the parties to a marriage or a de facto relationship or either of them, means property to which those parties are, or that party is, as the case may be may, entitled, whether in possession or reversion.66 [page 58] Property has a very wide definition in family law jurisprudence. It is descriptive of every possible interest which the party can have.67 This means that the court is required to look at all of the property, in its various forms, to which parties have an entitlement. When looking at trusts in a family law context, judges are empowered to reject a party hiding behind the ‘corporate veil’ and a trust structure that is contrary to the manner with which they have dealt with the property of the trust. In taking this approach, it is critical that the structure of discretionary trusts is analysed.

Practically, when faced with a trust in a family law context, the following questions should be asked: • •

• • •

Who is the settlor and responsible for establishing the trust? Who are the trustees? A trustee holds legal title to the property in the trust and controls the trust. The trustees owe a fiduciary duty to the beneficiaries of the trust. Who is the appointor? This person has effective control over the trust and the property of the trust. Who are the beneficiaries? Does the trustee have a discretion to make any or no distributions?

The answers to these questions, together with the trust deeds and the financial documents relevant to the trust, allow the degree of control and influence that a party has over the trust to be determined. A discretionary testamentary trust typically protects a party by making the party a mere beneficiary so that property of the trust cannot be regarded as property of the party. However, well-established case law indicates that various additional factors can elevate the beneficiary’s interests to the point where the trust is the ‘alter ego’ of the beneficiary. For example, if there has been a demonstrated willingness and/or ability to control the trust, then despite any apparent limitations on the party’s role in the legal structure of the trust, the court will likely deem the assets or part of them to be property of a party to a marriage or de facto relationship and available for division in a property settlement. The essence of the additional factors is the ability of the beneficiary to exercise control, but the threshold is not so high that the claimant needs to show that the beneficiary has positive ‘control’ over the trustee of the discretionary trust; it is sufficient to show mere ‘influence’.68 Courts are reluctant to allow assets to be excluded from being property of the parties, for no other reason than that the assets are owned by a trustee and not the parties themselves. In the Marriage of Ashton69 concerned a husband who was the

appointor of the trust. He was neither a beneficiary nor a trustee. He could theoretically have taken shares in a company that was an eligible beneficiary, and then either appointed himself as trustee or appointed a trustee that was ‘his own creature’. On this basis, the property of the trust was considered to be his for the purpose of establishing the property of the parties: see 3.38. [page 59] In In the Marriage of Stein,70 the only asset in the husband’s name was the former matrimonial home. The husband’s business was conducted in the name of a company as trustee for the family trust. The husband and his accountant were the directors of the trustee company. Under the terms of the trust deed, the husband was the sole beneficiary of the trust. An advance from the funds of the trust had been used by the husband towards the purchase of a property in the name of a third party. The court found that despite the husband requiring his accountant’s agreement, the company was a ‘mere puppet’ of the husband or his ‘alter ego’. By virtue of being a director of the trustee company, the other director being a paid employee of his who was required to act at his direction, he had ‘the power to apply the income and property of the trust for his own benefit’. The Full Court, comprising Evatt CJ, Wood SJ and Nygh J said: It is not open to a party to assert on the one hand that the assets acquired in a family trust are not his and at the time deal with them as if they are. There is no doubt that for general purposes Mr Barry Stein considers the business known as Barry Stein Nissan to be his, whatever arrangement he may have made for taxation purposes. It is a regrettable fact that frequently spouses, usually husbands, come to this court asserting on the one hand that assets placed in the wife’s name do not really belong to her but to the husband, having been placed there for taxation purposes, and asserting at the same time that assets standing in the name of a third party, such as a trustee, do not really belong to the husband. Fortunately the law does not compel us to adopt such an artificial view.71

The court found that the husband had the power to apply income and property of the trust for his own benefit and an order

was made requiring the husband to pay an additional sum out of the trust to the wife. It follows that the central issues in determining whether the assets in a trust are part of the property pool are the control and the degree of control or influence that a party has in the trust.

2. Are a family trust of the parties to the marriage/de facto relationship and its assets financial resources of the parties or a mere expectancy? 3.33 If a party is successful in establishing that the trust is not property, this does not rule out the trust and assets or income received being identified and classified as a potential financial resource or source of support available to a party.72 Financial resources are required to be identified at step one of the four-step process outlined above in 3.32. While financial resources are not included in the property pool to be divided between the parties, they are critical in [page 60] an analysis of the third and fourth stages of the process. Section 75(2)(b) and (o) (for married couples) and the mirror s 90SF(3)(b) and (r) (for de facto couples) require a court to consider ‘the income, property and financial resources of each of the parties …’ as well as ‘any fact or circumstance which, in the opinion of the court, the justice of the case requires to be taken into account’ in its determination of property disputes and the adjustment, if any, to be made. A direct order may not be made in relation to a financial

resource, but it is likely to be taken into account in deciding the orders to be made in respect of any property of the parties. This means that even where the court acknowledges that a party to a marriage or de facto relationship (as a mere beneficiary of a discretionary testamentary trust) does not hold property in relation to the trust assets, they may still view that interest (and the degree to which they are likely to benefit in the future) as a ‘financial resource’. Hence, although the assets of the trust will be protected from division, the court has discretion to take into account the financial resource that the trust provides a party and make any adjustment necessary to ensure a just and equitable outcome. Each case needs to be judged according to its unique circumstances and any adjustment will be looked at in monetary terms, rather than strictly percentage terms.73 This could mean that where a testamentary trust is found to be a financial resource of a party, the party in question may not in the end be much better off than if the trust assets were found to be property of the party. The court could hold that the party in question is able to rely on the financial resource of the trust and on that basis the court could make an adjustment in favour of the other party. On the other hand, in the circumstances of the case, justice and equity might mean that no adjustment is required. If the trust is treated as a financial resource, the fact that a party has been able to have their trust property kept intact may be of limited comfort. Typically, the difficulty for parties and the court when treating a trust as a financial resource is quantifying it and comparing it with the value of the assets (if any) in the pool for division. If the value of assets a party has ‘foregone’ as a result of the trust being considered a financial resource is similar to the value of the party’s interest in the trust, the party may gain little by having the interest in the trust treated as a financial resource as opposed to the party’s property. It will depend on the size of the pool and the overall division of the pool between the parties. Including the trust in the pool may make the pool larger, and

result in one party enjoying a greater share of the assets than if the trust had been considered a financial resource. If a party’s interest in the trust is more valuable than the overall pool, it may be advantageous to that party for the trust to be treated as a financial resource rather than as part of the pool. Again it will depend on the size of the pool and the court’s overriding duty to ensure a just and equitable outcome in the circumstances of the matter. [page 61] A finding that a party’s interest in a trust is a financial resource is generally better than a finding that trust assets are property of the party, so a trust that gives asset protection strong enough to prevent the trust assets from being property of the party but still a financial resource is probably better than nothing. Practically speaking, if a party to the relationship does not have any measure of control over a trust and the property is under control of third party trustees, then the trust is likely to be treated at most as a financial resource. A finding that the beneficiary has a mere expectancy and that the trust was neither property of the party nor a financial resource will mean that the asset protection strategies have been successful. If the party has a mere expectancy, the trust will likely be disregarded in the property proceedings. In White and Tulloch v White,74 the question was whether a party had an expectancy in their mother’s will. The Full Court said: We do not consider there is any absolute rule. The ultimate criterion is whether the evidence is, or may be, relevant to the just and equitable process under s.79. An expectancy of inheritance will not be relevant in many s.79 proceedings. In the end, relevance must depend upon the nature of the claims being put forward and the facts of the particular case …There must be a worthwhile connection between a specific element of the party’s case and the suggested expectancy.75

In deciding whether the party had a mere expectancy, the court will consider whether the party is a beneficiary to a trust, the number of beneficiaries in the trust and the history, frequency and

value of the distributions made to the party during the operation of the trust. If the party is a beneficiary of a trust, there are other beneficiaries, and it is known that the distributions to the party have been limited, the question comes down to the rights and future entitlements of the beneficiaries of the trust: is the beneficiary’s interest really discretionary? Ultimately, the court will decide in the circumstances whether justice and equity require that the interest in the trust should be taken into account in deciding the property outcome for the parties.

3. The power to set aside transactions pursuant to s 106B of the Family Law Act 1975 3.34 The Federal Circuit Court, exercising its jurisdiction in family law, and the Family Court, are empowered to set aside transactions which would seek to defeat an existing or an anticipated order in proceedings. Section 106B(1) provides: In proceedings under this Act, the Court may set aside or restrain the making of an instrument or disposition by, or on behalf of, or by direction, or in the interest of, a party, which is made or proposed to be made to

[page 62] defeat an existing or anticipated order in those proceedings, or which, irrespective of intention is likely to defeat any such order.

Section 106B imposes the following requirements: 1. An application under s 106B cannot stand by itself and must be ancillary to proceedings on foot, or completed.76 2. There must be an instrument or disposition, for example a sale, transfer of gift.

There must be an element of control by the party at the time of 3. disposition so that either: a) the instrument or disposition has been made by a party or on behalf of a party, or by direction of a party, or in the interest of a party; or b) the instrument or disposition is proposed to be made by a party or on behalf of a party, or by direction of a party, or in the interest of a party. The applicant bears the proof of establishing that the immediate effect is to place beyond the reach of the applicant the very asset in respect of which an order is sought.77 The court looks to the effect, as opposed to the intention. If the intention to defeat is established, then s 106B applies. If there is no such intention, the question is whether the disposition was likely to defeat the order or anticipated order. It was this power that Strickland J, the judge at first instance in Stephens and Stephens78 (which became Kennon v Spry in the High Court79) relied on to void the actions taken by the husband to remove the trust capital to different trusts for the benefit of the parties’ children. Kennon and Spry is discussed further at 3.41. Relief under s 106B is purely discretionary, so that even if all of the requirements are made out, the court might still decline to grant relief.

4. The power to alter the ownership of property of a third party under Pt VIIIAA of the Family Law Act 1975 3.35 In 2003, the Family Law Act 1975 was amended to include Pt VIIIAA. This Part gives the court power in relation to property of a party to a marriage (and s 90TA means that Pt VIIIAA applies to de facto couples) to make an order under s 79 or s 90SM

(alteration of property interests) or s 114 or s 90SS (injunction) that is directed to, or alters the rights, liability or property interests of, a third party.80 The court’s power is discretionary.81 The legislation [page 63] requires a sufficient connection between the remedy and the division of the property between the parties to the marriage or de facto relationship. Affording procedural fairness is critical. Part VIIIAA expressly overrides any other law, written or unwritten of the Commonwealth or a state, and overrides anything in a trust deed or instrument.82 Practitioners are no longer required to rely upon the court’s accrued powers when seeking orders against third parties in the terms of Pt VIIIAA, and aggrieved parties are able to seek a range of remedies. The amendments came 24 years after the High Court’s decision in Ascot Investments Pty Ltd v Harper,83 which restricted the court’s power to make orders binding on third parties. It was found in that case that a court has no power under s 114 either to affect an existing right enjoyed by a third party or to impose upon a third party a duty to which he or she was not otherwise subject. The exceptions to this principle related to sham transactions and thirdparty entities such as a company controlled by a party to the marriage. The constitutional validity of Pt VIIIAA has been questioned. Justice Brereton wrote in a paper delivered in October 2005: The constitutional validity of Part VIIIAA is questionable and it should not be assumed that the new provisions would survive a constitutional challenge, though they may … Until the constitutional question is resolved, practitioners are likely to continue to try to avoid invoking Part VIIIAA when there is another less controversial remedy available.84

5. The power to treat the trust as a sham 3.36 It is open to a party in property proceedings, seeking to have discretionary trust assets considered property to a marriage, to argue that the trust is a sham. A sham has been explained as follows: Shams are transparent. No rights, obligations or fiduciary duties arise when a trustcreating transaction is set aside as a sham. All property involved passes on resulting trust to the person wherefrom it came. If a discretionary trust were declared a sham, the court could exercise its jurisdiction under s 79 of the Act and follow the property settled on trust free from the inference of equitable doctrines. A transaction is a sham if the parties to it did not intend the transaction to be effective according to its terms … Either a trust as a whole, or a particular provision in a trust, can amount to a sham. For a trust as a whole to be a sham, the thing to be considered is the trust-creator’s intention at the time that the trust was settled or declared. His or her unilateral intention

[page 64] or capabilities possessed by persons able to control the trustee are of no relevance to the test.85

In Ascot Investments Pty Ltd v Harper, Gibbs J said: The position is, I think, different if the alleged rights, powers or privileges of the third party are only a sham and have been brought into being, in appearance rather than reality, as a device to assist one party to evade his or her obligations under the Act. Sham transactions may always be disregarded. Similarly, if a company is completely controlled by one party to a marriage, so that in reality an order against the company is an order against the party, the fact that in form the order appears to affect the rights of the company may not necessarily invalidate it. Except in the case of shams, and companies that are mere puppets of a party to the marriage, the Family Court must take the property of a party to the marriage as it finds it.86

The authors are not aware of any cases in which a party to property proceedings raised sham in an attempt to bring discretionary testamentary trust assets before the court. Attempts have been made in relation to discretionary inter vivos trusts.87 An interesting question to consider: If a discretionary testamentary trust was declared a sham, to whom would the assets of the trust devolve? The settlor is the testator, not the beneficiary/party to

the proceedings. Presumably, the argument would have to run along the lines that the trust creation provisions of the will being relied on were not genuine, and in fact the will made an absolute gift to the beneficiary (party to the property proceedings) who then created a trust (inter vivos by necessary implication) which itself was a sham. One would also think that in relation to an inter vivos trust, an argument that the transaction setting up the ‘trust’ was a sham would only be useful if the settlor of the trust were a party to the marriage. This follows from the consideration that if the settlor was a party outside the marriage, the property would simply remain the property of that third party and would not pass to the other party to the marriage. However, in Keach v Keach,88 a wife sought to argue that an inter vivos trust created by the father of the husband in the proceedings was a sham. The court gave full consideration to the argument, which ultimately failed on the evidence. One would have thought the argument need not have been fully considered, since presumably if the trust had been held to be a sham, the outcome would have been that the assets would have resulted in favour of the father and hence be outside the property pool: see further 3.45. [page 65]

CASES WHERE THE FAMILY COURT HAS LOOKED THROUGH DISCRETIONARY TRUSTS Background 3.37 It is not surprising that almost all of the major cases where the Family Court has looked through discretionary trusts have involved inter vivos rather than testamentary trusts. Inter vivos trusts will always be more likely than testamentary trusts to be the

subject of attempts to have the trust assets brought into the marital pool. For one reason, a testamentary trust will, by definition, never have been created by a party to a marriage, and will almost never contain assets contributed to it by a party to a marriage. Further, there are far more inter vivos trusts than testamentary trusts in existence. However, the inter vivos trust cases need to be considered. The reasoning used by the Family Court to ‘look through’ discretionary inter vivos trusts could, in most cases, apply just as well to a discretionary testamentary trust of which a party to the marriage is a beneficiary or appointor, and further the cases show the evolving willingness of the Family Court to look through discretionary trusts of whatever type. The cases enable one to identify the issues that need to be kept in mind when structuring a discretionary testamentary trust with protection from a family law settlement in mind. The cases that follow are perhaps a representative but by no means exhaustive collection of cases relevant to ‘trust busting’ by the Family Court.89 In the Marriage Of: Timothy Mills Ashton Appellant/Husband and Phillipa Lenore Ashton Respondent/Wife Appeal (‘In the Marriage of Ashton’)90 3.38 • • •

•

The facts of the case were as follows: The husband and wife were married in 1974 and there were two children of the marriage born in 1977 and 1980. In 1977, a family trust was created with the husband and his cousin appointed co-trustees of the trust. In 1980, the husband removed himself as trustee and appointed as trustee a company in which he and the wife were directors and shareholders. In 1982, the husband removed that company as trustee and appointed a second company as trustee in which the husband and his cousin were shareholders. The cousin held

his share on trust for the husband. The husband had full control of the assets of the trust and conceded this at trial. The husband was not a beneficiary, but the wife was a beneficiary by class (being a ‘past or present wife’ of the husband). [page 66] •

The parties separated on 1 January 1982 and the wife commenced proceedings in the Family Court for a property settlement and lump sum spousal maintenance.

In relation to the issue of the family trust, the trial judge found that the trust was the ‘alter ego’ of the husband and ordered the husband to appoint himself trustee of the family trust and cause the trust to pay a lump sum to the wife. The husband appealed. He sought an order that the wife’s application for property settlement and lump sum spousal maintenance be dismissed and that the wife surrender any claim that she had in respect of the family trust. The husband argued that he did not personally own sufficient assets to meet the order and that the property of the trust was not his property. He also argued that the trust deed precluded him from appointing himself as trustee. The Full Court disagreed and held: It was conceded throughout that the husband was in full control of the assets of the trust, and the evidence made it clear that he was applying them and income from them as he wished and for his own benefit. Having regard to the admissions made during the hearing, there are good grounds for saying that the trust is no more than the husband’s alter ego. However, even on the construction of the trust deed in the light of the relevant facts, it would seem that the husband has power to appoint himself as trustee. It is apparent that by the deed the husband was, in fact, appointed trustee and that he acted as such in accordance with the terms of the deed … In the result, having regard to the powers and discretions which the husband has, and having regard to what had in fact taken place, for the purposes of s. 79, the husband’s power of appointment, and all the attributes it carries with it, amounts

to de facto ownership of the property of the trust. His Honour’s order that he should appoint himself trustee so as to make a requisite payment was not contrary to the trust deed on its proper construction, nor did it require the husband to deal with property which was not his own … The powers which the husband has in the Ashton Family Settlement give him control of the trust either as trustee or through a trustee which is his creature, and at the same time he is able to apply all the income and property of the trust for his own benefit, in my opinion, in a family situation such as the one here, this Court is not bound by formalities designed to obtain advantages and protection for the husband who stands in reality in the position of the owner. He has de facto legal and beneficial ownership.91

The Full Court went on to say: His Honour found that the husband’s greatest resource was the trust. In my opinion, his Honour would have been entitled to find that the whole of the trust was in reality the husband’s property.92

[page 67] The reasoning in the case was that the husband could use his position as appointor to appoint himself as trustee and make selfinterested distributions. This reasoning does appear to ignore the inherent fiduciary duties that apply not only to the husband as appointor, but which would also apply to him if he appointed himself as trustee (or would apply to any trustee he appointed, regardless of whether they were his ‘creature’ or not). This case was followed and cited in many of the cases that follow in this chapter, and Professor John Glover in his article on the intersection of fiduciary duties and the Family Court93 noted that it has been said that the authority of Ashton was increased by the fact that the High Court refused to grant the husband leave to appeal to the High Court. In the article Professor Glover makes the compelling point: … consider the implications of the Ashton reasoning. Should a spouse’s assets, for the purposes of property division, include the value of what he or she has the opportunity to steal at work? The case’s finding that a party was able to control the determination of discretionary trustees was premised on the controller’s resort to unlawful means. Fiduciary duties of discretionary trustees are rules of law standing

in a series with rules of the criminal law and the law of torts. A controller who procures a trustee’s breach of fiduciary duty commits an unlawful act.94

In the Marriage of Davidson95 3.39 This case is a saga. The powers which the husband had in respect of the family trust are similar to those of the husband in Ashton. The facts are as follows: •

•

The husband owned and controlled a trustee company which was trustee of a discretionary family trust of which he was the sole appointor but not a beneficiary. The wife and grandchildren were beneficiaries. The husband made cash distributions from the trust to the wife and his grandchildren (who either then gave or loaned that cash back to him).

Cook J at first instance ordered that the husband pay the wife $700,000 from the trust. The husband sought a stay of the orders,96 pending his appeal to the Full Court, with one of the grounds being that he could only make the payment to his wife by causing the trustee company to make a distribution to him, and because he was not a beneficiary this would be a breach of trust. His application for a stay was refused. [page 68] In refusing to grant the stay, Cohen J noted the trial judge’s finding that the trustee company was: … the alter ago of the husband, who, under the terms of the trust, cannot be trustee, but does have the right to appoint or remove the trustee. His Honour also found that he was “… entirely satisfied that the trust was indeed the creature of the husband within the full meaning and effect of the judgment in Ashton’s case and Stein’s case.” It is clear to me that by this, in context with the whole judgment, his Honour intended to conclude and did in fact conclude, that, although the trust is not a sham, it is controlled and has always been controlled by the husband, and it

and the trust property have always been used by the husband as though they were his sole property.97

Cohen J affirmed that the trial judge had correctly followed the decision in Ashton and treated the assets of the trust as property over which the husband had full control and could make payment out of without conflict as to his duties as an appointor under the trust. The trial judge regarded the assets of the trust as the de facto property of the husband by virtue of his control of the trustee company, thereby enabling him to have recourse to those assets to satisfy the lump sum payment to the wife. The husband appealed to the Full Court.98 One ground of appeal was that the reasons were ambiguous. The argument was that it was not clear whether the trial judge found that the trust was a sham that did not exist or, that the trust had legal existence with consequent rights to the beneficiaries under the trust but that it was so manipulated by the husband, and so much under his control, that the assets might be regarded as his resource. The husband said that if the position was the latter, it was not open to the trial judge to order payment of $700,000 to the wife because the husband could not legally become an eligible beneficiary of the trust and any action to pay himself a lump sum would amount to a breach of trust rendering him liable to the beneficiaries. The question became whether or not the husband was able to put himself in a position to pay himself through the trust. The Full Court determined he could and dismissed the husband’s appeal. The Full Court held: It was argued that such a manipulation of the provisions of the trust would amount to a breach of the fiduciary duty of the husband as appointor relying on the decision of Kay J in re: Skeats’ Settlement (1989) 42 ChD 522. Whatever may have been the position 100 years ago, Australian Courts today have to look at the reality of the situation and the purpose which family trusts serve today. A limitation as to the husband’s power to control the assets and income of the trust in accordance with the provisions of the trust deed, is inconsistent with the reasoning of the Full Court in Ashton. Leave to appeal from that decision was refused by the High Court on 5 December 1986 by a bench composed of Gibbs CJ, Wilson and Brennan JJ.

[page 69] Whatever might be the remaining effect of Skeat’s case, it is not authority for the proposition that the husband is prevented from appointing a trustee who is compliant to his wishes. It is our view, therefore, that if the husband were to follow the procedure outlined above, it will not render him liable to any other beneficiary.99

The Full Court said in relation to the question of distribution of capital and notice to the beneficiaries of the trust of the distribution: We do not regard the lack of notice thereof, as in any way warranting interference with the order. In any event it is not disputed that both trustee companies had been served with the wife’s amended application and neither chose to intervene. We adopt the words of Strauss J when dealing with the Ashton Family Settlement Deed. That no person other than the husband has any real interest in the property or income of the M.A.V.K. Trust except at the will of the husband, and that therefore he has the defacto ownership of the trust property. We are of this view notwithstanding the existence of a valid trust.100

It is hard to reconcile the above statement with the principles of trust law. If one party is said to have absolute unfettered control over property, how can that property also be the subject of a trust? The matter did not end there. The husband made an unsuccessful application to the High Court for special leave to appeal. In October 1991, Lestato Pty Ltd, the company that the trial judge had found was the husband’s alter ego, executed a Deed of Variation removing the husband as appointor of the trust. Around this time, the wife applied to enforce the original trial judge’s order and be paid her monies. That application was heard by the Family Court in August 1993. The wife was successful. An order was made that the Deed of Variation executed by Lestato Pty Ltd removing the husband as appointor be set aside, pursuant to s 85 of the Family Law Act 1975 (now s 106B) because it was an instrument that had been created as part of a scheme to defeat the original order and the wife’s entitlement. A second order was made pursuant to s 80(1) of the Family Law

Act 1975 requiring the husband to execute an agreement nominating an accountant of the wife’s choosing to act as appointor of the trust. Section 80(1) sets out the ‘general powers of the Court’. These powers are wide and include, among other things: making an order that any necessary deed or instrument be executed and that such documents of title be produced or such other things be done as are necessary to enable an order to be carried out effectively or to provide security for the due performance of an order;101 appoint or remove trustees;102 order that payments be made direct to a party to the marriage, to a trustee to be appointed or into court or to a public authority for the benefit [page 70] of a party to the marriage;103 and make any other order (whether or not of the same nature), which it thinks it is necessary to make to do justice.104 In essence, the court has the power to change the legal title of a trust. In the current case, the method of changing legal title was directing the husband to exercise his power of appointment (once it was restored) to ensure the wife was paid the funds out of the trust she was entitled to, pursuant to the original orders. The husband appealed these orders to the Full Court, and the appeal was dismissed.105 Following this, the wife’s accountant, Mr Smith (who had been made appointor of the trust due to the s 80(1) order), appointed Andco Nominees Pty Ltd — being a company owned by the accounting firm — as trustee of the trust. Further court proceedings were then undertaken in the Supreme Court of New South Wales, Equity Division: Andco Nominees Pty Ltd v Lestato Pty Ltd.106 Those proceedings related to an order vesting shares previously held within the trust in the new trustee,

appointed by the new appointor pursuant to the orders made by virtue of s 80(1). The claim was that the appointment of Andco Nominees Pty Ltd as trustee be set aside, on the basis that the appointment of Andco Nominees as trustee was a corrupt appointment, being a fraud on a power to appoint a new trustee. It was argued the fiduciary power of appointment was not being used for the purposes of the due administration of the trust but rather to benefit the appointor by remunerating the accountant indirectly through the MAVK Trust. The accountant, Mr Smith, who had been ordered by the court to be Appointor, was a member of the accounting firm Horwarth and Horwarth. Mr Vella, a partner with Horwarth and Horwarth, was also a director of Andco Nominees Pty Ltd, which was a wholly owned company of the same accounting firm. Andco Nominees Pty Ltd was appointed as trustee by the appointor. Andco Nominees was entitled to charge for their services of being trustee. The husband argued that the choice and appointment of the trustee was a fraud on the power of the appointor to appoint a new trustee, as it was made for direct or indirect gain from the trust and not in the best interests of the administration of the trust. The court refused to set aside the appointment. Santow J considered the argument that the appointor (the wife’s accountant) was exercising his power of appointment to benefit himself as he had appointed a company wholly owned by his accounting firm to act as a paid trustee of the trust): I am satisfied from the evidence that there is no basis for concluding that the trustee Andco Nominees would directly or through Mr Vella charge more than permitted by the trust deed. I am accordingly satisfied that any

[page 71] indirect benefit thereby derived by Mr Smith through any arrangement with Horwarth and Andco Nominees, could not then infringe the trust deed.107

The conclusion that the appointment was not a fraud on the power because there was no evidence that the appointed trustee might charge in excess of what was permitted under the deed is open to comment. The absence of evidence to suggest that the appointed trustee might charge in excess of what was permitted under the deed hardly seems relevant to the question whether the choice of trustee was made in the interests of the objects of the trusts or for the financial interest of the appointor. The husband’s second argument was that the power of appointment was not being used for the due administration of the trust, but rather it was being used in circumstances where the appointor and trustee were already committed by prior agreement to cause the trust property to be appointed to the wife. The evidence was that a potential beneficiary of the trust (a cousin of the husband) had written to the appointor seeking confirmation that the appointor would exercise his powers in the aid of the administration of the trust and not for an ulterior purpose. In response, he received a letter from solicitors who were acting for the wife, the appointor and for the newly appointed trustee company. The solicitor’s response stated: We are instructed to advise that the trustee intends to refer to, and act in accordance with the judgments of their Honours Mr Justice Cook and Ellis and of the Full Court of the Family Court of Australia in relation to the administration of the trust.108

This appears to suggest that an antecedent decision in favour of the wife had been taken. The trial judge at first instance had ordered that the husband pay the wife $700,000 from the trust, and the Full Court had rejected the husband’s appeal to overturn that decision. In rejecting the argument that there had been an antecedent agreement between the trustee and appointor as to the trust property being allocated to the wife, Santow J was of the view that the validity of any distribution could not be determined by the manner in which Andco Nominees was appointed, but rather the manner in which they exercised their obligations to the beneficiaries. He found:

Thus it is certainly the case that Andco Nominees must first consider the interests of all potential objects. It may reach a conclusion favourable to one of them. It is possible that that conclusion might be in favour of Mrs Davidson who is an object. However, it is also possible that the decision might be otherwise. So long as the outcome is not preordained, either in the sense that there is some pre-existing agreement that Mrs Davidson would benefit, or an arrangement to that effect on the part of the Trustee from the time of appointment, the appointment of Andco Nominees could not be said to be a fraud on the power, having regard to the wide terms of

[page 72] CL12 of the Trust Deed. The actual determination falls to be tested by the process followed at the time it is made.109

The decision of Santow J was appealed to the New South Wales Court of Appeal and was dismissed on 27 October 1997, with Meagher JA expressing his views as follows: The second issue in the proceedings before Santow J, and apparently the only one before us, concerns alleged breach, or possible breach, of fiduciary duty by Andco. It is common ground that the MAVK Trust was a discretionary trust of the normal kind and it is also common ground that it is not a sham. In this regard it is a little difficult as Mr Grieve QC pointed out, to know what to make of the Family Court’s findings that the Trust’s assets were de facto Mr Davidson’s assets. Nor is the task of discovering what is, made any easier by the fact that the Family Court apparently thought that the payment of $700,000 from the assets of the trust would be perfectly proper and would discharge the obligation which arose under the Family Court order. Nor is the fact made any easier by the fact that the High Court seemed to have endorsed this argument. In the present case the argument for Mr George presented by Mr Grieve in this regard was that Andco Pty Ltd accepted the trusteeship of the trust under an agreement to see the Thurlstane shares, which constitute almost the entire capital of the trust, in order to pay Mrs Davidson her $700,000 and such an agreement would be in breach of trust. It is important in this regard to note exactly what findings of fact Santow J made after hearing all the evidence. They are as follows: 1. 2. 3.

That there was no such prior agreement. That Andco had no intention of blindly following any direction from anyone. That Andco’s present disposition, which his Honour found no reason to challenge, was to act in all situations according to the law.110

The wife was the victor at every stage of the proceedings. The

saga of In the Marriage of Davidson represents an important evolutionary point in the availability of trust assets when dealt with in family law matters. The courts have grown willing to recognise a trust as being in existence (that is not a sham), but at the same time to ignore the fiduciary duties of the appointor or controller of the trust. This seems to be the case irrespective of whether the appointor is a party to the parties’ property settlement or has been placed in the office by order of the court. Professor Glover notes111 in relation to In the Marriage of Davidson (No 2): A number of objections might have been taken. First the accountant presumably exercised the trustee’s dispositive powers in relation to the

[page 73] settlement as an officer of the Court. Restrainable conflict of duty and duty would seem to be entailed by this.112 Second, though a distribution was made to the wife as an eligible beneficiary, the accountant who was appointed trustee was unlikely to pay any or any sufficient regard to the claims of children or other discretionary objects when giving effect to the scheme of property distributions determined by the Court. It is equally a breach of trust not to consider the claims of all members of the class of eligible persons, as to distribute to a person who is ineligible. Third, the husband was required to exercise his trustee-appointing discretion by direction of a third party and not for the purposes of the trust. Family Court purposes are not trust purposes. An appointor who acts at the direction of the Court without seeking an exercise of state jurisdiction to give trust-administering directions may commit an illegal fraud upon a power.113

When the Davidson cases are read in totality, the cases that follow seem to be less an evolution or increase in ‘trust’ busting, but merely consistent applications of the reasoning in the Davidson cases. In the Marriage of Harris114 3.40 The husband and wife had commenced their 24-year marriage with no assets of significance. During their marriage they established a business that generated most of their assets. The

business initially started as a partnership between the husband and wife but was sold to a discretionary family trust. The trustee of the family trust was a company of which the husband, wife and son were director. The husband was both the appointor and guardian (‘guardian’ being equivalent to ‘Protector’ in the Precedents in Chapters 8 and 9) and also a beneficiary under the trust deed. The trial judge included the assets of the trust as property of the parties. The husband appealed to the Full Court arguing that what he had in the trust was a chose in action as a beneficiary under the trust and that such a chose in action, although property, had no real or ascertainable value. The Full Court dismissed the appeal and found: The husband had the fullest power of disposition over the property and the income of the trust, including the power to cause to have distributed to himself all of its income and all its corpus. If he should choose to do so, no person could complain of any breach of trust. If the trustee were to be unwilling to carry out his wishes, he could replace the trustee with another company which was in his effective control or any other person who would do his bidding. The very object of the Trust, as appearing from the

[page 74] instrument, was to put the husband, his appointor and guardian into the position of complete and unfettered control just as if he were the owner of the property. This arrangement was not a sham. It was a genuine transaction intended to bring about the legitimate income tax advantage and may have had other commercial motives. In our opinion, the husband’s interest as a beneficiary under the Trust in combination with his rights and powers as appointor and guardian place him, for the purposes of s 79 of the Family Law Act 1975, into the position of an owner of property which property is constituted by his interest and his rights and powers under the Trust. This property is properly evaluated as equivalent to the value of the assets of the Trust. Under s 79 the court may make orders altering the interests of the parties in this property. If necessary, the court may require the husband to exercise his rights and powers under the Trust Deed so as to bring about a settlement of property out of the corpus or income of the Trust for the benefit of the wife.115

The outcome was not surprising given the earlier cases. With

Ashton and Davidson as precedents and considering that the assets of the trust were marital assets and assets sourced from the business that had previously been a partnership of the husband and wife, together with the fact that the husband held all possible forms of interest in the trust, being a beneficiary, appointor, director of the trustee company and guardian/protector of the trust, the conclusion was clear. However, the case is interesting for the fact that the Full Court clearly indicated that while it might be true that a beneficiary of a discretionary trust merely holds a chose in action, that interest will elevate to property as soon as the beneficiary holds sufficient power to make distributions of part or all of the income and capital themselves without fetter. Kennon and Spry116 3.41 This decision brought before the High Court the question whether property in a discretionary trust is property of the parties and able to be accessed for the purposes of a s 79 order altering property interests. Among other things, it is an important decision in determining the concept of ‘property’ within the framework of the Family Law Act 1975. All the cases mentioned above involved a party to the marriage having some form of control over a trust, either as trustee with an ability to make a distribution to themselves directly or indirectly (for example, into a company that they hold the majority of shares), or as appointor with a power to appoint a trustee who could make such a distribution. As has been seen, courts have not hesitated to look through trusts where a party to the marriage has had power of this kind and has at the same time been a direct or indirect beneficiary. However, Kennon and Spry goes further. The High Court held that the assets of the trust could be considered property of the parties if a party to the marriage [page 75]

has control over a discretionary trust and could exercise the power not in favour of themselves but in favour of the other party to the marriage. The facts of the case and the course of events are set out here: 1. In 1968, the husband established an inter vivos discretionary trust in which he was both settlor and trustee. He had had the power to vary the terms of the trust. To avoid stamp duty, he did not execute a Trust Deed until October 1981. 2. Under the terms of the trust the eligible beneficiaries were the husband, any spouse of the husband, the husband’s issue, siblings and their spouses and issue. 3. In 1978, the husband married his wife and they had four children (all adult at the time of the hearing). 4. In 1983, the husband varied the terms of the trust to exclude himself as a beneficiary of the trust. 5. During the marriage, the husband contributed substantial assets to the trust. 6. In 1998, when the marriage was in difficulty, the husband again varied the trust deed so as to exclude the wife as a capital beneficiary. The Deed also provided that upon the husband’s death or resignation as trustee, two of his daughters would become trustees of the trust. If the husband ceased to be a trustee, no payment could be made out of the trust without his written consent. 7. In October 2001, the parties separated. 8. In January 2002, the husband established four separate trusts, being one for each of the parties’ four children and distributed equally to each of the four new trusts in equal shares, the capital and income of the trust. The terms of each trust were that the husband and each respective daughter held the power of appointment over the trust. The husband was the trustee. The husband and each daughter had the power to change the terms of the trust. Upon attaining the age of 32, the respective daughter could become an additional trustee with the husband.

The husband was excluded as a beneficiary of the trust. 9. The husband executed a deed (in relation to the original trust) applying all income and capital of the original trust in equal shares to the four trusts for the daughters. 10. In May 2002, the wife instituted proceedings in the Family Court. At first instance she was successful as the trial judge, pursuant to s 106B, made orders setting aside the 1998 and 2002 trust variations, finding that the husband’s intention in such variations was to defeat any future property claim by putting the trust assets beyond the reach of the Family Court. Having set aside the variations, the court found the trust assets to be ‘property’ under the Family Law Act 1975 because of the husband’s control of those assets, and divided the pool 52% to the husband and 48% to the wife out of a pool of $9,818,144. It was acknowledged that the husband would only be able to facilitate such a transfer of property to the wife out of the trust property. [page 76] 11. The husband appealed to the Full Court of the Family Court (reported as Stephens and Stephens).117 His appeal was dismissed. 12. By way of special leave, the husband appealed to the High Court. The appeal was dismissed. The central issue in the case was whether prior to the deed made in 1998 removing the husband as trustee and the wife as beneficiary, either or both of the husband and wife had, in relation to the property of the trust, interests which would meet the definition of ‘property’ of the parties to the marriage within the meaning of s 79 of the Family Law Act 1975. It should be noted that in the High Court, the husband did not challenge the orders made pursuant to s 106B setting aside the trust deed variations. Instead the husband contended that the

property of the original trust could not be made the subject of orders for a settlement in favour of the wife under s 79 of the Family Law Act 1975. This was rejected by a majority of the High Court. There were three judgments dismissing the appeal, being a judgment by French CJ, a joint judgment of Gummow and Hayne JJ and a separate judgment by Kiefel J. As the judgment by Kiefel J is primarily concerned with issues relating to s 85A and postnuptial settlements, it will not be considered here. Heydon J dissented and his judgment will not be considered here in detail. Unfortunately, the decision did not deliver the certainty or clarity that many had hoped for. The majority (French CJ, Gummow and Hayne JJ) upheld the orders of the trial judge and found the trust to be property under the Family Law Act 1975, albeit for slightly different reasons. French CJ considered the question of when a trust may be considered property in the context of the Family Law Act 1975. His Honour examined a number of decisions by the Full Court that dealt with the issue of whether the assets of a trust fall within the definition of property. He said: It is the Trust assets, coupled with the Trustee’s power, prior to the 1998 Instrument, to appoint them to her and her equitable right to due consideration, that should be regarded as the relevant property. It should be accepted that, in the unusual circumstances of this case and but for the 1998 Instrument and the 18 January 2002 dispositions, s 79 would have had effective application to the Trust assets. Dr Spry was the sole Trustee of a discretionary family Trust and the person with the only interest in those assets as well as the holder of a power, inter alia, to appoint them entirely to his wife.118

He went on: Where property is held under such a trust by a party to a marriage and the property has been acquired by or through the efforts of that party or his or her spouse, whether before or during the marriage, it does not, in

[page 77]

my opinion, necessarily lose its character as ‘property of the parties to the marriage’ because the party has declared a trust of which he or she is trustee and can, under the terms of that trust, give the property away to other family or extended family members at his or her discretion. For so long as Dr Spry retained the legal title to the Trust fund coupled with the power to appoint the whole of the fund to his wife and her equitable right, it remained, in my opinion, property of the parties to the marriage for the purposes of the power conferred on the Family Court by s 79. The assets would have been unarguably property of the marriage absent subjection to the Trust.119

Further he noted: Dr Spry’s power as trustee to apply assets or income of the Trust to Mrs Spry prior to the 1998 Instrument was, as pointed out by Gummow and Hayne JJ, able to be treated for the purposes of the Family Law Act as a species of property held by him as a party to the marriage, albeit subject to the fiduciary duty to consider all beneficiaries. This is so even though it may not be property according to the general law. So characterised for the purposes of the Family Law Act it had an attribute in common with the legal estate he had in the assets as trustee. He could not apply them for his own benefit but that did not take them out of the realm of property of a party to the marriage for the purposes of s 79. Insofar as Gummow and Hayne JJ rely upon the property comprised by Dr Spry’s power as trustee and Mrs Spry’s equitable rights prior to 1998, I agree that these property rights were capable of providing a basis for the orders which Strickland J made. I do so, as already indicated, by considering that power and the equitable rights, in conjunction with Dr Spry’s legal title to the Trust assets, without which the power and the rights were meaningless.120 [Emphasis added]

Essentially, French CJ found the trust was the ‘alter ego’ of Dr Spry and that it was the combination of the husband’s power to appoint trust assets, the title that the husband held as trustee and the wife’s right to ensure proper administration of the trust as a beneficiary that qualified the trust assets as property of the parties to the marriage. In his view the legal title, as well as the origins and character of the trust need to be regarded when making a determination of whether assets of a trust will fall within the definition of ‘property’ in the Family Law Act 1975. Gummow and Hayne JJ also regarded the combined rights and duties of both the husband and wife together qualifying the whole of the trust assets as being property of the parties to the marriage: The jurisdiction being exercised by the Family Court was, as earlier indicated,

jurisdiction over proceedings between the parties to a marriage with respect to the property of the parties to the marriage or either of them.

[page 78] What matters in this case is that once the 1998 Instrument and the 2002 Instrument were set aside by the s 106B orders, the property of the parties to the marriage or either of them was to be identified as including the right of the wife to due administration of the Trust, accompanied by the fiduciary duty of the husband, as Trustee, to consider whether and in what way the power should be exercised. And because, during the marriage, the husband could have appointed the whole of the Trust fund to the wife, the potential enjoyment of the whole of that fund was ‘property of the parties to the marriage or either of them’. Furthermore, because the relevant power permitted appointment of the whole of the Trust fund to the wife absolutely, the value of that property was the value of the assets of the Trust.121

French CJ, and Gummow and Hayne JJ in their joint judgment, held that the trust assets were property of parties to the marriage. French CJ based this conclusion on the fact that the husband held bare legal title as trustee when coupled with his power to appoint trust assets, and the fact that the wife had been a beneficiary, while Gummow and Hayne JJ concluded that the fact that the husband held the power to appoint the whole of the trust assets to his wife during their marriage meant that the trust assets were property of the parties to the marriage. Gummow and Hayne JJ said that an equitable right to due administration could be taken into account as property of the wife, she being a party to the marriage, notwithstanding that it may be difficult to value that right. It is not readily clear why those particular aspects of trusteeship are so relevant to causing the trust assets to qualify as property of the parties to the marriage. One is also led to wonder if it would have made any difference if the husband had not been a trustee (for instance if the trustee had been independent) and the husband had, instead of being trustee, held a power of appointment. Heydon J dissented, holding that the word ‘property’

contemplates an interest in property other than as trustee, and although the wife was a beneficiary, she had no entitlement to any part of the income or capital until the date of distribution. His judgment has formed the basis of much of the criticism that has been made about the decision of the majority. Federal Magistrate Bender said in her analysis of the impact of the case in her judgment in Ogden and Ogden:122 Many commentators have expressed concern that the decision undermines the independence of the Trust structure, and in particular removes the concept of discretion from Discretionary Trusts if the court can make orders that a Trustee exercise its powers in such a way that the beneficial interests of named beneficiaries in the Trust are disregarded. Other commentators have speculated that the decision represents “an appreciable extension of the meaning of property in the context of cases involving complicated

[page 79] Trust structures, especially those established to try and put Trust assets beyond reach.”123

Lee Aitken in a paper in the Australian Bar Review stated: The judgment further dangerously muddies the waters with respect to the position of the object of a discretionary trust. The practical effect of the majority judgment is entirely unclear which is an unfortunate position for the litigants after a protracted and bitter dispute … Constantly denaturing the purity of the trust concept will eventually leave it useless. Since the precise ratio of the decision is impossible to state, perhaps little harm will be done. On one view, it could be read down as an eccentric view on the width of ‘property’ as a term under the Family Law Act — but of course, an actuary advised of the decision would have to regard something which was formerly the merest spes as having a real, although incalculable value!124

Professor Glover commented on the way the court elevated the power to appoint property held by the trustee into property. The fact that exercise of the power may result in property (for the power-holder or someone else) does not mean that the power is itself property. Power is a capacity to act and not a thing which one owns. Equity jurisprudence has distinguished between powers and property for centuries.125

Justice Paul Brereton responded to the above comment as follows: It is true, as Heydon J demonstrated, that even a general power of appointment over property, pursuant to which the donee can appoint the property to anyone including himself or herself, is not the equivalent of property, at least for all purposes. But it is very close to it. Indeed, if one has power to appoint property to oneself, it is difficult to see why for at least some purposes it should not be treated as one’s property.126

He also noted that there was a common theme running through the cases leading up to the decision and the decision of Kennon v Spry itself, saying: What emerges from these cases, although not always clearly articulated in them, is that the critical criterion that enabled assets of a discretionary trust to be treated as property of the parties is the capacity of one spouse to exercise powers which can cause the trust assets to become property of one or other of the spouses, and thus amenable to s 79. That is more clearly so where the ‘controller’ is also an eligible beneficiary, but Ashton

[page 80] and Davidson show it to be so also where only the other spouse is an eligible beneficiary. Where those criteria are satisfied, the controller has power – as Trustee directly, or as appointor indirectly – to augment the pool of ‘property of the parties to the marriage or either of them’, to the extent of the trust assets, if he or she so chooses. In distinction from the ordinary case, the Trustee’s interest is valuable, because it is in his or power to procure a distribution of the whole of the trust assets, if not to himself or herself, then to the other spouse, and thus to make it property of one or other of the spouses available for division between them.127

Following the High Court decision, enforcement proceedings came before the Full Court of the Family Court as Stephens and Stephens.128 The husband argued that the amount of the orders was greater than his personal assets and that the Family Court could not order that the excess be paid from the trust assets. The Full Court found that the Family Court had jurisdiction to make direct orders against trust assets: In this regard we observe that although in the circumstances of this case Pt VIIIAA

of the Act was rejected by Strickland J, all parties agreed that there was jurisdiction under that Part to make an order against assets of the Trust. In our view, this is correct and that it may be applied in circumstances where an order is sought that an entitlement under a property settlement order be satisfied out of the assets of a trust. In our view, it follows that an order may be made that enables an entitlement of a party to the marriage who is an object of a trust, or ceased to be an object by reason of divorce, to be satisfied out of the assets of the trust. Put another way, an order may be made that enables a party to the marriage who is in control of the trust to satisfy his or her personal liability to the other party to the marriage who is an object of the trust from the assets of the trust.129

Ward v Ward130 3.42 In this case the husband’s mother amended her will two days before the husband separated from his wife. The change in the will was instead of an equal absolute division of her estate between her three children, the husband’s share was to be held in a discretionary testamentary trust of which the husband and his children were beneficiaries (along with other potential beneficiaries). The trustees of the trust were the husband’s sister and the mother’s solicitors. The husband admitted under cross-examination that the purpose of the trust was to put his inheritance out of the reach of his wife. The court acknowledged that the property had not vested with the husband, and while [page 81] not his property, it was considered a financial resource. Federal Magistrate Baumann held: I am satisfied that the creation of the testamentary trust was for the purposes, acknowledged by the husband, to put it out of reach of the wife. Certainly he has achieved that in a control sense. The wife cannot assert any right to alter the husband’s contingent interest in the trust. I am satisfied that it is likely on the balance of probabilities that the husband will receive the whole of the entitlement of the testamentary trust personally. Once

final orders are made then any vesting of an interest in the trust will be “beyond the reach of the wife”. I expect it will vest for the husband’s full benefit. The contingent interest represents at this time a financial resource.131

Simmons v Simmons132 3.43 The husband was a beneficiary of a substantial inter vivos trust, but had no control over the trustee. The husband, along with his siblings and mother had taken equal regular distributions from the trust, and the husband worked for the business owned by the trust. The Full Court noted that the husband had enjoyed significant interest-free loans. The wife claimed that the husband’s interest as an object of the trust should be property of the parties, and that consequently Pt VIIIAA of the Family Law Act 1975 could be used to order the trustee to transfer assets from the trust as part of the property division. The trustee of the discretionary inter vivos trust applied for summary dismissal of the claim by the wife. The trustee’s application was dismissed. The court found that there was a nexus between the assets of the trust and the property of the parties to the marriage, and that the nexus was sufficient to enable Pt VIIIAA of the Family Law Act 1975 to be applied. Third party orders (against the trustee) could therefore be made, as follows: The decision of the majority of the High Court in Spry establishes an important principle when considering the interests of those who seek relief under section 79 of the Act based on the rights that accrue to a beneficiary of a discretionary trust where ownership of the trust property is vested in a party to the marriage, albeit as trustee. In Spry, the husband’s legal ownership of the assets as sole trustee and the wife’s interest as a beneficiary of the trust were found to have provided a proper basis for orders made by the trial Judge that required the husband to pay to the wife a substantial sum in circumstances where the source of payment of such an amount was the trust assets. In so holding, French CJ acknowledged at 80, that any order made in such circumstances would have to take into account the interests of other beneficiaries.

[page 82]

In my view there are facts in this case that establish a connection between the trust assets and the husband: he has lent the trust the proceeds of his shares in the entity that previously owned and conducted the family business on terms that can only be described as very favourable: no interest is payable at any time, and the initial period for repayment was 25 years. This was recently extended by a further 10 years. This is a very different situation from that which existed in B Pty Ltd and Ors & K and Anor where the court found that on the facts available to it for the purposes of dealing with the application before it, there was no relevant connection between the trust assets and the marriage, and therefore the powers under Part VIIIAA could not be properly engaged to grant the wife the relief that she sought … In Spry, neither the trial Judge (nor, therefore the High Court) was required to consider the effect and operation of Part VIIIAA. Put another way, the powers that Part VIIIAA provides were not relied upon to underpin the orders made under section 79 in that case, because the husband was the owner, as trustee, of the trust assets. Here the husband is not the owner of the trust assets and the wife seeks to rely on the court’s powers under Part VIIIAA specifically. I accept the argument, advanced by Mr North SC on behalf of the wife, that the decision in B Pty Ltd and Ors & K and Anor is distinguishable from the present case on the basis inter alia of the facts to which I have made reference. I consider that the wife’s claim does not lack a reasonable cause of action thereby being doomed to failure: the husband’s interest as an object of the F Family Settlement is property for the purposes of the Act. It may be difficult to value that property but as held by the French CJ in Spry, that difficulty does not deprive it of the character of property that it otherwise holds, and the existence of a longstanding scheme of distributions to beneficiaries such as the husband and his siblings provides a useful starting point in the valuation process. I find that there is a sufficient nexus between the assets of the trust and the property of the parties to the marriage for a court to find that Part VIIIAA applies, and is available to enable orders binding third parties to be made for the purpose of the making of orders, or the granting of injunctions, ‘that are reasonably necessary, or reasonably appropriate and adapted, to effect a division of property between the parties to the marriage’ and that these powers could be exercised in a way that takes into account the existence of other beneficiaries, and is not limited by the terms of the trust deed or any other law.133

It should be noted that the matter was settled, so there has not been a full judicial consideration of the trial judge’s decision. The interest-free loans are a factor, but it is interesting that in spite of the fact that the husband had no control over the trustee and held the status of beneficiary only, the court was willing to find his interest as being property, as opposed to a financial resource. [page 83]

Essex v Essex134 3.44 In Essex v Essex, the parents of the husband and the husband’s brother established separate inter vivos discretionary trusts. Ostensibly, each trust was for the benefit of a brother and his lineal descendants. However, because of the parents’ concerns over the future of the husband’s marriage, they made his brother trustee of his trust, and excluded him as a beneficiary. The trial judge found that the trust was neither property nor a financial resource for the husband. On appeal to the Full Court, the majority affirmed that the trust assets were not property of the husband, but that the trial judge had erred in finding that the trust was not a financial resource. The finding that the trust assets were a financial resource was based on two factors. First, admissions by the husband’s brother that but for the husband’s separation, the husband would have had control of the trust assets and second, written advice of the accountants in setting up the trusts that upon resolution of the husband’s property proceedings, control or benefit would go to the husband. The majority found: Significantly, as the sole director of the corporate trustee of the S Trust the husband’s brother had control of that trust and was only obliged to consider the husband as one of the three income beneficiaries entitled to the income of the trust. However, the husband’s brother conceded that, but for a disqualifying factor (the property proceedings) the husband should have the benefit of assets in the trusts. This in our view required the trial Judge to find that the S Trust was a financial resource of the husband.135

Keach v Keach136 3.45 While this case is only a decision at first instance, it is interesting for two reasons. First, it contains an extended consideration of whether the trust in question was a sham and second it is another example of a party to a marriage succeeding in having trust assets not counted as property, but because the trust

is considered a financial resource, the practical outcome is that they gain little. In this case the share of net marital assets that the husband would have received was reduced from 50% to 20%. Worse still for him, his legal costs were greater than the total net marital pool of assets, and when his costs were notionally added back to the marital pool, the practical outcome of the order was that not only would he receive nothing from the marital pool of assets, but he would in fact have to make further contributions in order to meet the order. [page 84] The case provides an interesting discussion on whether the trust was a sham. The husband’s father created a discretionary family trust, over which the father retained complete control. Evidence was accepted that the son had no control directly or indirectly, and indeed he had requests regarding the trust administration denied. Among other things, the trust owned a property, which the husband and wife lived in at a reduced rate of rent. The court gave full and detailed consideration to the wife’s argument that the trust was a sham.137 Strickland J found that the trust was not a sham, and the trust assets were not property of the husband, but did find it to be a financial resource: In relation to financial resources, I find that the Junior Trust and its assets can be treated as a financial resource of the husband. I need not repeat the evidence as to the establishment of the Trust, its history and its apparent purpose, along with the other three trusts established at the same time using the names of the four children of the husband’s father. However, the fact of the matter is the husband has been able to rely on the Junior Trust as a source of benefit to him in many ways. He has received allocations of income from the Trust in the past and he remains a potential income beneficiary. He and his family have been able to live in the M property at a reduced rental, and he was able to renovate it to his liking at the expense of the Trust. Although he moved out of this property not long after separation, it is still there and available for his occupation again, subject to the agreement of his father who it is accepted controls the Trust.

I have no doubt that in the future the husband will continue to benefit from that Trust, including receiving allocations/distributions of income. If any authority is needed for this finding, then I refer to the recent Full Court decisions of Essex & Essex (2009) FLC 93-243 and Baldwin & Baldwin [2010] FamCAFC 227. In those cases the Full Court held that the trusts involved represented financial resources to the husbands on the basis of the benefits/distributions received from the trusts in the past and the likelihood of receiving the same in the future.138

It is interesting to consider the outcome if the trust had been declared a sham. As noted earlier, if a trust is considered a sham, then the trust property results in favour of the person from whom it came on resulting trust. So presumably, even if the wife had been successful in having the trust declared a sham, then the trust property should have resulted in favour of the father, and out of the marital pool. [page 85] Lovine & Connor139 3.46 This matter involved the trial judge making a finding that the husband controlled the residual property in a testamentary trust and to treat it as property of the husband and include it in the pool. The husband and wife were aged 50 and 40 respectively. They commenced living together in late 1999, married in 2000 and separated in 2010. There were two children of the marriage born in 2001 and 2003. In 2001, the husband’s father died and created two testamentary trusts which were administered as one. At first instance, the husband argued that the assets of the testamentary trust should not be treated as his and included in the divisible pool. He contended that they constituted a financial resource. The wife asserted the husband exercised sole and absolute discretion to determine the distribution of the remaining balance of the

residuary estate and that they should be included in the property pool. The trial judge undertook a detailed examination of the creation of the subject testamentary trusts and the issue as to the benefit, if any, which the husband might have in those trusts. The history of the testamentary trusts was traced as well as the history of distributions and application of the assets of that trust. Ultimately, the trial judge found: However in every sense the husband is the only real decision maker and while the will appointed his sister as trustees with him, they play no active role. The actual distributions in this matter have already benefited the husband’s two sisters and/or their children and it is entirely consistent with the fact that the residual assets must be included as an asset in these proceedings.140

The husband appealed to the Full Court and the wife crossappealed. However, the issue of whether the testamentary trust was property to be included in the pool was not a ground that was argued.

IMPLICATIONS TO BE DRAWN FROM THE FAMILY LAW CASES 3.47 The cases discussed above show that the question whether the assets of a discretionary trust will be counted as property of the parties of a marriage, or considered a resource, will involve a consideration of the terms of the trust, the history of its administration and distributions, along with the background facts of the marriage and the creation of the trust itself. Due to all of these variables, it is impossible to set out a prescription as to which trust structures and terms will and will not offer protection from a [page 86]

family law settlement. However, it is possible to make some observations on how certain terms and structures of a trust have caused the trust assets to be considered property of a party to the marriage. •

•

•

•

Merely holding the Appointorship over a trust can be sufficient to have the trust assets counted as property of a party to the marriage: In the Marriage of Ashton141 and In the Marriage of Davidson.142 Trusteeship held by one spouse, coupled with the other spouse being a beneficiary, may cause the trust to be considered property of the first spouse: Kennon v Spry.143 Holding the Appointorship and Protectorship (or ‘guardianship’ as Protectorship is called in some trust deeds) can be sufficient to cause the trust to be considered property of a party to the marriage: In the Marriage of Harris.144 Depending on surrounding circumstances relating to the operation of the trust (for instance, the fact that a beneficiary has received very favourable benefits such as interest-free loans), being a beneficiary can on its own, with no other position of control, cause the trust to be considered property of a party to the marriage: Simmons v Simmons.145

The cases above reveal that a discretionary trust (and by implication a testamentary discretionary trust) does not necessarily offer parties asset protection in the context of family law proceedings. It appears that, particularly with the new third party amendments and the court’s treatment of trusts, there is little to be done to ensure the assets of the trust are beyond the reach of the court’s powers. However, careful drafting, structuring and consideration of how the trust will be administered, can assist in minimising the risk that the Family Court will break through the trust.

Key issues in drafting and administration

3.48 The key issue of whether assets in a trust will be considered property or a financial resource will ultimately depend on the circumstances of each case and the level of control. When drafting and administering a discretionary testamentary trust, the advisor should consider the following questions. Questions relating to the provisions of the trust deed include the following: • • • •

What roles, if any, do the parties have in the trust? What are the mechanics of the trust and its administration? What distributions have been made? To whom have distributions been made and what has been the frequency of the distributions? [page 87]

• • • •

Who is the Appointor? Who are the trustees? Who are the beneficiaries? What is the class of beneficiaries?

Questions to consider in relation to the control of the trust by the beneficiary include the following: •

•

•

•

Will one or both parties to the marriage or de facto relationship have effective or actual control of the trust by virtue of holding the position of Appointor? Is one of the parties a trustee, either as an individual or by virtue of being in control of the trustee company? (In the Marriage of Stein146) If the trustee is to be a corporation, what is the constitution of the company and who has control of the company? Is the trustee company a ‘creature’ of one of the parties? Will one or both parties to the marriage or de facto relationship hold the position of Appointor and Protector of

•

•

the trust? Will one party hold the position as trustee (but not a beneficiary) and the other party a beneficiary? (Kennon v Spry147) Will a party have de facto control of the trust so much so that the trust could be classed as their ‘alter ego’?

If the relevant indicia of control do not lead to the assets of the trust being treated as assets of the parties, the question whether the asset is a financial resource of the party should also be considered. The number of variables means that it is not possible to provide a formula that will provide absolute protection from the Family Court. As noted above, a testator who uses a discretionary testamentary trust both for the benefit of their children (beneficiaries) and also to put assets beyond the reach of their children’s partners in the event of separation, faces the dilemma: leave total control and access to the child (beneficiary) but compromise on asset protection or reduce that control and access and maximise the level of asset protection that the trust provides. As the elements of control that a beneficiary has over a trust increase, so too does the likelihood that the Family Court will consider that control to have caused the trust assets to be ‘property’ of that party. Even a beneficiary, who has no ostensible control over a trust, may, if the administration of the trust so indicates, be considered in actuality to have that control.

Solicitor’s advice on asset protection 3.49 A solicitor preparing a discretionary testamentary trust for a client should give the client realistic expectations of the asset protection that will be afforded, particularly in relation to family law matters. The solicitor should

[page 88] help the client to choose a meaningful and worthwhile balance between asset protection and control in relation to a trust.

Separate trusts for each child 3.50 The precedents in Chapters 8 and 9 are based on the presumption that a parent testator passing their estate to her or his children will offer each child her or his own separate discretionary testamentary trust. This is done because testators commonly desire to allow each child to manage their inheritance/trust independently of each other, and at the same time to allow each child to make her or his own choice as to whether or not they wish to receive their inheritance on trust. There is no doubt that a single trust controlled by all the children equally offers better asset protection than do separate testamentary trusts for each child. This is because when there is a single trust, each child can validly state that they do not have sole control of the trust, and no inference can be made that all of the trust assets are in reality their own ‘property’. The negatives are, however, strong. A single trust can be troublesome because it requires all the children to cooperate and agree on the ongoing management of the trust, and the administration of the trust in itself is likely to cause complications and disagreements between the children. A single trust for all the children also introduces its own questions in relation to succession of Appointorship and control of the trust. Further, even if a child’s inheritance is held in a single trust for a number of children, circumstances may cause at least part of the trust to be considered a financial resource of that child. If, for example, distributions from the trust have always been on an equal basis, it would be expected that the Family Court would consider a child to have an equal proportionate interest in

the trust with their siblings, and that would accordingly be considered to that extent a financial resource.

Family law and automatic disqualification clauses The basic automatic disqualification clause 3.51 The default precedent in this text includes an automatic disqualification clause: see the clause Automatic disqualification of an Ineligible Officebearer (see 8.24). This clause provides that upon separation a party who would otherwise be an Appointor or trustee of the trust is automatically disqualified from those positions (but Protectorship is retained). This disqualification is by default temporary; however, a variation clause exists which makes the disqualification permanent. The authors are of the view that a non-permanent disqualification would be considered as not being genuine. In this limited form, it is conceded that the provision would at best stop the trust assets being considered as property: the fact that the party remains able to be a beneficiary once they are no longer an Ineligible Officebearer makes it hard to imagine the trust would not be considered a resource of the party. [page 89]

Strong automatic disqualification provision 3.52 The precedents offer a variation on the basic disqualification provision, offering a stronger level of protection: see, in Chapter 9, Automatic disqualification of an Ineligible Officebearer: ‘strong’ asset protection variation. This variation not only permanently disqualifies the party as

Appointor and trustee, but also permanently (as opposed to temporarily) disqualifies the party and her or his spouse or former spouse from being beneficiaries. This variation is offered for those seeking to raise asset protection to a higher level in the hope of making it less likely that the trust will be considered a financial resource. However, even with the party to the marriage and the spouse and former spouse being removed as beneficiaries, it would still be possible that the Family Court would consider the trust to be a financial resource if the children of the party were to remain beneficiaries of the trust, because distributions could be made from the trust to the children thus making the trust an indirect financial resource. The outcome of such a matter would probably turn on the factual administration of the trust, for example whether the trustees were genuinely independent, and whether benefits did or did not indirectly flow to the party via other family members.

1. 2. 3. 4. 5. 6. 7. 8.

9. 10. 11. 12. 13. 14. 15.

J Glover, ‘Discretionary Trusts, Fiduciary Duties and the Family Law Act: Has the Family Court Acted Beyond Power?’ (2000) 14 AJFL 184. Re Burton: Wily v Burton (1994) 126 ALR 557. Re Skeats Settlement; Skeats vEvans (1889) 42 Ch D 522 at 526–7. (1841) 4 Beav 115. Jacobs, K, Meagher R, and Gummow, W, Jacob’s Law of Trusts in Australia, 5th ed, Butterworths, Sydney, 1986, [2916]. T Riordan, ‘Trusting into the Future’, paper presented at the 18th National Tax Intensive Retreat, Noosa, The Taxation Institute, 19 August 2010, p 3. C Symes and J Duns, Australian Insolvency Law, LexisNexis Butterworths, Sydney, 2015, p 3. Australian Financial Security Authority, Annual Statistics 2014–15, , go to ‘Resources’, then ‘Statistics’, then ‘Personal insolvency statistics’, then ‘Annual personal insolvency statistics’, accessed 15 March 2016. Section 139D of the Bankruptcy Act 1966 (Cth). Section 139E of the Bankruptcy Act 1966 (Cth). Silvia v Thomson (1989) 87 ALR 695. Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694. Ibid. (1990) 170 CLR 306. [1965] AC 694.

16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40.

41.

42. 43.

44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.

Re Pevsner; Ex parte Trustee in Bankruptcy (1983) 68 FLR 254. Section 152 of the Bankruptcy Act 1966 (Cth). Section 116(2)(a) of the Bankruptcy Act 1966 (Cth). Dwyer v Ross (1992) 34 FCR 463. Dwyer v Ross (1992) 34 FCR 463. Dwyer v Ross (1992) 34 FCR 463 at 466. Gartside v Inland Revenue Commissioners [1968] AC 553. Gartside v Inland Revenue Commissioners [1968] AC 553. Re Burton; Wily v Burton (1994) 126 ALR 557; Dwyer v Ross (1992) 34 FCR 463. Re Burton; Wily v Burton (1994) 126 ALR 557; Dwyer v Ross (1992) 34 FCR 463. Dwyer v Ross (1992) 34 FCR 463. Gartside v Inland Revenue Commissioners [1986] AC 353, House of Lords. Gartside v Inland Revenue Commissioners [1986] AC 353 per Lord Reid. Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 at 552. [2006] FCA 814. [2006] FCA 814. [2006] FCA 814 at [29]. Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 at [36]. [2007] NSWSC 1217. [2007] NSWSC 1217 at [76]–[78]. [2008] NSWSC 397. [2008] NSWSC 397 at [135]. [2008] NSWSC 397 at [138]. [2008] NSWSC 397 at [139]. [2008] FCA 1293 at [44]–[45]. This case can be distinguished factually from Richstar and is less relevant to the broader application of Richstar to testamentary discretionary trusts. [2008] FCA 1931 at [26]. The court held that the principle under Richstar may be a basis for a freezing order on the basis that trust assets were effectively personal assets due to an effective control over the power of selection. [2008] WASC 167; the court held that a mere beneficiary entitlement was not property. (2009) 73 ACSR 466 at [29]–[37]. The court considered Richstar and the issue of alter ego; however, no ultimate decision was handed down with respect to the relevant principles. Part XI of the Bankruptcy Act 1966 (Cth). Section 246 of the Bankruptcy Act 1966 (Cth). Section 244 of the Bankruptcy Act 1966 (Cth). Section 245 of the Bankruptcy Act 1966 (Cth). Section 246 of the Bankruptcy Act 1966 (Cth). Section 249A of the Bankruptcy Act 1966 (Cth). Section 247(1)(b) of the Bankruptcy Act 1966 (Cth). Victorian Producers’ Co-Operative Co Ltd v Kenneth [1999] FCA 1488. [2005] FMCA 342. Schmierer v Horan [2004] FMCA 16. Verge v Devere Holdings Pty Ltd (No 5) [2010] FCA 1452. (2006) 227 CLR 471. [2002] FCA 1503.

57. 58. 59.

60.

61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84.

85.

[2006] HCA 6. Part VIIIAA of the Family Law Act 1975 (Cth). In the Marriage of Ashton [1986] FamCA 20; In the Marriage of Davidson (No 2) (1990) 101 FLR 373; In the Marriage of Goodwin (1990) 101 FLR 386; In the Marriage of Harris (1991) 104 FLR 458; In the Marriage of Gelley (No 2) (1992) 107 FLR 160; Kennon v Spry (2008) 238 CLR 366. Hickey & Hickey (2003) FLC 93-143; Clauson and Clauson (1995) FLC 92-595; Lee Steere & Lee Steere (1985) FLC 91-626; Ferraro &Ferraro (1993) FLC 92-335; Townsend & Townsend (1995) FLC 92-569; Biltoft & Biltoft (1995) FLC 92-614; Campbell v Kuskey (1998) FLC 92-795; Stanford v Stanford [2012] HCA 52; Baglio v Baglio [2013] FamCA 105; Sebastian & Sebastian No 5 (2013) FamCA 191; Bevan & Bevan [2014] FamCAFC 19. [2012] HCA 52 at [42]. [2014] FamCAFC 19. Stanford v Stanford [2012] HCA 52 at [42]. Rule 13 of the Family Law Rules 2004. Weir & Weir (1993) FLC 92-338; Black & Kellner (1992) FLC 92-287; Chang & Su (2002) FLC 93-117; Tate v Tate (2000) FLC 93-047. Section 4(1). Duff & Duff (1977) FLC 90-217. In the Marriage of Davidson (No 2) (1990) 101 FLR 373 at 378–83. (1986) FLC 91-777. (1986) FLC 91-779. (1986) FLC 91-779. Kelly & Kelly (No 2) (1981) FLC 91-108. Best & Best (1993) FLC 92-418; Clauson and Clauson (1995) FLC 92-595; Sindel & Milton [2010] FamFC 232. (1995) FLC 92-640. (1995) FLC 92-640 at [45]. Page & Page (1978) FLC 90-525; Whitaker & Whitaker (1980) FLC 90-813; Davidson (No 2) (1994) FLC 92-469. Whitaker & Whitaker (1980) FLC 90-813; Pflugraft & Pflugraft (1981) FLC 91-052 at 76-429. [2005] FamCA 1181. [2008] HCA 56. Section 90AA of the Family Law Act 1975 (Cth). Simmons v Simmons (2008) 232 FLR 73. Section 90AC of the Family Law Act 1975 (Cth). (1981) 148 CLR 337. Justice P Brereton, ‘Part VIIIAA of the Family Law Act Update: Orders and Injunctions Binding Third Parties’, paper delivered to the Family Law Residential 2005, organised by the Queensland Law Society and Family Law Practitioners Association, October 2005. J Glover, note 1 above, at 196–7, citing Vandervell v Inland Revenue Commissioners [1967] 2 AC 291 at 313–17 per Lord Upjohn; Inland Revenue Commissioners v Broadway Cottages Trust [1955] Ch 20 at 36; Scott v Commission of Taxation (Cth) (No 2) (1996) 40 ALJR 265 at 279, Windeyer J; 14 ATD 333; 10 AITR 290; see also Richard Walter Pty Ltd v Federal Commissioner of Taxation (1996) 33 ATR 97; 96 ATC

86. 87. 88. 89.

90. 91. 92. 93. 94. 95.

96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113.

114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124.

4550. [1981] HCA 1; (1981) 6 Fam LR 591 at 602. Keach v Keach [2011] FamCA 192. [2011] FamCA 192. Relevant cases that are not considered include Pittman v Pittman (2010) 43 Fam LR 121; Ogden v Ogden [2010] FMCAfam 865; Coventry v Smith [2004] FamCA 249; Milankov v Milankov [2002] FamCA 195; BP and KS (2003) FLC 9. [1986] FamCA 20. [1986] FamCA 20 at [14]. [1986] FamCA 20 at [22]. J Glover, note 1 above, at 199 (fn 103). Ibid at 199–200. In the Marriage of Davidson, KR and Davidson, MI (1991) FLC 92-207; In the Marriage of Davidson, KR and Davidson, MI (1991) FLC 92-197; In the Marriage of Davidson, KR and Davidson, MI (No 2) (1994) FLC 92-469. In the Marriage of Davidson, KR and Davidson, MI (1991) FLC 92-207. Ibid at 78,410. In the Marriage of Davidson, KR and Davidson, MI (1991) FLC 92-197. Ibid at 78,365. Ibid at 78,366. Section 80(1)(d) of the Family Law Act 1975 (Cth). Section 80(1)(e) of the Family Law Act 1975 (Cth). Section 80(1)(f) of the Family Law Act 1975 (Cth). Section 80(1)(k) of the Family Law Act 1975 (Cth). In the Marriage of Davidson, KR and Davidson, MI (No 2) (1994) FLC 92-469. (1995) 17 ACSR 239. Ibid at 264. Ibid at 249. Ibid at 266–7. Thurlstane (Aust) Pty Ltd v Andco Nominees Pty Ltd [1997] NSWCA 317. J Glover, ‘Discretionary Trusts, Fiduciary Duties and the Family Law Act: Has the Family Court Acted Beyond Power?’ (2000) 14 AJFL 184. Citing P Finn, Fiduciary Obligations, Law Book Co Ltd, Sydney, 1977, p 282. Applying principles in Re Skeats Settlement (1889) 42 Ch D 522 at 526–7, Kay J (no appointment of self as trustee) and Re Crawshay (dec’d); Hore-Ruthven v Public Trustee [1948] Ch 123 at 144, Cohen LJ (per curiam) (no benefit to excluded person). (1991) 15 Fam LR 26. (1991) 15 Fam LR 26. [2008] HCA 56. (2007) 212 FLR 362. [2008] HCA 56 at [62]. Ibid at 65–6. Ibid at 79. Ibid at 137. [2010] FMCAfam 865. Citing CCH Australia Ltd, Australian Family Law & Practice, volume 2, at 30,872. L Aitken, ‘Muddying the Waters Further – Kennon v Spry: ‘Ownership’, ‘Control’ and

125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147.

the Discretionary Trust’ (2009) 32 Australian Bar Review 173. J Glover, ‘Are the Lights Changing for Discretionary Trusts?’ (2010) 84 LIJ 34 at 35. Justice P Brereton, ‘A Trustee’s Lot Is Not a Happy One: Discretionary Trusts and Self-Managed Superannuation Funds’ (2010) 34 Australian Bar Review 49. Justice P Brereton, ‘A Trustee’s Lot Is Not a Happy One: Discretionary Trusts and Self-Managed Superannuation Funds’ (2010) 34 Australian Bar Review 49. [2009] FamCAFC 240. Ibid at 354–5. [2004] FMCAfam 193. Ibid at 32–3. [2008] FamCA 1088. Ibid at 117–9 and 122–3. [2009] FAMCAFC 236. Ibid at 177. [2011] FamCA 192. Ibid at 172. Ibid at 210–2. [2011] FamCA 432. Ibid at 126. (1986) FLC 91-777. (1991) FLC 92-207. (2008) 238 CLR 366. (1991) 15 Fam LR 26. [2008] FamCA 1088. (1986) FLC 91-779. (2008) 238 CLR 366.

[page 91]

4 SOCIAL SECURITY, TESTAMENTARY AND SPECIAL DISABILITY TRUSTS

Introduction Background to Social Security Entitlements — the Assets and Income Means Tests Social security eligibility — the assets and income test 92 Deprivation and disclaiming interests Taxation implications of disclaiming an interest Trusts — the source and control tests Special Disability Trusts Introduction to special disability trusts Benefits of a special disability trust Creation of a special disability trust Reform to special disability trusts Incorporating a special disability trust in a will

INTRODUCTION 4.1 This chapter looks at social security issues which are relevant to drafting discretionary testamentary trusts. In this chapter the term ‘social security’ is used as a general term to refer to Centrelink1 and Department of Veterans’ Affairs benefits. The following topics are considered:

• • • •

background to social security entitlements — the assets and income means tests; deprivation and disclaiming interests; trusts — the source and control test; and special disability trusts. [page 92]

BACKGROUND TO SOCIAL SECURITY ENTITLEMENTS — THE ASSETS AND INCOME MEANS TESTS Social security eligibility — the assets and income test 4.2 A person may meet the initial eligibility requirements for entitlement to a particular form of social security benefit; however, whether they receive all, part or none, of that benefit will depend ultimately on how they are assessed on an ongoing basis under the ‘income means test’2 and the ‘assets means test’.3 The actual thresholds for those tests depend on whether the person is single or in a couple, and whether the person is a homeowner or a non-homeowner. The thresholds are complex, and change from year to year. Careful examination of the circumstances is necessary to calculate a particular person’s entitlement. Current details can be accessed at the Department of Human Services website. Various deemed inclusions and exclusions of assets are taken into account in assessing an applicant’s income and assets. For example, for asset means test purposes for a homeowner applicant, the value of the principal residence is disregarded, whatever its value.4

There are two levels of means test threshold. The first is the level of income or assets above which the pension amount starts to be reduced, and the second threshold level is the level above which the person is not eligible for any pension at all. If a person is deemed to have income or assets which are in excess of the second threshold, not only will the person receive no pension, they will no longer be entitled to any of the associated benefits either. Maintaining even a very small part pension will entitle the person to various benefits and subsidies such as significantly subsidised health care entitlements — which can be of considerable value, particularly to elderly or disabled people. Appointment as an absolute beneficiary, or as a beneficiary of a testamentary trust, can therefore have an inadvertent or possibly unintended impact on the person’s deemed assets for the purposes of the income and assets means test.

Deprivation and disclaiming interests 4.3 As noted earlier, the method by which a pensioner’s assets and income will be assessed for the purposes of the income and assets means tests is by a process of deemed inclusions and exclusions under the relevant part of the Social Security Act 1991. An important deemed inclusion relates to assets that the pensioner has either transferred for inadequate consideration (or given away) or transferred for the purposes of obtaining a social security entitlement (this is sometimes referred to as ‘deprivation’).5 The deprivation provisions will apply where the amount in question exceeds $10,000 in value in a single [page 93] year, or exceeds $30,000 in total over an unbroken five-year period. The excess value of the asset will be deemed to be that of

the pensioner, and the income of the asset will be deemed (at the statutory rate) to be the pensioner’s for the following five years.6 The deprivation provisions are primarily intended to stop people seeking to artificially manipulate their eligibility for social security benefits by gifting their assets away to family and associates. There are, however, certain exceptions to these provisions, such as where the pensioner is transferring the assets into a special disability trust: (see 4.6). The anti-deprivation rules are generally intended to apply to those who seek to deprive themselves of their own assets in order to gain a social security benefit; however, the rules also apply to those who are beneficiaries under a will and who seek to disclaim their interest. Even where the pension recipient has not been consulted by the testator prior to being made a beneficiary, and even where the beneficiary does not wish to receive the gift in question and would rather disclaim the gift, it is taken into account in assessing the income or assets of the beneficiary. The result is that the pension will be reduced, and if the income and assets of the beneficiary exceed the upper threshold of the income and assets means test, the pension recipient will become ineligible to receive even a part pension. This is because even where a beneficiary of an estate never actually receives the gift in question, in disclaiming their interest they are giving away that legal interest. This might be particularly unfortunate if the gift in question is relatively modest, but of sufficient value to cause the pensioner to slightly breach the upper threshold of the assets means test. A testator drawing a will should therefore carefully consider the implications of a bequest to a social security recipient. This issue is particularly complicated in the case of testamentary trusts, because unlike a simple or absolute gift of an asset under a will (which will always be deemed to be that of the beneficiary, even if the pensioner seeks to disclaim that gift), the degree to which the assets of a testamentary trust will be deemed to be those of a

beneficiary (or potentially even a non-beneficiary in some cases) is far less clear-cut.

Taxation implications of disclaiming an interest 4.4 Where an individual disclaims their interest in the estate or in a testamentary trust, consideration should be given as to whether the disclaimer will result in any income tax or capital gains tax (CGT) implications for the beneficiary. From an income tax perspective, where there has been an absolute disclaimer by a beneficiary of her or his interest in a testamentary trust, all income attributable to the disclaimed interest will divert to the person or persons to whom the disclaimed interest has subsequently passed.7 [page 94] As a general proposition, if a beneficiary disclaims an interest in a testamentary trust immediately upon becoming aware of that interest, the effect of the disclaimer is to retrospectively void the gift so that the beneficiary is treated as if they never held the interest. The Commissioner’s views expressed in Taxation Ruling TR 2006/148 confirm that no CGT event takes place where there has been an ‘effective’ disclaimer of an interest (in the context of a life interest or remainder owner). It should be noted, however, that TR 2006/14 does not specify how quickly a beneficiary must disclaim their interest in order for it to be effective. If a beneficiary does not effectively disclaim their interest and a CGT event is taken to occur as a result of the disclaimer, then the beneficiary will be deemed to have received proceeds equal to the market value of the interest.9

Trusts — the source and control tests

4.5 As of 1 January 2002, changes to the Social Security Act 1991 mean that a person can be attributed assets or income not only from directly owned assets but also potentially from those held in private companies and trusts from which the person benefits. In relation to testamentary trusts, this means that if the testamentary trust is found to be a ‘controlled private trust’10 in relation to the person, then unless the Secretary determines otherwise, they will be deemed to be the ‘attributable stakeholder’11 in relation to the trust and will be deemed all assets and income of the trust (or such part of which the Secretary determines them to be the ‘attributable stakeholder’). A testamentary trust will be a ‘controlled private trust’ in relation to a person, if they are found to either meet the ‘source test’ or the ‘control test’. A person will be considered to meet the source test12 if the person transferred property or services to the trust after 7.30pm (Australian Capital Territory time) on 9 May 2000, and the transfer was made for no consideration or for a consideration less than the arm’s-length amount. Obviously this will generally be irrelevant in relation to a testamentary trust, as it is unlikely the beneficiary in question will be making transfers of assets to the trust at any point. A person will be considered to meet the control test13 if the person (or her or his ‘associate’14 — which is defined widely and includes among many other parties, a relative or business partner) has a sufficient level of control over [page 95] the trust. Although the concept of ‘control’ is generally intended to target the appointor or trustee of the trust, it is not limited to this, and matters that will be considered relevant include both the

direct and indirect control of the trust, exercised not only by that person but also by any of her or his associates. The most obvious forms of control in relation to a discretionary testamentary trust, which can cause a person to pass the control test, are if the person or an associate of the person is the trustee, or if the person is appointor. Other factors that will be considered in determining ‘control’ are wide and varied, and are set out in s 1207V(2) of the Social Security Act 1991. They are described in the Commonwealth Government publication Guide to Social Security Law15 as follows: • •

•

•

•

•

•

If there is a sole appointor, attribution will generally be made to the appointor. If the appointor is a professional, attribution will generally be made to the person or persons instructing the professional in relation to the affairs of the trust. If the professional is receiving instructions from an entity, attribution may be made to the controller or controllers of that entity. If there is no appointor, attribution may be made to the trustee or trustees of the trust. If the trustee is a company, attribution of the trust assets and/or income would generally be to the person or persons who control the company. If there are multiple trustees, but one trustee clearly directs the exercise of the trustee’s power, attribution will be made to that trustee. If there are multiple trustees but there is a partnered couple, whether of the same sex or a different sex, acting as trustees who can jointly exercise control, attribution may be made to the members of that couple. In any other circumstances, where there are multiple trustees, attribution may be made among those stakeholders who jointly exercise control. Attribution will be made in proportion to the capacity of those stakeholders to exercise control. Whether a person or persons is or are capable under a scheme (s 1207A) of gaining control.

•

Whether the trustee might reasonably be expected to act in accordance with the directions or wishes of the person or persons. • For the purposes of the Guidelines, it is permissible for the assessing officer to look beyond the presumptions raised under the law of trusts.16 One of the implications of the ‘associates’ rule is, for example, that if the spouse of the testator (who meets the definition of ‘associate’) is made a trustee or appointor (or holds a controlling position) of a testamentary trust, even if the spouse of the testator is not a beneficiary (and was never intended to benefit from the trust), that spouse can have the assets of the trust attributed [page 96] to them for the means test, because he or she is an associate and (as trustee or appointor) has control of the trust. The meaning of ‘beneficial interests in the corpus or income of the trust’ in s 1207V(2)(d) of the Social Security Act 1991 was considered in Elliott v Secretary, Department of Education Employment and Workplace Relations.17 In that case, an elderly couple were beneficiaries of a discretionary testamentary trust created by the father of the husband. The trustee was a friend and a solicitor of the testator, but was independent of the husband, and made distributions on a purely discretionary and independent basis. It was noted in the case that several requests by the couple in question had not been granted by the trustees. Kenny J found: In this case, neither of the Elliotts acting alone or together, or with their daughter (or with any lineal descendant as yet unborn) have any legal or practical capacity to take control of the testamentary trust. Consistently with this and in accordance with the trust deed, the trustees (so the Tribunal found) exercised their independent judgment in considering whether or not to make payments to any of the discretionary beneficiaries. In this context, it is inapt to attribute to the Elliotts ‘beneficial interests in the corpus or income of the trust fund’, which are capable of aggregation, as per 1207V(2)(d) contemplates. This is a case in which each discretionary beneficiary possesses certain limited rights. I doubt that these rights

might ever be aggregated in any relevant sense, but, even if they could, they would not permit the discretionary beneficiaries to require the trustees to make any distribution of any kind, whether out of income or capital, to them or any of them.18

In that case, the terms of the will went so far as to direct that in exercising discretion as to distributions of income and capital, the trustee was to have primary regard to the needs of the husband (the applicant). It was found that even this direction to the trustee did not raise the husband’s interest to meeting the required level of ‘control’. Kenny J said: As noted above, pursuant to clause 5(b) of the will, in exercising their discretion with respect to the income or capital of the trust, the trustees are required always to have primary regard to the needs of the first applicant, Paul Elliott. This would appear to place Mr Elliott in a more advantageous position than the other discretionary beneficiaries. Neither the Elliotts nor the Secretary sought to rely on this as a factor in support of their respective arguments. Neither party sought to argue that this direction changed the essential nature of the trustees’ discretion from an absolute discretion to something relevantly less than this.

[page 97] Indeed, it does not seem to me that the direction alters the essential nature of the rights held by Mr Elliott and the other discretionary beneficiaries. They remain as set out above. Acting in accordance with the terms of the trust, in considering an exercise of discretion, the trustees will always have primary regard to Mr Elliott’s needs and, in consequence, his needs will be considered first, but, having considered his needs, it remains for the trustees to determine whether to make a payment out of trust income or capital to him, or to another discretionary beneficiary, and, if so, how much that payment should be. The existence of the direction does not turn the bundle of rights that Mr Elliott enjoys into beneficial interests in the corpus or income of the trust. Nor does it affect the nature of the rights held by the other discretionary beneficiaries. The direction does not enable any aggregation of beneficial interests for the purposes of par 1207V(2)(d) of the Social Security Act. Part 3.18 of the Social Security Act is not, I think, intended to operate through subs 1207V(2) so as to require that assets that the individual cannot turn to his own use as he wishes to be taken into account in determining whether that individual qualifies for a benefit under the Social Security Act.19

If the trustees had been ‘associates’ of the couple, then the attribution of those assets would most likely have occurred. The

trustees, however, were not associates of the couple; there was evidence that requests had not always been granted by the trustees, and the couple in question held no controlling power or office over the trust. Understanding the social security means tests in relation to trusts is relevant not only for avoiding any unintended attribution, which could occur if the trust appoints a beneficiary who is in reality never intended to receive a benefit; it is also important for understanding how a trust can be structured with the intention of benefitting a particular beneficiary while avoiding unnecessary impact on that person’s social security entitlements. One of the explicit ways that provision can intentionally be made for a severely disabled beneficiary, without negatively impacting the social security entitlements of either the person gifting the assets or the severely disabled beneficiary, is through the use of a special disability trust.

SPECIAL DISABILITY TRUSTS Introduction to special disability trusts 4.6 Special disability trusts have been available since 20 September 2006. The conditions which a trust must meet in order to be recognised as a special disability trust are set out in Pt 3.18A of the Social Security Act 1991 and Div 11B of the Veterans’ Entitlements Act 1986. The provisions in the two Acts mirror each other; the Act which grants the pension entitlement to the principal beneficiary determines which special disability trust provisions apply. Where a trust is recognised as a special disability trust, family members and carers are able to make contributions to the trust [page 98]

for the current and future care and accommodation needs of a family member with a severe disability,20 and receive means test concessions (these concessions are available both for the person gifting to the trust, and for the beneficiary). The conditions imposed on special disability trusts are strict and narrow. The requirements are as follows: •

There must be only one principal beneficiary, who must meet the requisite level of disability,21 which has quite a high threshold level. The required levels of disability under the Social Security Act 1991 are set out in s 1209M, and are as follows: … (2) If the principal beneficiary has reached 16 years of age: (a) the beneficiary must: (i) have an impairment that would qualify the person for disability support pension; or (ii) be receiving invalidity service pension under Part III of the Veterans’ Entitlements Act; or (iii) be receiving income support supplement under the Veterans’ Entitlements Act on the grounds of permanent incapacity; and (b) the beneficiary must: (i) have a disability that would, if the person had a sole carer, qualify the carer for carer payment or carer allowance; or (ii) be living in an institution, hostel or group home in which care is provided for people with disabilities, and for which funding is provided (wholly or partly) under an agreement, between the Commonwealth, the States and the Territories, nominated by the Secretary under subsection (3); and (c) the beneficiary must have a disability as a result of which either: (i) he or she is not working, and has no likelihood of working, for more than 7 hours a week for a wage that is at or above the relevant minimum wage; or (ii) he or she is working for wages set in accordance with the program administered by the Commonwealth known as the supported wage system. Note: For relevant minimum wage, see subsection 23(1). (3) The Secretary may, by legislative instrument, nominate an agreement for the purpose of subparagraph (2)(b)(ii).

(4) If the principal beneficiary is under 16 years of age, subsection (4A) must apply to him or her. [page 99] (4A) This subsection applies if: (a) the principal beneficiary is a person with a severe disability or a severe medical condition; and (b) another person (the carer) has been given a qualifying rating of intense under the Disability Care Load Assessment (Child) Determination for caring for the principal beneficiary; and (c) a treating health professional has certified in writing that, because of that disability or condition: (i) the principal beneficiary will need personal care for 6 months or more; and (ii) the personal care is required to be provided by a specified number of persons; and (d) the carer has certified in writing that the principal beneficiary will require the same care, or an increased level of care, to be provided to him or her in the future.

• • • • • •

The purpose of the trust must be for the accommodation and care needs of the principal beneficiary. The trust must have a trust deed that contains the prescribed clauses as set out in the model trust deed.22 The trust must have an independent trustee, or alternatively have more than one trustee. The trust must comply with the investment restrictions.23 The trust must provide annual financial statements. Independent audits must be conducted when required.

Benefits of a special disability trust 4.7 Special disability trusts offer a number of benefits: • Immediate family members of the principal beneficiary are able to make contributions to a special disability trust, and a total combined amount of $500,000 can be gifted to the trust, without impacting on the donors in relation to their own social security means test (ie the gifts will not count as

• •

deprivations against the donors). For the principal beneficiary, there is an assets test exemption of $636,750 (as of 2015/2016, indexed annually). From 1 July 2006, there is a: CGT exemption for any asset donated to a special disability trust; CGT main residence exemption for a property in the trust used as the main residence for the principal beneficiary; [page 100]

•

•

CGT main residence exemption available for a recipient of a main residence transferred from a special disability trust, if sold within two years of the principal beneficiary’s death. From 1 July 2008, unexpected income of a special disability trust is taxed at the principal beneficiary’s personal income tax rate, rather than at the top rate. From 1 January 2011: a principal beneficiary of a special disability trust can work up to seven hours a week at or above the relevant minimum wage; the trustee can pay for the beneficiary’s medical expenses (including private health fund membership) and the maintenance expenses of the Trust’s property; and the trustee can spend up to $10,000 in a financial year (based on the rate at 1 January 2011 and indexed annually) on discretionary items not related to the care and accommodation needs of the beneficiary of the trust, that is, for items relating to a beneficiary’s health, wellbeing, recreation, independence and social inclusion.

Creation of a special disability trust

4.8 A special disability trust can be established either during the lifetime of the settlor (ie inter vivos) or as a testamentary trust in a will. When a special disability trust is established inter vivos, the trust deed will usually reproduce all of the clauses of the ‘model trust deed’. In the case of a will, however, it is unnecessary to reproduce the actual terms of the model deed itself, as the legislation makes it possible simply to empower the trustee to create a special disability trust: Pt 3.18A of the Social Security Act 1991 or Div 11B of the Veterans’ Entitlements Act 1986 (or equivalent legislation), and thus incorporate the terms of the ‘model trust deed’ by reference. Incorporating the terms of the special disability trust by reference in a testamentary trust will (as opposed to reproducing the current model terms) is preferable because whereas in the case of an inter vivos special disability trust which comes into effect immediately, in the case of a special disability trust created by will, the trust itself will not come into existence until the testator’s death. The terms of the ‘model trust deed’ have changed over time, and presumably will continue to change. Indeed, there is already a ‘model Deed of Variation of Special Disability Trust’24 that must be adopted by those special disability trusts, which came into effect with the first model deed, if they wish to take advantage of concessional changes that have become available since the first model deed. [page 101]

Reform to special disability trusts 4.9 The relatively onerous conditions required for a special disability trust, and the limited concessions that were made available when they were first introduced in 2006, led to a

relatively low rate of take-up. This led to an inquiry by the Senate Standing Committee on Community Affairs into Special Disability Trusts,25 which was tabled in October 2008. In its report, the Committee noted that it was estimated when the trusts were first made available in 2006 that at least 5000 people in Australia would be eligible to qualify as principal beneficiary of a special disability trust. However, as at 30 June 2008, only 33 special disability trusts were in existence, and only 262 people in total had been granted eligibility status by Centrelink.26 In the years since the report was tabled, several of the Committee’s recommendations have been implemented. Examples of such recommendations are the CGT concessions noted above, allowing the principal beneficiary to be employed for up to seven hours per week, and allowing the annually indexed $10,000 spending on discretionary items. In spite of these reforms, the requirement that a principal beneficiary meet such a relatively serious level of disability27 continues to act as a significant limitation on the potential scope of special disability trusts. However, reforms and improvements may extend the reach of the legislation over time, and so it is important when drafting a testamentary trust for a person who is disabled to consider empowering the executor and/or trustee to make provision for a special disability trust even if the person does not currently meet the definition of being ‘severely disabled’.

Incorporating a special disability trust in a will 4.10 The precedent clause in Chapter 9 in this text empowers the trustee to set up either the ‘Trust for a disabled beneficiary’ (Schedule 2 trust) precedent or use a special disability trust depending on the circumstances then prevailing: see Executor may allocate part or all the property I have provided for [name of disabled person] to a Special Disability Trust. In particular, the trustee can deal effectively with the situation which arises if the amount available exceeds the maximum amount permitted under the special disability trust means testing rules without

impacting the beneficiary. In this case, the trustee can set aside an amount within the prescribed limit in a special disability trust, and put the balance in the disabled beneficiary’s testamentary trust, or any other combination they deem appropriate at the time.

1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

19. 20. 21. 22.

23.

This includes the age pension, disability support pensions, Newstart allowance and Austudy. Part 3.10 of the Social Security Act 1991 (Cth). Part 3.12 of the Social Security Act 1991 (Cth). Section 1118 of the Social Security Act 1991 (Cth). Section 1123 of the Social Security Act 1991 (Cth). Ibid. Vegners v Federal Commissioner of Taxation (1991) 21 ATR 1347; for further discussion, see M Stewart and M Flynn, Death & Taxes: Tax-Effective Estate Planning, 5th ed, Thomson Reuters (Professional), Sydney, 2012, [8-130]. TR 2006/14 ‘Income tax: capital gains tax: consequences of creating life and remainder interests in property and of later events affecting those interests’. For further discussion, see M Stewart and M Flynn, Death & Taxes: Tax-Effective Estate Planning, 5th ed, Thomson Reuters, (Professional), Sydney, 2012, [16-270]. Section 1207V of the Social Security Act 1991 (Cth). Section 1207X of the Social Security Act 1991 (Cth). Section 1207V(3) of the Social Security Act 1991 (Cth). Section 1207V(2) of the Social Security Act 1991 (Cth). Section 1207C of the Social Security Act 1991 (Cth). This can be viewed at . Go to ‘Guide to Social Security Law’. See version 1.189 at 4.12.1.20, available at and search for ‘guides’. (2008) 249 ALR 182; [2008] FCA 1293. It seems that the correct name of the first party is Elliott; the case name in [2008] FCA 1293 is wrong. At [49] and [50]. An appeal to the FCAFC was dismissed: Secretary, Department of Families, Housing, Community Services and Indigenous Affairs v Elliott (2009) 254 ALR 223; [2009] FCAFC 37 (Black CJ, Stone and Edmonds JJ). At [51] and [52]. As defined in s 1209M of the Social Security Act 1991 (Cth) and s 52ZZZWA of the Veterans’ Entitlements Act 1986 (Cth). Section 1209M of the Social Security Act 1991 (Cth) and s 52ZZZWA of the Veterans’ Entitlements Act 1986 (Cth). The model trust deed can be accessed at: . Go to ‘Home — Our Responsibilities — Disability and Carers — Publications & Articles — Special Disability Trusts: Model Trust Deed’. Section 1209R of the Social Security Act 1991 (Cth) and s 52ZZZWE of the Veterans’

24.

25.

26. 27.

Entitlements Act 1991 (Cth). This can be viewed at . Go to ‘Home — Our Responsibilities — Disability and Carers — Publications & Articles — Special Disability Trusts: Model Trust Deed’. Senate Standing Committee on Community Affairs, Building Trust, Supporting Families through Disability Trusts, Commonwealth of Australia, Canberra, October 2008. The report can be viewed at . Ibid, p 4. Section 1209M of the Social Security Act 1991 (Cth) and s 52ZZZWA of the Veterans’ Entitlements Act 1986 (Cth).

[page 103]

5 INSURANCE AND ESTATE PLANNING

Introduction Background Approaches to Insurance The replacement method The expenses method Types of Insurance Term life insurance Total and permanent disability (TPD) insurance Trauma insurance Income protection Key person insurance Specific Issues Relating to Insurance Affordability issues Nomination of beneficiaries Family provision Policy ownership Insurance and business interests Estate Planning Strategies which Employ Life Insurance

INTRODUCTION 5.1 The majority of estate plans will require an advisor to provide for the event of death or disability of the client. The most

effective way of doing this is usually through an insurance product, so understanding the basics of insurance is fundamental to effective estate planning. The following topics are considered in this chapter: • • • •

approaches to insurance; types of insurance; specific issues relating to insurance; and estate planning strategies which employ insurance. [page 104]

BACKGROUND 5.2 Insurance can be an important funding mechanism for an estate plan, particularly for clients with blended families or dependent beneficiaries. Without appropriate insurance cover in place, the assets within the estate may not be sufficient to meet the needs of the testator’s spouse or other beneficiaries. This is particularly the case with younger clients who have not yet built a significant pool of assets, and still have considerable liabilities in the form of home and other loans. The need for life insurance to provide funding to an estate depends on: • • • • • • • • •

the client’s age; the client’s level of debt; the client’s income; the client’s business arrangements; the number of intended and potential beneficiaries; the needs of the beneficiaries; other sources of income available to the beneficiaries; taxation issues and potential tax liabilities; and inflation.

APPROACHES TO INSURANCE There are typically two methods for determining the appropriate amount of cover: 1. the replacement method; and 2. the expenses method.

The replacement method 5.3 The replacement method in the context of estate planning is based around determining the potential salary that would be lost over the client’s remaining working life, taking into consideration the impact of inflation and the likely investment return on the claim amount paid, and then insuring for this amount. Using this method, it is not necessary to consider issues such as debt levels as it is assumed that if the income of the client is replaced, then any existing debt will be amortised as if the death did not occur.

The expenses method 5.4 The expenses method is based around what vital expenses are ahead and insuring for this amount. Using this method, it is important that all expenses are accounted for, which may include repayment of debts such as home loans, education expenses for children, funeral expenses and any potential shortfall in living expenses. The amount calculated is then reduced by the amount of other resources such as superannuation death benefits that are available to the estate and beneficiaries. [page 105]

TYPES OF INSURANCE 5.5 There are a number of different types of insurance including: • term life insurance; • total and permanent disability (TPD) insurance; • trauma (or critical illness) insurance; • income protection; and • key person insurance. While there are many products within each category, specific advice should be sought from a financial advisor in order to ensure that particular products are tailored to the specific needs of each client, particularly in relation to payout terms.

Term life insurance 5.6 Term life insurance provides a lump sum payment upon death of the life insured, with payment made to either the nominated beneficiary or the estate if no beneficiary is nominated. Where the policy is held personally, the proceeds will generally be paid to the nominated beneficiary and in the absence of a nomination, to the estate to be dealt with under the will. Where benefits are paid to the estate, the proceeds from the insurance payout may be available for payment of the debts and liabilities of the estate and to satisfy a family provision claim. In these circumstances, it may be appropriate for the client to nominate a beneficiary to receive benefits directly. The proceeds of a life insurance policy that is taken out on the life of the deceased and payable to the estate will not be assessable income of the estate. This is the case even if the premiums of the policy are paid for by a third party (see Taxation Ruling IT 155). Where the policy is held within superannuation, the premiums will generally be deductible within the fund; however, where the fund has claimed a tax deduction either for the premiums or for a

future liability to pay benefits, the taxable component of those benefits will include an untaxed component. Where a binding death benefit nomination provides that a death benefit must be paid to a superannuation dependant, the proceeds will be paid to the superannuation fund.

Total and permanent disability (TPD) insurance 5.7 TPD insurance provides a lump sum payment if the life insured meets the policy definition of ‘total and permanent disability’. This definition may be either ‘own’ occupation or ‘any’ occupation. ‘Own’ occupation means being unable to do the duties of the life insured’s own specific occupation while ‘any’ occupation means the insured is unable to perform the duties of any occupation the insured is reasonably suited to by education, training or experience. [page 106] Based on these definitions, an ‘own’ occupation definition is superior to and therefore more expensive than ‘any’ occupation. In addition, a separate definition exists for ‘non-working’ or ‘homemaker’, which is generally based around an assessment of function and/or activity (eg bathing and showering). Generally, most policies will exclude any disablement that has arisen as a result of the insured’s intentional act or omission. Since 1 July 2014, any new insurance policy commenced inside superannuation must have a claim definition that matches the conditions of release for death, terminal medical condition, temporary or permanent incapacity. This means that ‘own’ occupation TPD cover is no longer permitted to be held inside superannuation. This is because under an ‘own’ occupation TPD

cover, the policy may pay out, but since the member may not have met a condition of release under superannuation law, they will be unable to access the benefits.

Trauma insurance 5.8 Trauma insurance provides a lump sum payment if a specified medical condition occurs. This type of insurance is becoming more important as technology in medicine improves the survival rates of medical traumas (such as heart attack and cancer). Reference to the relevant product disclosure statement is necessary in order to understand what is covered, in particular the relevant definitions that are applicable to the trauma (eg what is a ‘heart attack’). Generally, most policies will exclude any trauma that has arisen as a result of the life insured’s intentional act or omission, or (for some specific traumas) within a short time frame after policy acceptance (eg 90 days).

Income protection 5.9 Income protection provides a regular payment if the life insured cannot work due to an injury or illness. Generally, most policies limit the cover to 75% of the life insured’s income. These policies have a waiting period, which is the period during which no benefit is accruing. The waiting period is typically 14, 30, 60 or 90 days, but can be as long as two years. The shorter the waiting period, the higher the cost of the policy (significantly so for a 14-day waiting period). Income protection policies also have a benefit period which is the maximum period of time that the life insured will be paid a

benefit for any one injury or illness. This can be as short as two years or to a certain age, for example age 55, 60 or 65. At additional cost the policies can be guaranteed (will not reduce with future changes to income), or can provide indemnity where the benefit will be the lower amount of the amount shown in the policy schedule or the life insured’s pre-claim income. In addition, there is usually a wide range of ancillary benefits that are included or can be attached to the policies such as assistance with retraining [page 107] and rehabilitation expenses, specific injuries, accommodation benefits, nursing care benefits and relocation benefits. Generally, most income protection policies will exclude a claim that arises from war or war-like activity, the life insured’s intentional act, or normal, uncomplicated pregnancy, miscarriage or childbirth.

Key person insurance 5.10 Key person insurance is vital in protecting the profitability of businesses in case a key person is unable to work in the business for an extended period of time. A determination needs to be made about who are the key people whose loss would result in a drop in revenue. In the case of a business operated by a company, the company is the policy owner and the key person is the life insured. The proceeds of a claim are paid to the company.

SPECIFIC ISSUES RELATING TO INSURANCE

Affordability issues 5.11 A consideration when assessing insurance needs is the future affordability of the premiums. It is not uncommon for policies to be cancelled later in a client’s working life (eg age 55) due to the premiums becoming unaffordable in the eyes of the client, which of course also coincides with the time the risks of claim are significantly higher, and thus thwarting all the careful planning that was put into the estate plan. Premiums can be taken on a ‘stepped’ or ‘level’ basis’. Either way, the premiums will increase if the amount of cover increases, with premium adjustments for inflation or if the insurer adjusts the premium rates. However, a level premium does not increase with age, and it is this factor which can result in premiums increasing significantly as a client ages. Level premiums are, however, higher in the early years than a stepped premium; therefore, a careful assessment is required to determine which is more appropriate. It generally takes a number of years after the policy is in force before a stepped premium is more expensive than a level one. A client’s age at the time the policy commences will determine the benefit of a level premium. The older the client, the lower the benefit of a level premium structure.

Nomination of beneficiaries 5.12 The life insurance policy may include a nomination. If a nomination is made, then any proceeds paid under a claim will not be passed through the estate, but will be paid directly to the nominee. There are consequences: certain estate planning strategies such as the use of testamentary trusts in [page 108]

the will may be sidestepped, or the result may be to give some protection from bankruptcy or to give some protection from a family provision claim: see Chapter 11. Existing insurance policies should be reviewed to consider whether to make a nomination, and the question of nomination should be considered while taking out a new policy. The revocation of a nomination and the termination of a nomination, for instance by the death of the nominee before the life insured, could result in undesired outcomes in relation to asset protection. Specific considerations relating to life insurance benefits and nominations are discussed in 5.6.

Family provision 5.13 Family provision legislation exists in each state and territory in Australia. Family provision provides a mechanism by which the courts can make provision for particular persons where a deceased person’s will or intestacy does not do so (see Chapter 11). With the exception of New South Wales, which has notional estate provisions, the legislation allows family provision to be made out of estate assets only. It follows that outside New South Wales, non-estate assets, such as life insurance proceeds paid directly to a nominated beneficiary, are not available to satisfy a family provision claim. The New South Wales notional estate provisions, however, give the court great power to access notional estate which can include the proceeds of a policy paid to a nominee, and must not be ignored. The use of life insurance can be a useful planning tool to protect benefits from a family provision claim, or alternatively, by increasing the dividends available to be given to potential claimants, to reduce the risk of family provision claims. Examples are given below.

Policy ownership 5.14 Generally, life insurance policies issued to more than one person are set up as a joint tenancy as most life insurance companies in Australia will not issue policies to owners as tenants in common. This means if a couple have a joint life insurance policy, and one dies, the proceeds will be paid to the surviving spouse, not to the estate of the deceased. Therefore, the assets cannot be passed to beneficiaries via the will of the first dying. Careful consideration should thus be given to policy ownership structure.

Insurance and business interests 5.15 Where a testator has an interest in a business with other persons, the beneficiaries of the testator and the surviving business partners may conflict. The surviving business partners may be focused on protecting the viability of the business while the surviving beneficiaries of the deceased may be focused on receiving fair value for their (inherited) interests in the business. [page 109] Typically a client’s business, as a significant contributor to family income, is integral to the financial planning process. A buy/sell agreement between the testator and the other business partners can ensure a satisfactory succession of the business interests by ensuring that the estate receives a fair market value for the equity the deceased held. Insurance can provide the funding mechanism to ensure that everyone’s needs are dealt with appropriately, along with the necessary legal agreements. The insurance benefit will provide the necessary capital to the business (or its other owners) to buy out

the deceased’s beneficiaries, without affecting the financial stability of the business. A legal agreement is therefore important to ensure that proper terms and conditions, including the role of insurance, the valuation methodology and trigger events, are established and agreed to. Capital gains tax may apply to the proceeds of an insurance claim if beneficial ownership changes and consideration is given to the transfer of an insurance policy, so the structure of the policy must be considered from this point of view.

ESTATE PLANNING STRATEGIES WHICH EMPLOY LIFE INSURANCE 5.16 Life insurance policies play a significant role in estate planning and can be used to address specific risks to the estate. Specifically, there can be risks that: • there will not be sufficient funds to pay the liabilities of the estate; • there will not be sufficient funds for the beneficiaries, in particular where there are minor beneficiaries; and • beneficiaries may have competing interests, but there may be insufficient assets to balance these interests. Example 1: Using insurance to increase the size of the estate John is aged 45 and has a 35-year-old wife Sarah and two young children aged four and two. John and Sarah have a principal place of residence worth approximately $1.2 million and a $1 million mortgage. John has limited superannuation and assets as a result of a previous separation. There are no children from his previous relationship. If John were to die (either before or after Sarah), given the quantum of debt on the principal place of residence, the assets are

unlikely to be sufficient to look after his beneficiaries. Given their age, there is a distinct need to ensure that the children will be adequately provided for not only in the short term after John’s death but also in the long term. Support must be found for their education, living expenses and medical and dental expenses until they are in full-time work. In this example, the estate planning solicitor will identify the shortfall in assets and recommend that John and Sarah consult an insurance advisor. [page 110] Through collaboration with the insurance advisor, John could implement a life insurance policy (either in his own name or through superannuation) in order to ensure that on his death, all liabilities could be paid out and that there would be sufficient assets in the estate to look after the needs of Sarah and the children. In the event that Sarah predeceases John, there is a risk that the children may inherit estate assets (including the insurance) on turning 18 and waste their inheritance. In order to address this risk, John’s will should be drafted to include testamentary trusts so that any life insurance benefits received through the estate can be held in a protective trust until such time as the children attain the relevant preservation age. The Model Testamentary Trust precedent in Chapter 8 is appropriate for this. Example 2: Using insurance in a blended family arrangement Peter is aged 45 and has a 35-year-old wife Winnie and two young children aged six and four. Peter has two teenage children from his previous marriage. Peter and Winnie have a principal place of residence worth approximately $1.2 million. Peter has limited superannuation but has other assets worth $100,000.

Peter faces a predicament. On one hand he wishes to provide for his wife Winnie and their two young children. He acknowledges that Winnie is significantly younger than he is and that their two young children will need significant support to get them through to adulthood. On the other hand, Peter also wishes to provide for his two older children from his previous marriage. Unfortunately, Peter’s assets are limited and cannot adequately provide for all of his beneficiaries. Given the size of his estate, he wants to leave 100% of his estate to Winnie and his two young children and must reluctantly exclude the children of his previous relationship. If he decides to do this, the children of his previous relationship might well succeed in a family provision claim, notwithstanding the distinct funding issue that his estate will have. In these circumstances, it would be appropriate for Peter to see an insurance advisor as insurance could be used to not only increase the size of the estate but also to reduce the risk of a family provision claim by providing for the older children.

[page 111]

6 SUPERANNUATION AND SUCCESSION PLANNING

Introduction Superannuation and the Deceased Estate Background An essential distinction: estate assets and non-estate assets ‘Defined Benefit’ and ‘Accumulation’ Superannuation Funds Distinguished Defined benefit schemes Accumulation funds and binding death benefit nominations Meaning of ‘super dependant’ and ‘tax dependant’ Payment of superannuation benefits Superannuation Death Benefit Taxes Lump sum superannuation benefits paid on death — superannuation death benefits tax Payment of superannuation death benefit lump sum to the deceased member’s estate Strategies to minimise death benefit taxes Superannuation Proceeds Will Trusts and Superannuation Proceeds Trusts Superannuation proceeds will trust Superannuation proceeds trust Superannuation and Family Provision Claims Family provision claims in all states and territories other than New South Wales Superannuation and Will Drafting Considerations Relevance of the testator’s will to the terms of the superannuation fund trust deed or the fund trustee Superannuation and equalisation clauses Succession Planning and Superannuation

Binding death benefit nominations for non-SMSFs

[page 112] SMSFs and superannuation wills Trustee succession for SMSFs Lessons for trustee succession and SMSFs

INTRODUCTION 6.1 This chapter is concerned only with the law relating to those payments of superannuation benefits on death that have been made after 1 July 2007, when significant changes to superannuation law came into effect. The following topics are covered: • • • • • •

superannuation and the deceased estate; ‘defined benefit’ and ‘accumulation’ superannuation funds distinguished; superannuation death benefits taxes and strategies for minimisation; superannuation proceeds will trusts and superannuation proceeds trusts; superannuation and will drafting considerations; and succession planning and superannuation.

SUPERANNUATION AND THE DECEASED ESTATE Background

6.2 The will drafter must understand fully the testator’s superannuation arrangements in order to prepare an effective estate plan and draft a will, particularly one containing a discretionary testamentary trust. The drafter must know: • the way in which superannuation benefits pass; • their value; and • to whom they are to be paid. On these facts depend: • • • • •

the need for and suitability of a discretionary testamentary trust; the amount of the assets available to be put into a discretionary testamentary trust; the terms on which any discretionary testamentary trust will be drafted; the ultimate tax liabilities; and possible family provision claims.

An essential distinction: estate assets and nonestate assets 6.3 As discussed in Chapter 1, superannuation death benefits may or may not become an estate asset. Whether superannuation benefits become estate [page 113] assets depends on how the superannuation fund is set up and the specific provisions in the deed. Unless the advisor is aware of the mechanisms which dictate how superannuation benefits pass, it will be impossible to prepare a proper estate plan or to draft a proper will, with or without a discretionary testamentary trust.

‘DEFINED BENEFIT’ AND ‘ACCUMULATION’ SUPERANNUATION FUNDS DISTINGUISHED 6.4 The rules of all superannuation funds vary according to the trust deeds of the funds, which are themselves subject to the overriding superannuation law.1 The way that funds can pay benefits upon death varies from fund to fund according to the fund’s rules and the type of fund in question. An ‘accumulation’-type superannuation fund consists of the superannuation guarantee contribution from the member’s employer, as well as whatever contributions the member makes, and what earnings the fund makes. Examples of accumulationtype superannuation funds are retail superannuation funds, industry superannuation funds and self-managed superannuation funds (SMSFs). In relation to accumulation funds, it is important to note that while SMSFs are a form of accumulation-type superannuation, they are not subject to all of the rules which apply to accumulation-type funds.2 A ‘defined benefit’ superannuation fund is a fund that upon retirement pays a member a defined benefit based on various factors such as years of service, salary and contributions. Examples of defined benefit schemes include the Commonwealth Superannuation Scheme (CSS), the Public Sector Superannuation Scheme (PSS), military funds such as Defence Force Retirement and Death Benefits Scheme (DFRDB), defined benefit schemes for state government employees, and Unisuper. Defined benefit schemes have traditionally been extremely generous, have generated considerable unfunded liabilities, and as a result almost all are now closed to further membership.

Defined benefit schemes 6.5

Most defined benefit superannuation schemes will not allow

a member who has retired and commenced a pension to direct how their benefits will [page 114] pass on death. Instead, the pension benefits will pass in accordance with the rules of the fund. As an example, the rules of the PSS and CSS schemes provide that in the case of the default pension, 67% of the pension of the deceased member will pass to the deceased member’s spouse or partner (the balance of the pension being effectively lost where there are no dependent children). It is important to understand the predetermined nature of these schemes when a person develops their estate plan. (The authors have seen wills that seek to make directions as to how such defined benefit scheme pensions will pass on death; however, such directions are meaningless.) Given the lack of any control or choice that a member has in relation to how such defined benefit scheme pensions will pass on death, no further comment will be made in this chapter about defined benefit superannuation schemes. In the remainder of this chapter, any reference to ‘superannuation’ is a reference to ‘accumulation’-type superannuation only.

Accumulation funds and binding death benefit nominations 6.6 The way that a member’s superannuation benefits pass on death will ultimately be decided by a combination of superannuation laws, the terms of the superannuation fund’s trust deed or rules, whether the member has signed a binding or nonbinding death benefit nomination and, if relevant, the way the trustee exercises any discretion they hold.

In practice, when a member of an accumulation fund dies, the first thing to be done is to look to the rules of the fund, and then to establish whether the member has signed a binding or nonbinding death benefit nomination. A non-binding death benefit nomination is simply an indication to the trustee that the member would like their superannuation benefits paid to one or more dependants. If there is a binding death benefit nomination which is valid (validity is considered below), the trustee has no discretion and must pay the deceased member’s benefits in accordance with the nomination. Most rules will provide that if the member has either signed a non-binding death benefit nomination or none at all, then the trustee will ultimately pay the member’s benefits according to the trustee’s discretion. In that situation, however, a trustee cannot pay the deceased member’s benefits to any person the trustee chooses; they can pay them only to the spouse, child or a person with whom the member was in an ‘interdependency relationship’ (see below), or to the legal personal representative (the estate) of the deceased. (These parties are referred to in this chapter as ‘super dependants’ — being parties to whom superannuation benefits can be paid directly upon the death of a member.)3 Some superannuation funds accept both binding and nonbinding death benefit nominations, and some accept only nonbinding nominations (this depends on the rules of the fund in question). If a fund does not accept a binding death benefit nomination, then it will always (ultimately) be at the [page 115] discretion of the superannuation fund trustee to whom to pay the benefits when the member dies. A binding death benefit nomination is a binding direction, signed by the member, requiring the trustee to pay the benefits of the deceased member in a particular manner and to a particular

person or persons. For funds other than SMSFs, the required form of a binding nomination is imposed by s 59(1A) of the Superannuation Industry (Supervision) Act 1993 (the SIS Act), and the requirements for what constitutes a valid binding nomination are set out in reg 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regs). In order to be valid, the binding nomination must: •

meet the conditions imposed by law and by any relevant rules of the fund, and under the requirements of reg 6.17A the nomination must (among other things) be in writing, witnessed by two adults and be renewed every three years by the member (note that SMSFs are exempt from these requirements); and • require a form of payment that is permissible under law (for instance, the nominated beneficiary must be a person who meets the definition of being a ‘super dependant’, which includes the legal personal representative of the deceased member — ‘super dependant’ is discussed in 6.7). As noted above, SMSFs are not bound by the requirements of reg 6.17A. This means that the rules of an SMSF can potentially allow a binding nomination to take any form at all, as long as all nominated beneficiaries are super dependants, and any party nominated to receive an income stream is a tax dependant (‘tax dependant’ is discussed in 6.7). Whereas a binding death benefit nomination in a non-SMSF will usually be as simple as setting out which super dependant is to receive what amount or proportion, an SMSF binding nomination can potentially be as complicated as the rules allow, and as a result it may be appropriate to prepare a ‘superannuation will’ (see 6.25) to give effect to the person’s complex estate planning needs. If a member has not signed a valid binding death benefit nomination, or if no binding nomination remains in force, then (subject to the rules of the fund) the trustee will usually have discretion to pay the deceased member’s benefits either to the

legal personal representative of the deceased member (to become part of the estate of the deceased member), or to pay the benefits directly to the ‘super dependant(s)’ of the deceased. If there are no ‘super dependants’ of the deceased, then the trustee must pay the benefits to the deceased member’s legal personal representative.4

Meaning of ‘super dependant’ and ‘tax dependant’ 6.7 In this chapter, the term ‘super dependant’ refers to a person who is a ‘dependant’ for the purposes of the SIS Act and ‘tax dependant’ refers to [page 116] a person who meets the definition of ‘death benefits dependant’ for the purposes of Div 302 of the Income Tax Assessment Act 1997 (ITAA 1997). The terms ‘super dependant’ and ‘tax dependant’ are not technical terms and they do not appear anywhere in the legislation, but they are commonly used to avoid the confusing similarity of the terms ‘dependant’ (as defined under the SIS Act) and ‘death benefits dependant’ (as defined under the ITAA 1997).

Super dependant 6.8 For the purposes of the SIS Act, a ‘dependant’ (here called a ‘super dependant’) of a member is limited to that member’s spouse (as defined) or child (which includes children and step-children) or a person with whom the deceased was in an ‘interdependency relationship’, that is, a relationship with a person with whom the deceased lived and had a close personal relationship, and in which

one or each of them provided the other with financial and domestic support and personal care.5 Direct payments from the super fund cannot be made to anyone except super dependants and the legal personal representative of the deceased member.

Tax dependant 6.9 ‘Tax dependant’ is a narrower category than super dependant. One key differentiation is that a tax dependant enjoys the benefit of not paying any superannuation death benefits taxes on any superannuation they receive from a deceased member (see below), and is able to receive an income stream from a deceased member (eg a reversionary pension). Essentially, a child of a deceased member will always qualify as a super dependant, but will only qualify as a tax dependant if the child is a minor, disabled or actually dependent on the deceased. The effect is that adult non-dependent children are super dependants but not tax dependants. So while they are eligible to have superannuation paid to them directly, they will not be eligible to receive benefits as an income stream and they will be subject to superannuation death benefit taxes on lump sum payments made to them.

Payment of superannuation benefits 6.10 Superannuation benefits can be paid directly as a lump sum or as an income stream to a person who is both a tax dependant and a super dependant. Where benefits are paid directly to a super dependant, those benefits pass as a non-estate asset. The passing of super directly to a beneficiary has significant advantages. It provides valuable asset protection: superannuation benefits can be directed to a super dependant without being liable to a potential family provision claim (ie in all Australian jurisdictions except New South Wales, which has ‘notional estate’

provisions), and the superannuation benefits are protected from estate creditors. [page 117]

Receiving superannuation benefits as an income stream 6.11 Where a beneficiary qualifies as both a super dependant and a tax dependant, the person is eligible to be paid the benefits as an income stream (ie as a pension), regardless of the age of the deceased member or the age of the tax dependant. (The age of the deceased member and the recipient is, however, potentially relevant in determining how the pension is taxed.) Receiving superannuation benefits as an income stream can have significant tax benefits. For example, if a member is over age 60 and receiving superannuation benefits in the form of an account-based pension, the member will pay no tax on either the earnings of the benefits in the fund or on the pension payments made from those earnings. If the member dies leaving (say) a disabled child, the child (being both a super dependant and a tax dependant of the deceased) would be able to take a reversionary pension from the deceased, which would (just like the pension the deceased had been receiving) be tax free both on earnings in the fund and on pension payments. (‘Disabled’ in this context is defined in s 8 of the Disability Services Act 1986 (Cth), and means that the child has a disability which is attributable to an intellectual, psychiatric, sensory or physical impairment or a combination of such impairments, which is permanent or likely to be permanent, which results in a substantially reduced capacity of the person for communication, learning or mobility, and the need for ongoing services, regardless of age.) By contrast, if on the member’s death the benefits were to be paid as a lump sum to the member’s estate and placed in a testamentary trust for the disabled child, the benefits (or income

from the benefits) would be taxed like any other inherited asset in a testamentary trust.

SUPERANNUATION DEATH BENEFIT TAXES Lump sum superannuation benefits paid on death — superannuation death benefits tax 6.12 Although Australia no longer has death duties, tax is levied on the payment of some lump sum superannuation benefits on death. If the recipient of the lump sum benefit is a tax dependant, no superannuation death benefits taxes will apply to the benefit.6 However, if a super dependant who is not a tax dependant receives the benefit, superannuation death benefits tax will apply to the benefit. So, for example, if the recipient is an adult child who is a super dependant but not a tax dependant, death benefits tax will apply. The rate of superannuation death benefits tax that will apply to superannuation lump sums received by a person who is not a tax dependant will depend on the ‘tax-free’ and the ‘taxable’ components of the lump sum death benefit. The ‘tax-free’ component of the lump sum comprises all non-concessional contributions (ie contributions made by the member from aftertax earnings or savings) made by the member after 1 July 2007 as well as all contributions [page 118] that were concessionally taxed under the pre-1 July 2007 eligible termination payment (ETP) rules, referred to as the ‘crystallised segment’.7 The ‘taxable’ component is the total value of the benefits less the ‘tax-free’ component.8

The ‘taxable’ component itself can be made up of a ‘taxed’ component and an ‘untaxed’ component. The taxed component is the part of the taxable component which has been taxed in the fund, such as concessional contributions (contributions made on a pre-tax basis, such as salary sacrifice) and earnings of the fund. The untaxed component is the component which has not been taxed in the fund. This could include, for example, the proceeds of a life insurance policy owned in the fund. Where a party other than a tax dependant receives a superannuation death benefit lump sum, the following superannuation death benefits tax rates will apply:9 • •

•

nil on the ‘tax-free’ component; up to 17% (15% plus the Medicare levy of 2%) on the ‘taxed’ part of the ‘taxable component’ (eg the member’s concessional contributions and the fund earnings); and up to 32% (30% plus the Medicare levy of 2%) on the ‘untaxed’ part of the ‘taxable component’ (eg proceeds of a life insurance policy owned in the fund).

Payment of superannuation death benefit lump sum to the deceased member’s estate 6.13 Where a superannuation death benefit lump sum is paid to the legal personal representative of the deceased (eg the executor), the applicable superannuation death benefits tax will depend on whether a tax dependant of the deceased has benefited, or is likely to benefit from that lump sum. The relevant provision is s 302-10 of the ITAA 1997, which applies to the ‘trustee of a deceased estate’ who receives a superannuation death benefit in the capacity of trustee of the estate. Section 302-10 provides that to the extent that one or more beneficiaries of the estate who were ‘death benefits dependants’ (in this chapter, ‘tax dependants’) of the deceased have benefited,

or may be expected to benefit, from the superannuation death benefit, then the benefit is treated as if it had been paid to a tax dependant of the deceased, and the benefit is treated as being income to which no beneficiary is presently entitled. The practical effect of this is that no superannuation death benefits tax will apply to that part of the benefit. If, however, one or more beneficiaries of the estate who are not tax dependants have benefited or are expected to benefit from the superannuation death benefit, then to that extent the lump sum is treated as having been [page 119] paid to a person who is not a tax dependant and the benefit is treated as income to which no beneficiary is presently entitled. The practical effect of s 302-10 is therefore to impose liability for superannuation death benefits tax on the executor and estate to pay superannuation death benefits taxes to the extent that the executor is unable to show that the beneficiary who has benefited or is likely to benefit from the superannuation death benefit is a tax dependant. Where a superannuation death benefit lump sum is transferred by the executor of an estate to a beneficiary, it will be received by that beneficiary as a non-assessable non-exempt income receipt. This follows from the operation of s 302-10 of the ITAA 1997, which deems the superannuation death benefit as income to which no beneficiary is presently entitled. Executors must be aware of this because if a superannuation death benefit is paid from an estate to a beneficiary who is not a tax dependant, and the payment is not made net of the applicable superannuation death benefits taxes, the liability for that tax will be borne by the executor and estate.

Strategies to minimise death benefit taxes Withdrawal and re-contribution strategy 6.14 A common strategy to minimise death benefit taxes is a withdrawal and re-contribution strategy. This strategy involves a member having met a condition of release, withdrawing a lump sum from their superannuation member balance and recontributing it back into the fund as a non-concessional contribution in order to convert the taxable component into taxfree benefits, which won’t be subject to death benefit taxes when these benefits pass to adult non-dependent children. The current non-concessional contribution would allow a member to contribute $180,000 per year or $540,000 in one year using the bring-forward provisions. It should also be noted that the taxable and tax-free proportions remain intact when they are withdrawn from super; that is, a member cannot pick and choose which components they are withdrawing. It is therefore crucial that advice always be sought to ensure that contribution caps are not exceeded and that such a strategy is only implemented under the advice of a financial advisor. The authors note that in the 2016/2017 Budget speech, measures were introduced to remove the $180,000 per year cap and replace it with a $500,000 lifetime cap. Such reforms have significantly impacted the viability of a withdrawal and recontribution strategy.

Withdrawing benefits before death 6.15 Another potential strategy which can be used to minimise death benefit taxes is for a member, having met a condition of release, to withdraw all of their benefits before death, so that no death benefit taxes will apply on benefits passing to adult children.

[page 120] All members should ensure that they have an appropriate enduring power of attorney (with the appropriate power to deal with superannuation) in place such that in the event that they are incapacitated and terminally ill or about to die, their attorney can withdraw all of their benefits if that is their desire for such an event. This strategy should be used with caution as, in the event that the member does not die, they may be unable to re-contribute those benefits back into the fund and will therefore be subject to marginal rates of tax on any earnings.

SUPERANNUATION PROCEEDS WILL TRUSTS AND SUPERANNUATION PROCEEDS TRUSTS 6.16 The terms ‘superannuation proceeds will trust’ and ‘superannuation proceeds trust’ are not legislatively defined or recognised. The terms are often used to identify two apparently similar but actually very different types of trust often used to hold a deceased member’s superannuation death benefits lump sum. The similarity of the terms makes it easy to confuse the two concepts.

Superannuation proceeds will trust 6.17 A ‘superannuation proceeds will trust’ refers to a trust created in a will, the purpose of which is to ensure that a superannuation death benefit lump sum will not be subject to superannuation death benefits taxes. If the executor can show that the person who received or was likely to receive the benefit of the lump sum was a death benefits dependant (in this chapter referred

to as a tax dependant) of the deceased, the superannuation death benefit lump sum will not be assessable income and so will not be subject to superannuation death benefit taxes: s 302-60 of the ITAA 1997. Section 302-60 provides: A superannuation lump sum that you receive because of the death of a person of whom you are a death benefits dependant is not assessable income and is not exempt income.

In other words, all the superannuation lump sum paid to a tax dependant is tax free. If some benefit from the lump sum passes to people who are not tax dependants, that portion will be subject to applicable superannuation death benefits taxes. Therefore, if the primary beneficiary of the trust is a tax dependant and the other beneficiaries are not tax dependants, it may be difficult to show that only the tax dependant benefited from the superannuation death benefit lump sum. However, if the will contains a provision allowing the executors to hold the superannuation lump sum in a ‘superannuation proceeds will trust’ as a separate or sub-trust of the discretionary testamentary trust which limits beneficiaries to tax dependants of the deceased, the beneficiaries will be able to establish that the ultimate recipients are tax dependants, and as such superannuation death benefits tax will not be applied. [page 121] The superannuation proceeds will trust is usually a separate trust or a sub-trust of a standard discretionary testamentary trust, and the clause Power of my executors in relation to superannuation lump sum death benefit directs the executor to hold superannuation lump sum benefits in a separate superannuation proceeds will trust for that primary beneficiary. The provisions of the clause provide that the beneficiaries of the trust are limited to people who meet the definition of being a death benefits dependant (ie a tax dependant).

As the terms of the superannuation proceeds will trust are restrictive, the executors’ most effective course of action may not always be to use the superannuation proceeds will trust. The choice whether to place all or some or none of the superannuation death benefit in the superannuation proceeds will trust rather than in the beneficiary’s standard discretionary testamentary trust will be made by the executor on the basis of advice received while the estate is being administered.

Superannuation proceeds trust 6.18 A ‘superannuation proceeds trust’ is not a will trust at all. It is not directly relevant to a testator who has set up discretionary testamentary trusts in her or his will. A superannuation proceeds trust is set up after the testator has died. It is usually a second-best remedy caused by the failure of a testator to create a superannuation proceeds will trust. The superannuation proceeds trust is described here because it is easily confused with the superannuation proceeds will trust which has just been described. Tax on income paid to a minor is normally at penalty rates; however, s 102AG(2)(a)(i) of the ITAA 1936 provides that income generated by property held in a trust created by will is exempt trust income, and is taxed at the adult rate, which means that the income is assessed at a lower rate. Taking advantage of this lower tax rate is integral to the tax effectiveness of the discretionary testamentary trust offered in this text. If a testator has not created a trust by her or his will, or has died intestate, it is too late to take advantage of the s 102AG(2)(a)(i) exception. However, another exception exists in the s 102AG provision: s 102AG(2)(c)(v). This section provides that income derived by the trustee of a trust from the investment of property transferred to the trustee for the benefit of the beneficiary is excepted trust income, ‘if the beneficiary of the trust concerned will under the terms of the trust, acquire the trust property (other

than as a trustee) when the trust ends’: s 102AG(2A). To make it easier to take advantage of this provision when a superannuation death benefit is due, the trustee of the superannuation fund can set up a superannuation proceeds trust which complies with these requirements, and the income from the lump sum in the trust will be ‘excepted trust income’, which means that the income will be taxed in the minor beneficiaries’ hands at adult marginal tax rates. The requirement that the ‘beneficiary (must) acquire the trust property … when the trust ends’ in s 102AG(2)(c)(v) implies that if the beneficiary dies before reaching the age of 18 the trust property will vest in [page 122] the minor beneficiary’s estate, which will usually be intestate.10 This is not a satisfactory outcome. Further, if the beneficiary reaches age 18, the beneficiary will then be entitled to the trust property and can call upon it at that time. Even if the beneficiary does not call upon it, the beneficiary, being presently entitled, will have no asset protection.11 In deciding whether or not to set up a superannuation proceeds trust in these circumstances, the executors will have to consider the age of the beneficiary, the quantum of the benefits and the likely income that will be generated. There are other reasons why setting up a superannuation proceeds trust might be advantageous in the absence of a trust set up by the testator’s will — one such reason is the fact that a minor cannot give a valid receipt, and if a superannuation proceeds trust is set up and the assets are paid to the trustee, this difficulty is overcome. A superannuation proceeds trust is unnecessary if the testator has created an appropriate trust (like the discretionary testamentary trust in this text) in her or his will.

SUPERANNUATION AND FAMILY PROVISION CLAIMS 6.19 This section is concerned with how family provision law relates to the payment of superannuation benefits on death. Family provision is discussed in Chapter 11.12

Family provision claims in all states and territories other than New South Wales 6.20 If a superannuation fund member has signed a valid binding death benefit nomination requiring the trustee to transfer the superannuation benefits either as an income stream or a lump sum from the fund to nominated beneficiaries, the benefits will pass directly from the fund to the beneficiaries and will never form part of the member’s estate. All family provision statutes provide that family provision may be ordered out of the estate of the deceased person, but if superannuation is paid directly to a beneficiary, it will never have become an estate asset, and thus (outside of New South Wales) it will not be available to be included in a family provision claim.13 [page 123] The New South Wales notional estate provisions in Pt 3.3 of the Succession Act 2006 (NSW) empower the court to declare that certain property affected by a ‘relevant property transaction’ is notional estate, and available to satisfy a family provision order. ‘Relevant property transaction’ is very wide indeed, and is wide enough to include the execution of a binding death benefit nomination and even the failure to change a binding death

benefit nomination. The passing of superannuation benefits and the implications of notional estate are discussed in Chapter 11. Where a member has signed a valid binding death benefit nomination in favour of an eligible party other than the claimant, the claimant will not have access to superannuation benefits to satisfy the claim, because the trustee has no discretion to do anything but to pay the benefits directly to the nominated beneficiary. This is a common strategy used by testators seeking to avoid or protect their superannuation from a possible family provision claim. By putting in place a valid binding nomination, they can be certain that (outside New South Wales) regardless of whether their estate will be subject to a family provision claim, their superannuation will pass directly to their nominated super or tax dependant. If no valid binding death benefit nomination has been signed (and in this case the terms of the trust will leave payment to the discretion of the trustee), and the trustee determines in its discretion to pay the benefits directly to a super dependant other than the claimant, then the only possible recourse that a claimant will have is through the Superannuation Complaints Tribunal. As noted in Chapter 11, review by the Superannuation Complaints Tribunal will not be available if the fund in question is an SMSF, as SMSFs are not subject to the Superannuation Complaints Tribunal.14 In that case (ie where the trustee of an SMSF pays the death benefits directly to a super dependant other than the claimant), the death benefit will be immune from the claim.

SUPERANNUATION AND WILL DRAFTING CONSIDERATIONS Relevance of the testator’s will to the terms of the superannuation fund trust deed or the

fund trustee 6.21 As noted earlier, it is not uncommon for a testator mistakenly to seek to direct by her or his will who is to receive their superannuation, without appreciating that such directions only have any effect if and when the superannuation benefits have been paid to their executor. The testator’s directions do not have the effect of passing superannuation benefits directly [page 124] to the beneficiary without passing first to the estate: the testator’s intentions expressed in the will as to the destination of her or his superannuation benefits bind the testator’s executor, but they do not affect the superannuation trustee. The superannuation trustee is bound by a binding nomination, but not by a will. The superannuation trustee will pay the benefit according to the nomination, and will not pay the benefit to the estate unless the nomination directs the superannuation trustee to do this, or the superannuation trustee exercises discretion to pay the benefit to the estate. Moss Super Pty Ltd v Hayne15 illustrates the fact that a testator’s will has no effect on the terms of the superannuation fund trust deed. In Moss Super, the testator’s will divided his residuary estate equally between his partner, his two step-children, and his two biological children — all parties who qualify as super dependants. The superannuation fund’s deed allowed the member to make a binding death benefit nomination. However, the deceased member left no nomination (binding or otherwise), but he did provide in his will a memorandum of wishes stating that he wanted his superannuation benefits to accrue to his estate. The superannuation fund deed provided in cl 54.8: Death of a Pensioner

In the event of the death of a Pensioner and at the time of death an amount is standing to the credit of the Pension Account of the Pensioner: 54.8.1 where a Reversionary Beneficiary has been nominated by the Pensioner, the Trustee shall, unless otherwise requested to the contrary by the Reversionary Beneficiary, pay to the Reversionary Beneficiary the balance of the Pension Account (either as a Pension or commuted to a lump sum) provided that such amount shall not exceed an amount calculated in accordance with the requirements of the Act; or 54.8.2 where no reversionary beneficiary has been nominated, the balance of the Pension Account shall be paid to such one or more of the Dependants of the Pensioner as the Trustee may determine or if there are no Dependants, to the legal personal representative of the Pensioner.

The court held that the benefits should be dealt with in accordance with cl 54.8.2. It followed that the benefits did not go into the deceased member’s estate. The court found that to the degree that his will represented his understanding of the superannuation deed it was irrelevant, and to the extent it might purport to represent a variation of the deed it was ineffective.16 The problem in Moss Super might have been ameliorated if the will had had an equalisation clause (discussed below).

Superannuation and equalisation clauses 6.22 As noted at the start of this chapter, the only way a member of a superannuation fund can know for certain that their superannuation benefits [page 125] will form part of their estate or pass to a particular specified beneficiary, is to sign a valid binding death benefit nomination dictating those wishes. This may either not be possible, because the member’s superannuation fund does not accept binding death benefit

nominations, or the member may fail to execute a valid nomination, or fail to re-sign the nomination less than three years before death (where that is required by the fund) or the nomination may be invalid for some other reason. It may also be the case that the member prefers not to remove the discretion of the superannuation trustee in this way, but rather wishes to give the trustee the discretion to decide to whom and how benefits are to pass at the time of death. Leaving such decision to the discretion of the trustee is particularly popular in the case of SMSFs, where the trustees are usually the family members who will be the major beneficiaries of the deceased. The member may desire this flexibility, recognising that the status of beneficiaries as tax dependants changes over time. A testator may desire that, for example, all her or his children receive equal overall shares of both estate and non-estate assets. An equalisation clause is a clause that seeks to secure the equality between the beneficiaries which a literal application of the will might not achieve. Thus, a testator may wish to benefit all his children equally, and provide in the will that his estate is to be divided equally between them. However, difficulties may arise. The testator may have assets which do not form part of his estate; for instance, he may be entitled to a superannuation benefit or the proceeds of a life insurance policy, and depending on circumstances, these assets might well not form part of his estate. Again, during his life the testator may have given a comparatively large benefit (sometimes regarded as an advance on the inheritance) to one of his children, leaving his estate depleted. Conscious of these matters, the testator may wish to include an ‘equalisation clause’ in his will. An equalisation clause authorises the executor to adjust the shares of the assets that each beneficiary receives from the estate by taking into account the factors specified in the equalisation clause. The executor is empowered to assess the value of all the matters to be taken into account, and to add them to the estate. In

effect the executor is asked to divide the total of both estate and non-estate assets equally between the beneficiaries. Equalisation clauses do not have a uniform format. Some equalisation clauses specify a wide range of non-estate benefits provided by the testator, including superannuation and life insurance benefits, inter vivos trusts as well as disproportionately large gifts or interest-free loans to one of the beneficiaries, to be taken into account. Others specify only one such matter, for instance, superannuation death benefits. Again, some equalisation clauses are mandatory and require the executor to undertake the equalisation; while others are directory only, and leave the executor a discretion as to what to take into account, how to assess relative values and even whether to attempt an equalisation at all. Equalisation clauses are not a panacea. The fact that there is no agreed preferred format shows that there is no clear principle behind [page 126] their formulation. If the clause is mandatory, it is likely to work unfairly in unexpected circumstances. If its application is discretionary, it is likely to be ignored when it is most needed. Again, if the range of matters to be taken into account is wide, the task of an executor conscientiously trying to carry it out is immense, and the imponderables such as the values of gifts or interest-free loans made long ago may overwhelm the executor. If the range of matters is limited — say, to only superannuation, then other matters of equal importance like life insurance will be ignored, and distortions will occur.

SUCCESSION PLANNING AND

SUPERANNUATION 6.23 Because the terms of a will can only have effect over superannuation death benefits that have been paid to the estate of the testator, it is crucial to ensure that in addition to considering the terms of a testator’s will, that adequate care has been taken in the succession planning for the superannuation benefits themselves. This will ensure that the superannuation death benefits are paid from the superannuation fund in the way intended or expected by the testator. The succession plan must ensure that the following are in place: •

•

a valid binding death benefit nomination (or ‘superannuation will’ where appropriate and permitted under the terms of an SMSF: see 6.25); and in the case of SMSFs, adequate trustee succession arrangements.

Binding death benefit nominations for nonSMSFs 6.24 For funds other than SMSFs, the requirements for a valid binding death benefit nomination are discussed at 6.6. Regulation 6.17A lays down requirements and these requirements, and any rules or instructions in the form supplied by the fund, must be met and complied with. SMSFs are explicitly excluded from the requirements imposed by reg 6.17A for valid binding nominations. Nevertheless, there have been cases in which courts have applied the requirements of reg 6.17A to SMSFs due to the terms of the deed unnecessarily incorporating those provisions by reference, and accordingly ruled binding nominations invalid where they have failed to meet the formalities set out in reg 6.17A. Donovan v Donovan17 is an example.

This has led to many SMSF deeds explicitly excluding reg 6.17A from applying to the fund. It should be kept in mind that even where an SMSF deed has excluded the operation of reg 6.17A, all superannuation funds including SMSFs are bound by reg 6.22, to the extent that a superannuation fund can only pay death benefits to the dependant or legal personal representative of the member. The case of Munro v Munro18 is a reminder of the importance of ensuring that the nominated party under a binding death benefit nomination is [page 127] in fact a dependant or the legal personal representative of the member. In Munro, a binding nomination was ruled invalid by the court because the nominated party on the form was the ‘Trustee of Deceased Estate’. Although this was presumably the member’s attempt to identify the ‘legal personal representative’, the court noted the distinction between an executor (the legal personal representative) and the trustee of the estate (who is not the legal personal representative). Despite the fact that in most cases the executor will become the trustee of the deceased estate after administration is complete, the court ruled that because the trustee of the deceased estate is not a ‘legal personal representative’, they did not qualify as a valid nominee, and the binding nomination was ruled invalid.

SMSFs and superannuation wills 6.25 Because SMSFs are explicitly excluded from the requirements of reg 6.17A, many SMSF deeds allow the member to draft what is often called a ‘superannuation will’. Whereas a standard binding nomination will usually be a form that simply

states which dependant receives what proportion of benefits, a superannuation will can allow the member to provide whatever level of specificity they choose. Like a will, there is no limit to the complexity that can be incorporated into a ‘superannuation will’, but as noted above, although SMSFs are excluded from the operation of reg 6.17A, they are not exempt from the requirements of reg 6.22 (ie that only a dependant or legal personal representative of the member can receive superannuation death benefits). So care still has to be taken that validity requirements are observed when drafting a superannuation will or complicated custom binding death benefit nomination.

Trustee succession for SMSFs 6.26 Although the importance of binding death benefit nominations in SMSFs is well known, the importance of putting in place effective trustee succession arrangements for SMSFs is often overlooked. Section 17A of the SIS Act requires that all members of an SMSF are trustees, or if the trustee of the fund is a company, that all members are directors of the company. The reasoning behind this requirement is to ensure that all members have a democratic voice within the operation of the fund. Section 17A allows certain exceptions to this rule. One such exception is that a deceased member can be represented by their legal personal representative as a trustee. This is, however, a permitted exception not a requirement (unless required by the deed). In other words, while a member who dies can be represented at the trustee level of an SMSF by their legal personal representative, this representation will not happen automatically unless required by the deed, Ideally, a member should, if possible, maintain trustee representation of the SMSF they belong to after they die. Trustee representation is maintained through the member’s legal personal

representative. This can be crucial where trustee discretion for payment of benefits on death is possible. [page 128] loppolo & Hesford v Conti 6.27 In the case of Ioppolo & Hesford v Conti,19 a wife and husband were individual trustee members of an SMSF. The wife and husband became estranged. The wife signed a new will appointing her children as executors and giving her whole estate including her benefits in the SMSF to her children. She went so far as specifically to exclude her husband from benefiting. She died, and had signed no valid binding death benefit nomination. The husband appointed a new sole director company (which he was director of) as trustee of the SMSF, and the trustee company resolved to pay the husband the wife’s entire death benefit. The children sought to argue that the wife should have been represented at the trustee level, as a result of s17A allowing her to be represented. The court found that because her SMSF deed did not require her legal personal representative to be automatically appointed in her place as a trustee in the event of her death, the mere fact that the legal personal representative could be permitted to be appointed did not cause them to automatically represent her following her death. Accordingly, the husband succeeded in receiving the wife’s death benefit, which the daughters would have stopped him doing if they could have established representation as trustees of the SMSF. Katz v Grossman 6.28 The well-known case of Katz v Grossman20 is often cited in relation to the importance of binding nominations, but it is in fact more a lesson in the importance of controlling trustee succession of an SMSF.

The essential facts in Katz v Grossman were that a father and mother (who were husband and wife) had two children, a daughter and a son. The father and mother were co-trustees of an SMSF, and the fund’s only members. The wife died and the father appointed his daughter to be co-trustee with him. After the trustees resolved to pay the deceased mother’s benefits to the father, the only remaining member of the SMSF was the father, with the father and daughter as the trustees. The SMSF deed was old and outdated, and did not include a standard trustee succession mechanism which is in most SMSF deeds; namely, that on the death of a member, the legal personal representative of the member automatically becomes a representative trustee of the SMSF for the deceased member until the benefit is paid out. In this case, however, the deed provided that a meeting of members could appoint new trustees. The father died on 19 September 2003 having signed a nomination, non-binding only, directing that his benefits pass equally to his son and daughter (the SMSF deed did not allow for a binding nomination). He had also signed a valid will which appointed his daughter and son as executors and gave his estate to them equally. Probate of the will was not granted until 5 August 2004. In the meantime, in a deed dated 5 December 2003, the daughter purported [page 129] to act as sole trustee of the fund and purported to appoint her own husband (ie the son-in-law of the deceased father) as an additional trustee of the fund. As the two trustees of the SMSF, the daughter and son-in-law refused to carry out the non-binding nomination, and so the son initiated proceedings to have the appointment of the son-in-law as trustee ruled invalid. The son’s argument was that the deed provided that a meeting of members could appoint a new trustee,

but that the daughter was not a member; she was a trustee only, and therefore the appointment of the daughter’s husband as the new trustee was invalid. (The daughter had earlier attempted to have herself appointed a member, but the court had ruled that attempt invalid.) The following facts militated against the daughter: •

The father had signed a nomination (admittedly nonbinding) directing that his benefits pass equally to his two children; the daughter was not a member (and hence could not rely on the clause in the deed empowering members to appoint new trustees). • The only member of the fund had been the father, who had appointed both his son and daughter as executors in his will and had given his estate equally between them. Despite these facts, the court ruled that given the unexplained delay in obtaining probate, the daughter was empowered by s 6(4) (b) of the Trustee Act 1925 (NSW) to appoint a new trustee, and that her appointment of her husband had been valid. The court held: Assuming that the plaintiff was prepared to act promptly either to obtain a grant of Probate or a limited grant of Administration and Mrs Grossman was not obstructive there are a number of possible scenarios once a grant was obtained. They may have been able to agree on someone whom they both regarded as suitable to be the new trustee and appointed that person, they may have been prepared to accept the person recommended or suggested by an independent person or body or they may have been unable to agree. If either party sought to appoint somebody closely associated with that party and not the other, a deadlock could be expected. The plaintiff and the defendant may have been able to agree to two new trustees being appointed, one being recommended by the plaintiff and one by Mrs Grossman. That may or may not have resolved any potential deadlock. Thus, the obtaining of a grant may but would not necessarily have resolved who was to be appointed as the new trustee. As I understand the position once it is held that Mrs Grossman was not validly appointed as a member in August 2003, the only member of the Fund was the late Ervin Katz. When the person nominated in the trust deed as having the power to appoint dies and his estate as represented by his executors becomes the member, a reasonable time should be allowed for the executors nominated in his will to obtain a grant of Probate or a limited grant of Administration.

On the other hand the due administration of the trust cannot be left indefinitely. Emergencies may arise, for example, a Trust’s shares or its other property may be about to drop in value. Potential liabilities may have to be compromised. [page 130] The trust deed envisages that a new trustee will be appointed within 90 days of a vacancy occurring in the office of a trustee. The period of 90 days expired on 18 December 2003, some 13 days after the appointment of 5 December 2003. On the evidence the appointment does not appear to have been precipitate. The continuing trustee cannot be criticised for carrying out the terms of the trust deed. As at 5 December 2003 and for many months thereafter there was no person or persons nominated for the purpose of appointing new trustees by the trust deed able and willing to act. The estate of the late Ervin Katz appears to have been either immobilised or deadlocked. In my opinion Mrs Grossman was entitled to exercise the power under s 6(4)(b) of the Trustee Act to appoint a new trustee and the challenge to the appointment of her husband fails.21

The judgment does not state specifically that the daughter resolved to pay all of the deceased father’s benefits to herself, but it does establish that she had refused to confirm she would carry out the father’s non-binding nomination that the benefits pass equally between his children. One can only assume what her intentions were then, upon appointing her own husband as the new co-trustee following her father’s death. Interestingly, although the son’s application was dismissed, costs were awarded against the SMSF.

Lessons for trustee succession and SMSFs 6.29 It is important to be aware with SMSFs that although a member can be represented by their legal personal representative as trustee in the event of death, this does not happen automatically unless required by the SMSF deed. For this reason, many SMSF deeds require that in the event of a member dying, the member’s legal personal representative is appointed as a trustee in place of the member until the death benefit has been

paid. But it should never be presumed that a particular SMSF deed contains such a requirement. Where provision is being made for the death of a member of an SMSF and the trustee of the SMSF is a company, trustee succession control can be improved by customising the company constitution and shareholder agreement to put in place the desired form of trustee succession. When amending or relying on the terms of an SMSF deed, not only must the current deed be checked, but all fund deeds must be audited to ensure that there are no hidden problems in the historical chain of fund rules or deeds.

1. 2.

3. 4. 5. 6. 7. 8. 9. 10.

11. 12.

13.

Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (the SIS Regs). For example, SMSFs are explicitly excluded from the conditions and requirements of a valid binding death benefit nomination set out in reg 6.17A, and SMSFs are not subject to the jurisdiction of the Superannuation Complaints Tribunal: s 5 of the Superannuation (Resolution of Complaints) Act 1993 (Cth). Section 10A of the SIS Act. Section 62 of the SIS Act and reg 6.22 of the SIS Regs. Section 10A of the SIS Act. Division 302 of the ITAA 1997. Section 307-210 of the ITAA 1997. Section 307-215 of the ITAA 1997. Section 302-145 of the ITAA 1997. Legislation allows minors to make wills in particular circumstances: see ACT: ss 8 and 8A of the Wills Act 1968; NSW: ss 5 and 16 of the Succession Act 2006; NT: ss 7 and 18 of the Wills Act; Qld: ss 9 and 19 of the Succession Act 1981; SA: ss 5 and 6 of the Wills Act 1936; Tas: s 7 of the Wills Act 2008; Vic: ss 5, 6 and 20 of the Wills Act 1997; WA: s 7 of the Wills Act 1970. Saunders v Vautier (1841) 49 ER 282. The law of family provision in the context of will drafting generally is discussed in C Birtles and R Neal, Hutley’s Australian Wills Precedents, 8th ed, LexisNexis Butterworths, Sydney, 2014, Ch 14. ACT: ss 7 and 8 of the Family Provision Act 1969; NSW: Ch 3 (in particular s 63) of the Succession Act 2006; NT: ss 7 and 8 of the Family Provision Act; Qld: ss 40, 40A and 41 of the Succession Act 1981; SA: ss 3 and 3A of the Inheritance (Family Provision) Act 1972; Tas: s 91 of the Testator’s Family Maintenance Act 1912; Vic: s 91 of the Administration and Probate Act 1958; WA: ss 6 and 7 of the Inheritance (Family and Dependants Provision) Act 1972.

14. 15. 16. 17. 18. 19. 20. 21.

Section 5 of the Superannuation (Resolution of Complaints) Act 1993. [2008] VSC 158 at [24] and [26]. [2008] VSC 158 at [24]. [2009] QSC 26. [2015] QSC 61. [2013] WASC 389. [2005] NSWSC 934. [2005] NSWSC 934 at [50]–[54] per Smart AJ.

[page 131]

7 A SYSTEM FOR DRAFTING TESTAMENTARY TRUSTS

Introduction The Purpose of the Model Testamentary Trust Precedent and the Variations Aims of the System: Flexibility and Ease of Use Flexibility Aspects to flexibility Flexibility in drafting Characteristics of the beneficiary Types of families and relationships to the testator Benefits to give to various beneficiaries, and how those benefits should be qualified Uncertainty about what shares to give Balancing asset protection aims and benefit aims Flexibility for the Individual Beneficiary After the Testator’s Death Optional discretionary testamentary trusts for adult beneficiaries of full capacity Technical Aspects of Creating a Testamentary Trust Creating a testamentary trust ‘Parallel’ trusts Ease of Use Modularity Features of the Testamentary Trust Key offices and concepts of the precedent The executor The primary beneficiary Potential beneficiaries

The appointor The protector The trustee

[page 132] The preservation age Ineligible officebearer The option of a stronger level of asset protection The Allocation of Powers Between the Different Offices and the Interaction Between them Example to illustrate the interaction of the offices Structure of the Model Testamentary Trust Precedent The first part The second part — Schedule 1: discretionary testamentary trust provisions The third part The last part

INTRODUCTION 7.1 The system for drafting testamentary trusts offered in this text is modular. The core is the Model Testamentary Trust precedent. This precedent is built up of a set of individual elements, each of which can be removed and replaced without disturbing any other elements in the precedent. The system is like a Lego set: because each block is self-contained, a block can be removed and replaced without compromising the integrity of the whole, and removing and replacing one block does not have implications for the rest of the structure. This means in practice that where a client has unique circumstances or needs, appropriate alternative elements for her or his trust can be selected from the available alternatives (collected in Chapter 9 on variations) and slotted into the Model Testamentary Trust precedent to build up a testamentary trust appropriate to that particular client. The great merit of the system is that it saves the drafter the difficulty and

danger inherent in laboriously considering each modification to a precedent, unsure all the time whether the change he or she is making will compromise other parts of the precedent. Four main topics will be covered in this chapter: • • •

•

the purpose of the Model Testamentary Trust precedent; the aims of the system: flexibility and ease of use; the features of the Model Testamentary Trust precedent; its key offices and concepts — the executor, the primary beneficiary, potential beneficiaries, the Appointor, the Protector, the trustee, the preservation age and automatic disqualification of an Ineligible Officebearer; and the structure of the Model Testamentary Trust precedent. [page 133]

THE PURPOSE OF THE MODEL TESTAMENTARY TRUST PRECEDENT AND THE VARIATIONS 7.2 The Model Testamentary Trust precedent in Chapter 8 is the core of a straightforward, flexible system for drafting testamentary trust wills for testators whose aims, requirements, assets and family situations differ widely from one another. The Model Testamentary Trust precedent offers a complete precedent for a discretionary testamentary trust will. At the same time the precedent is so structured that its elements can easily be added to or dropped and replaced to create wills that suit the varying needs of testators. Chapter 9 contains a collection of clauses and provisions to be used as alternatives to the elements in the Model Testamentary Trust precedent itself. Once the intentions of the testator are understood, the system helps the drafter select the appropriate elements in the precedents and makes it easy to assemble the

selected elements to produce a will which meets the testator’s needs. The modularity of the precedents in the system enables the drafter to make variations without having to check for inconsistencies with other clauses of the precedent.

AIMS OF THE SYSTEM: FLEXIBILITY AND EASE OF USE 7.3 The central purpose of the Model Testamentary Trust Precedent is to provide a flexible and easy-to-use system for drafting discretionary testamentary trusts. Perhaps the main strength of the system is that it allows the will drafter to deal easily and flexibly with what has always been a very complicated and difficult problem: modifying a testamentary trust precedent to accommodate the widely different family circumstances and testamentary wishes which testators present to the drafter. One testator will want a common option: to provide for a spouse, and if the spouse predeceases the testator, the testator’s children. If a child predeceases the testator, the children of that child will represent that child and take what the predeceased child would have taken. All beneficiaries are to have the ability to receive their inheritance through a testamentary trust. So far so good: this is what the usual discretionary testamentary trust precedent provides for. Other testators have different and more challenging requirements, however. The trust may, for example, have to provide for a disabled child, a blended family, a spouse who is unhappy in the marriage or a difficult business situation. While Chapter 9 contains a collection of individual clauses which can be used as variants for clauses in the Model Testamentary Trust precedent, Chapter 10 contains a representative sample of widely different family situations for which a testator may wish to provide. These solutions to difficult problems are adaptable because they are in the form of precedent

examples which the drafter will be able to take and modify or develop to meet new or different testator needs. [page 134] These flexible examples are easy to use. Any of them can be selected, lifted up and dragged and dropped into the will being prepared, generally without the need for complicated, difficult, time-consuming and risky modification of other clauses in the Model Testamentary Trust precedent to make the chosen variation precedent fit into the rest of the will. The features of flexibility and modularity and how they have been achieved in the system are discussed in more detail in what follows.

FLEXIBILITY Aspects to flexibility 7.4 •

•

There are two aspects to flexibility: flexibility in drafting: the system and precedents should allow the drafter to choose the appropriate provisions for the individual testator; and flexibility for the individual beneficiary after the testator’s death.

The purpose of the discussion in 7.4 to 7.11 is to illustrate the flexibility of this system by showing the wide variety of problems and situations for which the system is designed to provide. The precedents and the discussion of the precedents and concepts in this and other chapters indicate approaches and solutions to these problems and situations.

Flexibility in drafting 7.5 The two aspects of flexibility are interlinked and cannot be fully separated. However, concentrating on flexibility in drafting, one can see that there are various types of situations or testator requirements for which the system must be able to provide. These types of situations or requirements include the following, which are examples only. It is obvious from the list that follows that the possible types of situations and requirements overlap and interact.

Characteristics of the beneficiary 7.6 The types and needs of beneficiaries for whom the testator wishes to provide vary greatly. The testator may wish to make absolute gifts to some beneficiaries, such as friends or more distant relatives. The testator may wish to make gifts to primary beneficiaries (often the testator’s children): •

•

all of whom are of full age and maturity and without particular asset protection concerns (a discretionary testamentary trust will can be used); some of whom are of full age and maturity and without particular asset protection concerns, while others are immature or have particular asset protection concerns (once again the discretionary testamentary trust will can be used); or [page 135]

•

one of whom may be disabled and needs a trust different from the basic discretionary testamentary trust which will be used for the other beneficiaries

Types of families and relationships to the testator 7.7 The testator may have a family which is, comparatively, simple or complex. Providing for a complex family may, for example, involve optional discretionary testamentary trusts for some people and not for others, or unequal shares, or representation for some members of the family who might die before the testator and not for others. The testator may require that some members of the family take their inheritance through a testamentary trust on the testator’s death, while others take only if other members of the family predecease them. In other words, the testator’s family may be straightforward (as in a ‘spouse and kids’ family), blended (in the sense of having children from a former as well as a current relationship), or mixed (in the sense that the family includes relatives and non-relatives).

Benefits to give to various beneficiaries, and how those benefits should be qualified 7.8 The testator making a will to provide for the individual needs of the members of a complex family may need to make gifts of various kinds. Examples are as follows: •

•

•

Some gifts may have to be absolute, while others need to be offered through a discretionary testamentary trust or on trust for a disabled person. Gifts to some primary beneficiaries may give to the beneficiary the choice whether to take the gift via a discretionary testamentary trust or absolutely. The testator may require that some gifts be made via ‘mandatory’ testamentary trusts; that is, the primary beneficiary is given no choice, but must take the benefit via a discretionary testamentary trust.

• • • •

Some gifts must be made via mandatory discretionary testamentary trusts for a time, or until the primary beneficiary reaches a particular age — the ‘preservation age’. Some gifts may be of particular assets, while others will be gifts of residue. Sometimes the testator may have to give benefits to beneficiaries in unequal shares. Indexing of a gift, or valuations, may be required.

Uncertainty about what shares to give 7.9 The testator may be uncertain about the size or proportions of gifts which he or she is going to make. This may be due to vacillation, but equally [page 136] it may be due to a legitimate lack of certainty about the circumstances that will exist at the testator’s death. So, for instance, the testator may on death be entitled to superannuation benefits which may be paid only to legally defined dependants. If the testator has a young family, it may be impossible to know in advance who those dependants will be. The testator who wishes to provide for her or his family fairly may therefore not be able to determine the appropriate amounts of the shares of their estate to allocate for the benefit of particular beneficiaries.

Balancing asset protection aims and benefit aims 7.10 The testator may be concerned that some beneficiaries may need asset protection more than others. At the same time, the

testator may wish to give freedom to a primary beneficiary to take her or his benefit absolutely, and if the beneficiary takes her or his benefit via a discretionary testamentary trust, the testator will usually want the beneficiary to have a high degree of control over the trust. At the same time the testator may be concerned that a beneficiary needs asset protection, say against the beneficiary herself or himself, or against attacks from outsiders like creditors or a separating spouse. Asset protection and control over the trust are to an extent mutually exclusive, and therefore must be balanced. The precedents give flexibility in managing this balancing act.

FLEXIBILITY FOR THE INDIVIDUAL BENEFICIARY AFTER THE TESTATOR’S DEATH Optional discretionary testamentary trusts for adult beneficiaries of full capacity 7.11 Most testators who want to include discretionary testamentary trusts in their wills do not know which of their beneficiaries will want to take their benefits absolutely, and which would prefer to take advantage of the trust offered to them. A solution is to offer the gift subject to an optional discretionary testamentary trust. If the option of the trust is not taken up, the administration of the estate is no more complicated than if the gift had been made absolutely. The mechanism by which the testator gives this choice to a beneficiary has a number of elements, two of which require mention. The Model Testamentary Trust precedent gives the ultimate choice whether or not to set up the trust to the executors and not to the beneficiary concerned. The choice is given to the executors because the beneficiary might at the time of the testator’s death be

in a state of crisis through relationship breakdown or pressure from creditors. If given the ultimate decision as to whether or not to use the discretionary testamentary trust, the beneficiary in crisis would be potentially vulnerable to the demands of creditors or the separating spouse, and asset protection would be lost: see Chapter 3. [page 137]

TECHNICAL ASPECTS OF CREATING A TESTAMENTARY TRUST Creating a testamentary trust 7.12 It is noted that it is necessary to use an initial settlement amount in an inter vivos discretionary trust precedent, although it is very unusual to do so in a testamentary trust precedent. However, the use of an initial fund amount in this way is done intentionally, and is primarily done to achieve drafting efficiency while allowing the trust to be optional, without bringing into doubt the trust’s existence. Most testamentary trust precedents which seek to offer an optional discretionary testamentary trust, do so by making a direction that the gift in question be held on trust, subject to the terms of the trust set out in a schedule in the will. The precedent will then set out the conditions by which the executor is empowered to transfer instead the gift or share of residue to the primary beneficiary absolutely. This wording is repeated for each gift or share of residue that is offered subject to an optional discretionary testamentary trust. This is usually unproblematic, because basic testamentary trust precedents are normally designed for a gift of the whole estate to a spouse or partner, and then failing that, as residue to children equally subject to optional

discretionary testamentary trusts. Repeating the required wording for each separate gift on trust in this way is not an issue as it will only have to appear a very limited number of times. However, if there is a large number of gifts or shares of residue subject to trust, or if the primary beneficiaries do not fall into a discrete single class like ‘my children’, then having to repeat the required set of trust creation wording every time a gift or share of residue is offered subject to an optional discretionary testamentary trusts becomes inefficient and repetitive. When drafting more complicated testamentary trust wills, with a large number of gifts offered via trust, it is more convenient from a drafting perspective to create the trusts at the outset in a single clause, and then detail each of the specific gifts and beneficiaries, and following that direct that the executor can either pay the gift to the trust or to the primary beneficiary directly. Many testamentary trust precedents do this, by simply stating as a declaration at the outset that a trust has been created, without specifying at that point what the trust property is. Given that trust property is an essential element for a trust to exist, it is arguable that the trust has not actually been created at that point, because despite the declaration that a trust exists (at that point), there is no identifiable trust property. The Creation of trust clause and the initial $10 ensures that the trusts do not fail for want of property and that there can be no question as to the existence of each trust. The provision of $10 as the initial trust fund does not meaningfully increase the required administration at all, and it is easy for a beneficiary to effectively not take up the trust option; the trust is simply wound up immediately at the time of administration of the estate, and the $10 [page 138]

distributed to the primary beneficiary before any obligation to carry out any administrative aspects of the trust has arisen (eg establishment of bank accounts and tax file numbers).

‘Parallel’ trusts 7.13 The precedent allows the beneficiary to ask the executor to set up ‘parallel’ trusts instead of a single trust. This is useful for, say, a primary beneficiary who is a widow with children, or a primary beneficiary who has business assets that they may want to quarantine from other assets: see 8.14.

EASE OF USE Modularity The precedents must be modular 7.14 A major principle of the system is that it must be only marginally more difficult to draft a discretionary testamentary trust will than a conventional will making absolute gifts with no option of a testamentary trust. Flexibility was a central aim of the system, and with flexibility comes complexity. Only by making the precedents modular could ease of use be achieved without losing flexibility. Making the precedents modular meant that as far as possible each individual clause in the Model Testamentary Trust precedent had to be concerned with one idea, and one idea only. So, for instance, the clause making gifts to be held via a discretionary testamentary trust could not contain provisions relating to the creation of trusts. Keeping these two ideas separate was essential to modularity. It meant that a large variety of gift provisions could be separately drafted and included in Chapter 9, available for selection. The drafter could choose the appropriate

gift clause and insert it into the will being prepared without having to alter the Creation of trust provisions or, indeed, any of the other provisions of the will. Modularity gives the Model Testamentary Trust precedent in Chapter 8 great power. The modularity of the clauses enables one testator’s need to provide discretionary testamentary trusts for the members of their blended family to be met straightforwardly, while the same modularity enables another testator to provide discretionary testamentary trusts for their siblings and their children.

Modularity: the elements of the precedents are ‘matched’ 7.15 The individual clauses in Chapter 8 and the variations in Chapter 9 are matched so that a clause in the Model Testamentary Trust precedent can be omitted and replaced with a clause from the variations, and the substitute clause will fit perfectly into the rest of the Model Testamentary Trust precedent. The result is that it is easy to construct a will which meets the testator’s needs or circumstances. The process is one of ‘drag and drop’. [page 139] In order to achieve modularity, a number of steps were taken: •

•

The Model Testamentary Trust precedent provides that all trusts are created with an initial trust property of $10, without regard to the fact that some primary beneficiaries will not take up the trusts option offered to them and will take their benefit absolutely. This was done to allow the trusts to be created before specifying the property which is to be potentially subject to those trusts, while avoiding any doubt about the trust’s initial existence and validity. The Absolute gifts clause is separated from the clause Gift

•

•

provisions through testamentary trusts and both are separated from the Creation of trusts clause. A benefit of the separation is that complex absolute gifts can be made individually and separately, without having to make difficult modifications to the creation of trusts provisions. The particular testator who requires complex gift provisions, sometimes absolute, sometimes through optional or mandatory discretionary testamentary trusts, can be accommodated. Separation of the clause Gift provisions through testamentary trusts from the Creation of trusts clause means that complex testamentary trust gift provisions can be drafted individually, again without having to make difficult modifications to the creation of trusts provisions. Both of these clauses are separated from the rules of the trusts, which are contained in the Schedules, and this means that individual variations in the gift provisions can be accommodated without having to make difficult consequential modifications to the rules of the trusts. Cross-referencing between different parts of the precedents is done not by references to the numbers of the individual clauses, but rather by references to the names of the clauses. This is because the names of the clauses are defined and stable, while the numbers of the clauses are fluid depending on whether clauses are added or removed.

Identity of beneficiaries kept separate from the rules of the trust in the Schedules 7.16 The Schedules (containing the rules of the trusts) are impersonal in the sense that they make no presumptions about the identity of the beneficiaries. The Schedules are not different for different beneficiaries (unless a separate Schedule is inserted with tailored rules for a particular primary beneficiary). The beneficiaries are identified in the clause Gift provisions through

testamentary trusts. In that clause their relationship with the testator is defined, and in that clause the extent of the shares of the estate to which they are going to be entitled to is set out. This means that changes to, and refinements of, the gift provisions to reflect the family relationships and circumstances can be made, and no consequential changes need to be made to the rules of the trusts as contained in the Schedules. [page 140]

FEATURES OF THE TESTAMENTARY TRUST Key offices and concepts of the precedent 7.17 It may be useful to describe some offices and concepts included in the precedents. This may help the drafter vary the powers and conditions which relate to those offices and concepts, to achieve a will which precisely meets the needs of the testator. Understanding the various offices created in the Model Testamentary Trust precedent in Chapter 8 and grasping how power and control is shared between them enables the drafter to take full advantage of the potential of the precedent to produce complicated and demanding types of testamentary trusts. The key offices and concepts that will be surveyed in this section are the: • • • • • • • •

executor; primary beneficiary; potential beneficiaries; Appointor; Protector; trustee; preservation age; and automatic disqualification of an Ineligible Officebearer.

The executor 7.18 In very broad terms, the function of an executor is to administer the estate in accordance with the law and the testator’s will. In these precedents, the executor is given important ongoing functions in addition to the executor’s basic function. These ongoing functions are to exercise the functions of Appointor if the office of Appointor becomes vacant, and the functions of Protector if the office of Protector becomes vacant. It is therefore important to ensure that there are sufficient alternative or substitute executors provided for in the will, to be available to act when called upon.

The primary beneficiary 7.19 The primary beneficiary is the person for whose primary benefit the trust has been created. In this precedent, each primary beneficiary (say, a child of the testator) is the primary beneficiary of her or his own trust. While these precedents offer each primary beneficiary the option to request that parallel trusts be set up for her or him, the precedents do not offer the testator the option to create a single trust with more than one primary beneficiary. There is no ‘office of primary beneficiary’. This is because there is no ‘generational succession’ that applies to a primary beneficiary. If a primary beneficiary dies, there is no longer a primary beneficiary as such and no new primary beneficiary comes into existence, though the powers of the primary [page 141] beneficiary do pass on to subsequent holders of those powers and the trust itself continues for the benefit of the remaining

beneficiaries. It is because there can never be more than one primary beneficiary that the name of each trust contains, by default, the name of its respective primary beneficiary. The primary beneficiary will be, by default, the first Appointor unless the primary beneficiary is below the preservation age, in which case the primary beneficiary becomes Appointor on reaching that age. As long as the primary beneficiary holds the Appointorship he or she has a great deal of control over the trust through the Appointor’s power to appoint persons, including herself or himself, as a trustee or the sole trustee. The Appointor (whether the Appointor is the primary beneficiary or not) can pass the Appointorship either during their lifetime by deed or on death through their will. The primary beneficiary is also, by default, the first Protector, and this gives the primary beneficiary additional control over the trust. The Protector (whether the Protector is the primary beneficiary or not) can also pass their powers to other persons by deed or will.

Potential beneficiaries 7.20 The potential beneficiaries are the persons eligible to be selected by the trustee to receive benefits from the trust. These may include the primary beneficiary or one or more of the potential beneficiaries. They are entitled to require that the trustee give them proper consideration when deciding how to exercise the trustee’s discretion. However, no beneficiary, whether the primary beneficiary or a potential beneficiary, ever has a right to receive a benefit. The Model Testamentary Trust classifies beneficiaries in two other ways: income beneficiaries and capital beneficiaries. The income beneficiaries are a broad range of beneficiaries to whom income (but not capital) can be distributed to. The capital beneficiaries are a more confined group of beneficiaries (generally

bloodline beneficiaries) to whom capital as well as income can be distributed. The distinction between income and capital beneficiaries allows enhanced asset protection. The precedent is structured in such a way so as to allow the will drafter to alter the income and capital beneficiaries of the trust easily. Where it is not desirable to have a distinction between the two classes, the will drafter can replicate the beneficiaries in both classes.

The appointor 7.21 The office and role of ‘Appointor’ are not defined by law or general practice. The definition of the Appointor’s office and role given in the Model Testamentary Trust precedent in Chapter 8 and the variations in Chapter 9 were developed for the purposes of this work only, to operate well and give the best balance in a discretionary testamentary trust. Other texts and precedents use the term ‘Appointor’ in very different senses and to describe very different offices, and the reader should not approach this work with preconceived ideas about what ‘Appointor’ means. [page 142] The role of Appointor is extremely important because it is the Appointor who will choose the trustee of the trust. Through the power to choose the trustee, the Appointor has crucial power over the trust. Nevertheless, merely holding the Appointorship does not give full power over the trust, because the Appointor has no power to make distributions or to end the trust. These powers are held by the trustee. The power of the Appointor is greatly augmented by the fact that the Appointor will always hold the power not merely to appoint a trustee, but in particular to appoint themselves as

trustee or even as sole trustee of the trust, and this means that in effect the offices of Appointor and trustee can be combined into one person at the discretion of the Appointor. The Appointorship is a crucial trust office and the Appointor’s power to appoint the trustee or trustees, including the power to appoint herself or himself, can be said to give the Appointor the ‘keys’ to the trust. In these precedents, the first Appointor will usually be the primary beneficiary, unless the primary beneficiary has not attained the preservation age in which case the executors will hold the powers of the Appointor. However, when the primary beneficiary does reach that age, he or she will attain exclusive Appointorship unless he or she is an ‘Ineligible Officebearer’.1 The Appointor is discussed further below: see 7.25.

The protector 7.22 The office and role of ‘Protector’ are not defined by law or general practice. For the purposes of this work they are defined in the Model Testamentary Trust precedent in Chapter 8 and the variation clauses in Chapter 9, according to what the authors determined would work best. Other texts and precedents use the term ‘Protector’ in very different senses and to describe very different offices, and the reader should therefore not approach this work with preconceived ideas about what ‘Protector’ means. In the precedents in this text, the Protector is an officer whose role is to protect the interests of the beneficiaries, particularly the primary beneficiary, from untoward actions by the trustee. The Protector does this by exercising a power of veto over certain actions by the trustee. In particular, the Protector’s written permission is required for a decision by the trustee to distribute capital (as opposed to income), to alter the terms of the trust or to wind up and end the trust. The Protector has no power to initiate actions by the trustee or

to perform actions which are within the scope of the trustee’s powers. Further, the Protector has no power to veto a decision by the trustee to distribute income of the trust (unless it was a capital receipt for which the trustee has exercised power to treat as an income receipt, the distribution of which does require the Protector’s written consent). In addition, the Protector has no power to veto the trustee’s power to choose and make investments, although the Protector [page 143] can require the trustee to invest in accordance with the requirements of the relevant Trustee Act. The first Protector is, by default, the primary beneficiary. There is an exception: if the primary beneficiary is a minor or loses capacity, the primary beneficiary’s legal guardian will be Protector until such time as the primary beneficiary attains the age of 18 or regains capacity. The Protector is expressly excluded from the scope of the provisions relating to disqualification of an Ineligible Officebearer. This ensures that even if a primary beneficiary loses the Appointorship or has never held it, the primary beneficiary (or her or his guardian) always continues to hold the Protectorship. As Protector, the primary beneficiary (or their guardian if they are minors or have lost capacity) will be able to protect her or his interests where the trustee is contemplating distributing capital, altering the terms of the trust or winding up and ending the trust.

The trustee Function and powers of the trustee 7.23

The trustee is the legal owner of the trust property, and has

the fiduciary duty to manage the trust property for the benefit of the beneficiaries, of whom the trustee may be one. The trustee’s powers are there to enable the trustee to carry out those duties. The trustee holds all the positive powers which relate to the management of the trust property. This means that no beneficiary or other officer of the trust can direct the trustee as to how to exercise her or his powers. The trustee as holder of fiduciary power has autonomy in relation to the exercise of that power. Therefore, no beneficiary or officer of the trust can require the trustee to make any distribution.

Controlling the trustee 7.24 On the face of it, the trustee appears to be all-powerful; however, the trustee is a fiduciary, and must act in accordance with the restraints which being a fiduciary imposes. Further, the precedent itself imposes some controls and restraints on the trustee. First, the trustee is constrained by the fact that he or she can always be removed from office by the Appointor. Second, the trustee requires the consent of the Protector to distribute capital, alter the terms of the trust or end the trust. There are further substantive powers which can be exercised by the trustee only with the consent of the Protector. The trustee’s discretion to distribute income is not subject to the consent of the Protector. This is for two reasons: first, to allow the trustee to make distributions of income in a timely and efficient basis; and second, to enhance asset protection. The enhancement of asset protection works thus: say the Protector is the primary beneficiary and the Protector’s power over the trustee extended to distributions of income, it might be argued that that power, even though it is only a power of veto, could be a resource in a family law property suit against the primary beneficiary. Limited as it is to a power to

[page 144] veto distributions of capital and a decision to end the trust, it is less easy to argue successfully that the Protector’s power of veto could be a resource. The trustee has another power not subject to the Protector’s veto: the power to choose and make investments. The trustee is explicitly exempted in the Model Testamentary Trust precedent from any form of ‘conflict of interest’ restriction on the trustee’s actions.

Appointment and removal of the trustee 7.25 The Appointor has the power to appoint and remove a trustee. The Appointor may appoint as trustee any person who is not an ‘Ineligible Officebearer’, including the Appointor herself or himself. The Appointor may choose to appoint as trustee someone other than herself or himself for various reasons. The Appointor may not wish to act in the office, or may prefer to have a professional trustee. Appointing a company to be trustee may have an asset protection function, and it may give continuity to the officeholder. Whatever appointment the Appointor makes, it is useful to remember that the Appointor retains the power to remove the trustee; it may for instance happen that the charges imposed by an institutional trustee become oppressive, or the service given inadequate. It may be unwise to appoint an institution as Appointor. The Appointor appoints the trustee, and may well appoint itself. If the trustee proves unsatisfactory, it will be impossible in practice to remove the trustee without the cooperation of the Appointor, which may not be forthcoming.

The Appointor should also be careful that when appointing a replacement trustee to an existing trust (eg if a trustee has been disqualified or has resigned), attention is paid to possible stamp duty implications arising from appointing a trustee who is an existing beneficiary: see, for example, in New South Wales Revenue Ruling DUT 037.

The preservation age 7.26 The preservation age is the age chosen by the testator as the age before which the testator believes the primary beneficiary will not be mature or responsible enough to take full control over her or his trust. The default preservation age in the Model Testamentary Trust is 25; however, the testator may wish to change this to suit the particular circumstances of their beneficiaries. The default preservation age of 25 is occasionally too high. On the other hand, if the beneficiary is vulnerable, perhaps for personality reasons or because of drug addiction or spendthrift tendencies, the testator may decide to set it higher than 25 — even much higher. For a disabled or irresponsible primary beneficiary, the testator could set the preservation age at a level which the primary beneficiary cannot reach, perhaps 99 years, as a means of securing protection for the primary [page 145] beneficiary at the same time as making available to, say, the children and further descendants of the primary beneficiary the benefits of a discretionary testamentary trust. The freedom to set the preservation age for each primary beneficiary enables the

testator to choose the level or degree to which a particular primary beneficiary is protected from herself or himself. The Model Testamentary Trust precedent in Chapter 8 provides that if the testator dies and the relevant gift or allocation comes into effect before the primary beneficiary has reached the preservation age the trust is not optional but is mandatory, and remains mandatory until the primary beneficiary reaches the preservation age. The primary beneficiary being below the specified preservation age, the clause Primary beneficiary may request special distribution (see 8.14) does not allow the trust to be bypassed at the request of the primary beneficiary. Furthermore, the primary beneficiary will be prevented from being either Appointor or trustee until he or she attains the preservation age. Crucially, even though the primary beneficiary who is below the preservation age cannot be Appointor or trustee, her or his interests are still protected. Where the primary beneficiary is below the preservation age the executor will be the Appointor. Provided the primary beneficiary has attained majority, the primary beneficiary who is below the preservation age holds the Protectorship. If the primary beneficiary is a minor, the Protectorship will be held by the primary beneficiary’s legal guardian. The practical effect of these arrangements is that the trustee (appointed by the executor as Appointor) will need to consult with and obtain the written consent of the primary beneficiary, or the primary beneficiary’s legal guardian, as the case may be, in her or his capacity as Protector, before a distribution of capital can occur, the terms of the trust can be altered or the trust can be terminated. On the other hand, even though a primary beneficiary who has attained majority but is still under the preservation age is Protector, the primary beneficiary cannot as Protector make or initiate any distributions of income or capital — only the trustee has the power to make distributions. The primary beneficiary who has attained majority but is still below the

preservation age continues, therefore, to be protected against herself or himself. Upon attaining the preservation age, the primary beneficiary: •

•

gains full control of the trust because then the primary beneficiary becomes Appointor, and with the Appointorship comes the power to appoint the trustee; and has the option of continuing the trust or ending it.

Ineligible officebearer 7.27 The concept of an ‘Ineligible Officebearer’ is crucial to the precedent, because it underpins all the forms of asset protection offered by the Model Testamentary Trust precedent in Chapter 8. [page 146] The Automatic disqualification of an Ineligible Officebearer clause (see 8.24) gives a definition of an ‘Ineligible Officebearer’ in subclause (2). In essence, the subclause provides that a person is an Ineligible Officebearer if the person: • • • •

has not reached the specified preservation age; has become separated from their spouse or partner; is unable to pay debts as and when they fall due, that is, has entered into bankruptcy; or lacks legal capacity (whether under a legal disability, by legal declaration, or by the assessment of at least two medical professionals including a treating doctor).

Subclause (3) provides, in effect, that if an individual is or becomes an Ineligible Officebearer, that individual (and their spouse, partner or issue) or a company in which the individual

held a controlling interest is disqualified from holding the positions of trustee and Appointor. It provides: Where a person is or becomes an Ineligible Officebearer: (a)

that person may not be appointed as trustee;

(b) if that person is or has been appointed a trustee, that person is automatically removed as trustee and her, his or its rights, powers and duties as trustee are terminated; and (c) if that person is or has been appointed as an Appointor, the person is automatically removed as an Appointor and her, his or its rights, powers and duties as Appointor are terminated.

The effect of the above provisions is that the automatic disqualification clause will only render an individual ineligible to hold the positions of Appointor or trustee where that individual is the primary beneficiary, their spouse, child or grandchild. The reason for this is deliberate. If the automatic disqualification clause operated in relation to any individual that went through a disqualification event, it is possible that if the primary beneficiary and an executor were going through a disqualification event at the same time (such as separation), both individuals would be disqualified and there would be a lack of suitable trustees and Appointors. The authors are of the view that given that the executor is unlikely to have ever received distributions from the testamentary trust, merely holding the position of Appointor and/or trustee of the trust is unlikely to result in the trust being treated as either property or as a financial resource in the property settlement of the executor. In any event, provision has been made to address such situations to exclude the executor (if they happen to also be a beneficiary) from being a beneficiary while they too are going through a crisis event. (3) A beneficiary that meets the criteria in subclause (2)(b) or (c) of the clause Automatic disqualification of an Ineligible Officebearer is excluded as a beneficiary of the trust whilst that beneficiary meets that or those criteria.

[page 147]

The crisis events referred to in subclause (3) are limited to divorce, separation and bankruptcy. If the primary beneficiary is an Ineligible Officebearer only because he or she has not reached the preservation age, then upon reaching that age he or she ceases to be an Ineligible Officebearer2 and becomes Appointor.3 While the primary beneficiary is below the preservation age, the executor will be Appointor, which prevents the primary beneficiary from appointing a trustee who will not responsibly manage the trust. On reaching the preservation age, the primary beneficiary becomes Appointor and Protector and so can take full control over the trust.

Temporarily or permanently being an Ineligible Officebearer? 7.28 A person who is an Ineligible Officebearer only because he or she is below the preservation age or because they have lost or do not have capacity, is an Ineligible Officebearer only for so long as he or she remains under the preservation age or lacks capacity. The Model Testamentary Trust precedent provides two variations: a temporary disqualification and a permanent disqualification mechanism. Under the latter, a person who is an Ineligible Officebearer for any reason other than being under the preservation age or lacking capacity remains an Ineligible Officebearer forever, and is excluded forever from being a trustee or Appointor. The permanent exclusion provision is a way of offering asset protection to the excluded person — usually, but not necessarily, the primary beneficiary. The reasoning is as follows. If the primary beneficiary (or some other beneficiary) becomes vulnerable either to creditors through bankruptcy, or to a spouse or partner through marriage or relationship breakdown, it is important to protect the trust assets. This can be done only by taking all control of the trust away from

the person. For this reason, a beneficiary in such a situation becomes an Ineligible Officebearer, and is removed from the offices through which the beneficiary can exercise control: the office of trustee and the office of Appointor. The removal is permanent because permanent removal shows that the intention to remove control from the beneficiary is serious and genuine — and there can be no inference that ultimately control will be returned and the person will later enjoy the trust property as property or as a financial resource. Temporary removal would only provoke a strong argument that the removal of control is little more than window dressing, and the real intention must be, after all, to benefit the beneficiary; no doubt in due course the flow of control and benefits to the beneficiary will start again. If this really is the intention, the trust could be treated by the court as property, or at least a resource, of the beneficiary. In other words, if the beneficiary were to be able to regain the Appointorship after the family law settlement, the [page 148] beneficiary would be vulnerable to s 106B of the Family Law Act 1975 (Cth), and if bankruptcy was the problem, the beneficiary would be vulnerable to s 302B of the Bankruptcy Act 1966 (Cth). The Ineligible Officebearer is not left without any protection, however. If he or she is Protector, he or she remains Protector, and so is able to refuse consent to distributions of capital or to ending the trust. The testator may wish to modify the rule making the disqualification permanent, so as to allow the disqualification to cease when the cause for the disqualification ends. However, as noted above, this may undermine the asset protection that is being sought: see 8.24.

The option of a stronger level of asset protection 7.29 The option of a stronger level of asset protection offered at 9.38 goes further than the ordinary asset protection provisions just described. The ‘strong’ option not only removes the beneficiary and her or his spouse or partner from being trustee or Appointor, it also removes the beneficiary and her or his spouse or partner from being beneficiary at all. Again, this removal is permanent. However, a vulnerable primary beneficiary or other beneficiary who is Protector does not lose all interest in the trust: he or she still remains Protector. Choosing which form of the disqualification clause to adopt will depend on the priorities of the testator. As noted in Chapter 3, if a person continues at all to be a beneficiary of the trust, that person’s interest in the trust is likely to be considered to be at the very least a resource of that person. However, because the strong option is drastic, it should not be used in the will without due consideration and explanation to the testator on the implications of its inclusion.

THE ALLOCATION OF POWERS BETWEEN THE DIFFERENT OFFICES AND THE INTERACTION BETWEEN THEM 7.30 It is useful to define the various offices, to separate them and to clarify their relationships to each other. Doing so helps one understand how together the offices contribute both to the asset protection the trust offers and also to the sensible and efficient running of the trust. To sum up, the offices are: • •

the Appointor who appoints and removes the trustee, which is a positive function; the trustee who legally owns the trust property and manages

•

•

it for the benefit of the beneficiaries, which is a positive function; the Protector who has the power of veto over the trustee’s power to take certain substantial actions — in particular, distributions of capital and ending the trust. The Protector’s function is a negative one; and the executor who administers the estate in accordance with the law and the will. The Model Testamentary Trust precedent appoints [page 149] the executor to certain additional roles in particular circumstances, including that of the Protector (if the office of Protector becomes vacant) and Appointor (if the office of Appointor becomes vacant).

The definitions of the offices and the allocations of powers between them in the Model Testamentary Trust precedent have been designed to contribute to asset protection and at the same time to enable the trust to be smoothly and efficiently managed and operated. The offices interact to contribute to asset protection in relation to protection from outside threats from creditors or a separating spouse. The interaction of the offices also creates checks and balances which help protect the assets against misapplication by trust officers themselves, particularly where the beneficiary is vulnerable.

Example to illustrate the interaction of the offices 7.31

How the offices interact to contribute to protecting assets

against misapplication by trust officers may perhaps be illustrated by using an example involving a minor beneficiary.

Example: Interaction of offices • • •

•

•

The testator Tina is a widow. She has two adult sons, Alan and Barry. Alan has a daughter Faye who is a minor; Barry also has a daughter Gina who is a minor. The testator made a will appointing her sons Alan and Barry as executors and leaving the whole of her estate to Alan and Barry, in equal shares in separate discretionary testamentary trusts. The testator’s son, Alan, predeceased the testator, but the testator did not alter her will to accommodate the change in family circumstances. The testator’s son Alan leaves a widow Wendy who is Faye’s mother and legal guardian.

Assume that the will adopts the Model Testamentary Trust precedent provisions. The effect of the will is that the share of the estate that Alan would have received will be taken by Alan’s daughter Faye as primary beneficiary with provision for a discretionary testamentary trust. As Faye is a minor, the trust will be mandatory. Further, Faye’s legal guardian is her mother Wendy and as legal guardian, Wendy will be Protector of Faye’s trust. Tina’s other son, Barry, is Tina’s sole executor, and is Appointor in relation to Faye’s trust until Faye reaches the preservation age, at which point she will hold the Appointorship. Until then Barry, as Appointor, will be able to appoint himself as trustee of Faye’s trust. Assume that he does so. Barry as the uncle of the primary beneficiary, Faye, is one of the potential beneficiaries of Faye’s trust. Barry, as trustee of Faye’s trust, has the power at his discretion to make distributions of

income from the trust and could, for example, distribute income to himself as a potential beneficiary of the [page 150] trust. He would not have to get the consent of the Protector, Wendy, to do so. However, he can neither distribute capital nor end the trust without the written consent of the Protector. Faye is therefore protected against misapplication of capital by her uncle, Barry, the trustee. However, Faye is still vulnerable to misapplication of income, since the trustee may distribute income without the consent of the Protector. It would have been possible to draft the Model Testamentary Trust precedent so as to require the Protector’s consent for all distributions including distributions of income, but a balance had to be struck between giving more protection to the beneficiary on the one hand and the efficient and sensible running of the trust on the other. Faye is potentially vulnerable to another threat: her mother Wendy, the Protector, might remarry, and be tempted to pressure the trustee into misapplying funds in her favour. However, Wendy will not be able to pressure the trustee because the Protector has no power to direct the trustee. The fact that the Protector has no positive powers contributes to protecting the assets. After Faye reaches majority but before she reaches the preservation age she, as primary beneficiary, is Protector, and so has the ability to protect the assets for herself. After reaching the preservation age, she becomes Appointor and so gains control over her trust. None of the protections are absolute, and to a great extent the protections depend on the quality of the persons holding the offices. The testator, Tina, appointed her sons executors because she trusted them sufficiently to believe that they would honourably fulfil the roles inherent in the office of executor. If she

had not believed in her sons, she could have appointed a solicitor or a trustee company or the Public Trustee as her executor. A testator may decide to vary the allocation and distribution of powers between the executor, the Appointor, the trustee and the Protector. However, in preparing the Model Testamentary Trust precedent, much consideration was given to allocating and balancing the powers inherent in the offices in the search for a good balance between asset protection on the one hand, and sensible and efficient management of the trust assets on the other. For this reason, and because certain variations in the allocation and distribution of powers will be legally impossible, careful consideration should be given to the consequences before alterations affecting the balance are made.

STRUCTURE OF THE MODEL TESTAMENTARY TRUST PRECEDENT 7.32 The Model Testamentary Trust precedent in Chapter 8 is made up of the following elements: • •

a first part, which contains the standard first clauses of the will; Schedule 1, which contains the rules of a standard discretionary testamentary trust created by the will. If only basic discretionary testamentary trusts are being created, there will be no Schedule 2 in the will; [page 151]

•

•

a reference to Schedule 2, which is a precedent for a trust designed especially for a severely disabled beneficiary for whom the basic discretionary testamentary trust would not be appropriate. Schedule 2 is set out in Chapter 9; if another trust different from the basic discretionary

•

testamentary trust is required, the testator would place the rules for that trust in a further Schedule; and a ‘Schedule of General Provisions’, which contains provisions which apply generally and are not specific to trusts the rules of which are contained in a Schedule.

These elements will now be considered further.

The first part 7.33 The first part of the will is not formally labelled a ‘part’ or ‘section’. The provisions in it form two groups. The first group of provisions consists of machinery, administrative and dispositive provisions which are not directly related to the discretionary testamentary trusts in the will. The usual starting clauses of a will are in this group. Among these clauses are: • • • •

the Testimonium (see 8.3); the Revocation clause (see 8.4); the Appointment of executors clause (see 8.9); and the Absolute gifts clause: see 8.10. For present purposes, absolute gifts are gifts that are not offered via a testamentary trust.

The second group of clauses in this first part relate directly to the testamentary trusts created by the will. The clauses in this group identify the beneficiaries of the trusts, create the trusts and define the gifts which are to make up the trust property. The clauses are: •

•

the Identification of primary beneficiaries clause (see 8.11), which provides that each beneficiary identified as a beneficiary in the Gift provisions through testamentary trusts clause (see 8.13) is a ‘primary beneficiary’; the Creation of trusts clause (see 8.12), which provides that a separate testamentary trust is to be created for the primary benefit of each primary beneficiary, and notes that parallel

•

trusts may be created for each primary beneficiary. This clause provides that the initial property of each trust is $10 unless parallel trusts are created for a primary beneficiary in which case the initial $10 is divided into as many parts as there are to be parallel trusts for that primary beneficiary; the Gift provisions through testamentary trusts clause (see 8.13), which defines the gifts or allocations to be offered via the testamentary trusts that have been created. There is of course an infinite variety of ways that a testator can divide and allocate her or his estate among the members of the family to be held for some or all of them on [page 152]

•

• •

trust. The Model Testamentary Trust precedent provides only one example: the common situation of the testator who gives the estate to her or his spouse or partner via a discretionary testamentary trust, and if the spouse or partner does not survive the testator, divides the estate between her or his children in equal shares with substitution of children of a predeceased child for the predeceased child, again via a discretionary testamentary trust; the Primary beneficiary may request special distribution clause (see 8.14), which permits the primary beneficiary to ask the executor to set up parallel trusts for her or him. The clause also permits the primary beneficiary to request that the executor bypass the trust and pay the substantive gift directly to the primary beneficiary. The clause gives the executor the power to accede to or decline these requests; the Default gift to take effect if all other gifts of residue fail clause (see 8.15); and the Schedules in my will clause (see 8.16), which lists the Schedules which are contained in the will and is the last clause in this part of the will.

The second part — Schedule 1: discretionary testamentary trust provisions 7.34 The Schedule 1 clauses set out the rules that will apply to the trust if it is created.

The third part Schedule 2: Trust for beneficiary with a disability 7.35 If the will is to create a trust for a person with a disability, Schedule 2, which contains the rules of the trust, would follow Schedule 1.

The last part Schedule of General Provisions 7.36 The Schedule of General Provisions (see 8.28) contains all the clauses of the will which apply in any event and are not specific to trusts, the rules of which are contained in a Schedule. This Schedule includes directions to and powers of the executor in relation to superannuation, and concludes with the general powers of executors and trustees. This lengthy clause gives powers to both executors and trustees, including trustees of trusts created by the will. This Schedule includes the Interpretation clause for the whole will. The Model Testamentary Trust precedent ends with the Attestation clause: see 8.35.

1.

See the clause Automatic disqualification of an Ineligible Officebearer: refer

2. 3.

8.24. See the clause Automatic disqualification of an Ineligible Officebearer, subclause (6): refer 8.24. See the clause The Appointor, subclause (4): refer 8.21.

[page 153]

8 MODEL DISCRETIONARY TESTAMENTARY TRUST PRECEDENT

Introduction Model Testamentary Trust Precedent for a Discretionary Testamentary Trust Testimonium Revocation clause Recommendation that executors, trustees and beneficiaries seek advice Presumption of survivorship Exclusion of requirement that beneficiaries survive the testator by 30 days Power to disclaim Appointment of executors Absolute gifts Identification of primary beneficiaries Creation of trusts Gift provisions through testamentary trusts Primary beneficiary may request special distribution Default gifts to take effect if all other gifts of residue fail Schedules in my will Schedule 1: Discretionary Testamentary Trust Provisions Application of the provisions in Schedule 1 The property of the trust The beneficiaries of the trust The purposes of the trust The appointor The protector

Trustee of the trust: definition and appointment Automatic disqualification of an ineligible officebearer Powers of the trustee Investment of the fund Ending of the trust and vesting of the balance

[page 154] Schedule of General Provisions Application of this schedule Streaming of income and capital Executors and trustees: conflicts of interest Power of my executors in relation to superannuation death benefit General powers of my executors and trustees Unanimity Interpretation Attestation Explanatory Document: Clause-by-Clause Explanation Explanation of Your Will Purpose of this document Testimonium Revocation clause Recommendation that executors, trustees and primary beneficiaries seek advice Presumption of survivorship Exclusion of requirement that beneficiaries survive the testator by 30 days Power to disclaim Executors Absolute gifts Identification of primary beneficiaries Creation of trusts Gift provisions through testamentary trusts Primary beneficiary may request special distribution Default gift to take effect if all other gifts of residue fail Schedule 1: Discretionary Testamentary Trust Provisions General comment Application of the provisions in Schedule 1 Property of the trust

Beneficiaries of the trust The purposes of the trust The appointor The protector Trustee of the trust: definition and appointment Automatic disqualification of an ineligible officebearer

[page 155] Powers of the trustee Investment of the fund Ending of the trust and vesting of the balance Schedule of other Provisions of my Will General comment Streaming of income and capital Executors and trustees: conflicts of interest Powers of my executors in relation to superannuation death benefit General powers of my executors and trustees Unanimity Interpretation Example of the Model Testamentary Trust Precedent Applied to Hypothetical Facts Plan for the will Schedule 1 — Discretionary Testamentary Trust Provisions Schedule of General Provisions Schedule 1: Discretionary Testamentary Trust Provisions Schedule of General Provisions

INTRODUCTION 8.1 • • •

This chapter contains the following documents: the Model Testamentary Trust precedent for a Discretionary Testamentary Trust set out clause by clause; the Model Testamentary Trust precedent set out in full; an Explanatory Document, explaining the Model

• •

Testamentary Trust clause by clause in non-technical language; variation clauses to the Model Testamentary Trust precedent; and an example of the Model Testamentary Trust precedent in use.

MODEL TESTAMENTARY TRUST PRECEDENT FOR A DISCRETIONARY TESTAMENTARY TRUST 8.2 The Model Testamentary Trust precedent is set out below clause by clause. The precedent is in its full form and an example of the precedent in use will be provided later in this chapter. Additional examples are provided in Chapter 10. The numbering in the below Model Testamentary Trust precedent is for illustrative purposes only. Where the variation clauses are used or standard clauses removed, the numbering should be altered accordingly. [page 156] The clauses below should be read in conjunction with the explanatory notes in 8.36.

Testimonium 8.3 See Chapter 3 in C Birtles and R Neal, Hutley’s Australian Wills Precedents, 8th edn, 2014 (Hutley’s), for discussion and a precedent for a will with a foreign element.

Last will THIS WILL is made by me [NAME] of [ADDRESS] in the [STATE or TERRITORY], [OCCUPATION].

Revocation clause 8.4 1. (1)

This clause revokes any previous will. Revocation clause I revoke all previous testamentary acts.

Recommendation that executors, trustees and beneficiaries seek advice 8.5 This clause contains a recommendation that the executors, trustees and primary beneficiaries obtain legal, taxation and financial advice. Many testators who give beneficiaries the option to take their benefits absolutely and dispense with the trust are concerned that the beneficiary may dispense with the trust without really understanding its benefits. This clause addresses the concern by ensuring that the beneficiaries, executors and trustees have the opportunity to understand the potential benefits and uses of the trusts. 2. Recommendation that executors, trustees and primary beneficiaries seek advice (1)

My will has been drafted to maximise tax effectiveness and asset protection for my beneficiaries. I recommend that before my executors decide how to administer my estate, and before a primary beneficiary makes a decision on the most appropriate

way to take her or his inheritance, my executors, trustees and each primary beneficiary investigate the benefits offered by this will in the light of appropriate professional legal, taxation and financial advice. At the time of signing this will my professional advisor is [NAME OF FIRM and its contact details].

Presumption of survivorship 8.6 See Chapter 6 in Hutley’s for commentary on the use of survivorship clauses. [page 157] 3. (1)

Presumption of survivorship Where: (a) a person has died and one or more deaths are presumed; or (b) two or more deaths are presumed; and (c) the order of deaths, whether proved or presumed, is uncertain, this will is to be construed as if the deaths, whether proved or presumed, had taken place in the following manner: first, the oldest; then, after a period of one day, the second oldest; then, after a period of one day, the third oldest; and so on to the youngest.

Exclusion of requirement that beneficiaries survive the testator by 30 days 8.7 The authors note that this clause is a variation of the standard clause in Chapter 6 of Hutley’s.

4. Exclusion of requirement that beneficiaries survive the testator by 30 days (1)

Excluding a requirement that a primary beneficiary attains their respective preservation age, no beneficiary is required to survive me by 30 days or any other period in order to take a benefit under my will, and this statement expresses a contrary intention for the purposes of statutory provisions which impose a general requirement that beneficiaries survive me for 30 days or any other period to inherit.

Power to disclaim 8.8 5. (1)

This clause contains the standard disclaimer clause. Power to disclaim A person may disclaim an interest under this will or its trusts in whole or in part.

Appointment of executors 8.9 There are many alternative variations of subclause (1): see Chapter 9. However, one common provision is offered here as an illustration: the appointment of wife or husband or partner and children. See Hutley’s for a fuller discussion of executors and a variety of forms. 6. (1)

Executors I appoint as my executor my [wife (or) husband (or) partner] [NAME OF EXECUTOR].

(2)

If my [wife (or) husband (or) partner] refuses or is unable to act as my executor, I appoint as my executors my children [NAME1] and [NAME2]. [page 158]

(3)

(4)

‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1.

Absolute gifts 8.10 The testator may choose to have any number of absolute gifts, that is, gifts not to pass into a discretionary testamentary trust. See further variations in Chapter 9. 7. (1) (2)

Absolute gifts My executors must give [description of gift] to [NAME OF BENEFICIARY]. My executors must give my property known as [description of property] to [NAME OF BENEFICIARY].

Identification of primary beneficiaries 8.11 This clause sets out the gifts that will be available through a testamentary trust (whether mandatory or optional).

8. (1)

Identification of primary beneficiaries In the clause Gift provisions through testamentary trusts my executors must give property to the trustee or trustees of the trust or trusts for a certain person or persons, and, unless otherwise specified, I hereby define that person or each of those persons as a ‘primary beneficiary’.

Creation of trusts 8.12 This clause refers to clauses Primary beneficiary may request special distribution (see 8.14) and Gift provisions through testamentary trusts (see 8.13). 9. (1)

(2) (3)

(4)

Creation of trusts My executors must set aside out of my estate a fund (the initial property fund) to provide the initial property of each trust created in this will. I create a separate discretionary testamentary trust for the primary benefit of each of my primary beneficiaries. The name of each trust must contain the words ‘discretionary testamentary trust for’ and the full name of the particular person for whose primary benefit that trust is created, or such other name as the trustee gives the trust. The initial property of each trust is $10, which must be paid by my executors out of the initial property fund, and the property of the trust includes property transferred to the trustee or trustees under the clause Gift provisions through testamentary trusts. [page 159]

(5)

Subject to the clause Primary beneficiary may request special

(6)

distribution, my executors may in their absolute discretion create a specified number of parallel trusts for a primary beneficiary by splitting the initial property of a trust into as many parts as there are to be parallel trusts for that primary beneficiary. The provisions governing the trusts are set out in the Schedule or Schedules identified for each primary beneficiary respectively in the clause Gift provisions through testamentary trusts.

Gift provisions through testamentary trusts 8.13 The Gift provisions through testamentary trusts clause is in two parts: • subclauses (1) and (2), which contains the actual gift provisions themselves, in other words they define the gifts and shares of the estate or of the residue given by the will; and • subclause (3), which provides that the gifts and shares of the estate given in the clause must be held on trusts under Schedule 1, Schedule 2 (if applicable) or absolutely. No standard precedent for subclauses (1) and (2) can be given, because gifts come in so many forms. In this clause, we have chosen the general form involving a spouse and children receiving the residue. 10.

Gift provisions through testamentary trusts

(1)

My executors must give the residue of my estate to the trustee or trustees of the trust for my [wife (or) husband (or) partner] [NAME OF WIFE, HUSBAND or PARTNER] who survives me. Subject to the preceding trust: (a) subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts

(2)

created for each of my children [NAME1] and [NAME2] who survive me; (b) if a child of mine does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. (3) Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1. The effect of the example clause is that: • the discretionary testamentary trust for the spouse or partner is to receive the sole allocation of residue; [page 160] •

if the spouse or partner fails to survive the testator, separate discretionary testamentary trusts for children of the testator are to take equal shares; and • the children of a predeceased child take in equal shares what a predeceased child would have taken through separate discretionary testamentary trusts. This clause can be amended as required by the circumstances and testamentary wishes of the testator. Further variations can be found in Chapter 9.

Primary beneficiary may request special

distribution 8.14 This clause refers to the clause Creation of trusts (see 8.12) and the clause Gift provisions through testamentary trusts (see 8.13). 11.

Primary beneficiary may request special distribution

(1)

A primary beneficiary who is not an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer may request that my executors exercise their powers in subclause (2). My executors may in their absolute discretion: (a) set up a specified number of parallel trusts for a primary beneficiary; and/or (b) transfer some or all of a primary beneficiary’s share of my estate: (i) to the primary beneficiary absolutely provided they are not an Ineligible Officebearer; (ii) to the trustee or trustees of an existing trust of which the primary beneficiary is the trustee or appointor; or (iii) in different proportions between the parallel trusts created for the benefit of that primary beneficiary. If after the exercise of the discretion given to my executors in subclause (2) a balance of the allocated share of a primary beneficiary remains, my executors must transfer that balance equally to the trustee or trustees of the trusts created for that primary beneficiary.

(2)

(3)

Default gifts to take effect if all other gifts of residue fail

8.15 The testator should consider inserting a gift or gifts to take effect if all other gifts of residue fail. Two such gifts are offered. The first is a non-charitable gift to friends, extended family or a non-charitable institution such as an unincorporated noncharitable association; the second is a gift to a charity. Either or both gifts may be used. The gift may be omitted altogether if the testator wishes. 12.

Default gift to take effect if all other gifts of residue fail

(1)

If after carrying out the other provisions of this will any part of my estate remains undisposed of and would otherwise pass on intestacy, my executors [page 161] must give that part to [NAME DEFAULT BENEFICIARY1] and [NAME OF DEFAULT BENEFICIARY2] as shall survive me and if more than one as tenants in common in equal shares.

OR (1)

(2)

If after carrying out the other provisions of this will any part of my estate remains undisposed of and would otherwise pass on intestacy, my executors must give that part to [NAME AND DETAILS OF CHARITY]. Gifts made in the preceding subclause are made for the general purposes of the respective charity and the following terms apply: (a) if the named institution has amalgamated with another institution or institutions, this legacy shall take effect as if it had been made to the amalgamated institution; (b) if the named institution has changed its name or constitution or both, this legacy shall take effect as if it had been made to the institution with either, or both,

(c)

(d)

(e)

the name or constitution as altered; if the named institution has transferred all of its assets to another charitable institution, this legacy shall take effect as if it had been made to the institution to which the assets have been transferred; if the named institution has ceased to exist, then my trustees shall pay this legacy to such other charitable institution the object of which in the opinion of my trustees most closely resembles those of the named institution; and the receipt of the secretary, treasurer or other proper officer for the time being of the institution to which the legacy is paid will be a full discharge for my trustee.

Schedules in my will 8.16 Insert the list of Schedules as appropriate. Schedule 2 must be included if there are provisions for a seriously disabled beneficiary in a Schedule 2 trust. 13.

Schedules in my will

(1)

My will contains the following Schedules: (a) Schedule 1 — Discretionary Testamentary provisions; and (b) Schedule of General Provisions.

Trust

SCHEDULE 1: DISCRETIONARY TESTAMENTARY TRUST PROVISIONS Application of the provisions in Schedule 1 8.17

In this clause reference is made to clause General powers

of my executors and trustees: see 8.32. [page 162] 14.

Application of the provisions in Schedule 1

(1)

In Schedule 1, ‘the trust’ means each trust governed by Schedule 1. The provisions in Schedule 1 do not apply to any trustee other than a Schedule 1 trustee. The provisions in Schedule 1 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

(2) (3)

The property of the trust 8.18

The clause defines the property of each trust.

15.

The property of the trust

(1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

The beneficiaries of the trust

8.19 This clause sets out the beneficiaries of the trust. A distinction is made between income and capital beneficiaries in order to maximise asset protection from a family law perspective. The standard clause as it appears below specifically excludes a spouse of the primary beneficiary from ever receiving capital from the trust unless the primary beneficiary has died leaving no surviving issue. Where a testator wishes neither to exclude the spouse of a primary beneficiary as a capital beneficiary, nor to make a distinction between income and capital beneficiaries, amendments can be made to subclause (5) (see 7.20 for additional commentary). Subclause (3) excludes a person who is going through divorce or de facto relationship breakdown or bankruptcy from being a beneficiary of the trust. This maximises asset protection. Subclause (3) may be omitted if the testator so desires. 16.

Beneficiaries of the trust

(1)

The beneficiaries of the trust are the income beneficiaries and the capital beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. A beneficiary that meets the criteria in subclause (2)(b) or (c) of the clause Automatic disqualification of an Ineligible Officebearer is excluded as a beneficiary of the trust while that beneficiary meets that or those criteria.

(2)

(3)

[page 163] Income beneficiaries (4)

The income beneficiaries of the trust are the following persons,

whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) a spouse of the primary beneficiary; (d) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (e) a spouse and the children of any of the persons specified in the preceding paragraphs; (f) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (g) a charity or charitable entity; and (h) an entity recognised as a deductible gift recipient entity under Australian taxation law. Capital beneficiaries (5)

The capital beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) the issue of a grandparent of the primary beneficiary; (d) the spouse of the primary beneficiary if the primary beneficiary dies leaving no surviving issue; (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law.

The purposes of the trust 8.20 17.

This clause contains the purposes of the trust. The purposes of the trust

Primary beneficiary is over the preservation age (1)

Where the primary beneficiary is over the preservation age, the purposes of the trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of [page 164] a beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes.

Primary beneficiary is under the preservation age (2)

Where the primary beneficiary is under the preservation age, I express the wish (without limiting the discretion of the trustee) that the trustee preserve the capital of the fund and, as far as seems to them reasonable, limit its application to the primary beneficiary’s: (a) medical and dental treatment; (b) education (including vocational training); (c) reasonable maintenance and welfare; and (d) such other expenses which the trustee considers appropriate.

Trustee has absolute discretion (3)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of

the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary.

The appointor 8.21 An alternative for subclause (2) is to name the Appointor: see 9.30. Subclause (3) would name any person whom the testator may wish to exclude from being Schedule 1 Appointor: see 9.31. An alternative for subclause (7) is to name the substitute Schedule 1 Appointor: see 9.32. The standard clause is set out below. 18.

The Appointor

Powers of the Appointor (1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor.

Eligibility and appointment of the Appointor (2) (3)

(4)

Subject to subclause (3), the primary beneficiary is the first Appointor. If a person (including an executor) is or becomes an Ineligible Officebearer, that person is disqualified and does not become or ceases to be an Appointor. A person who is or would otherwise be entitled to be an Appointor, but is an Ineligible Officebearer because he or she is

under the preservation age, becomes Appointor on reaching the preservation age if: (a) that person is able and willing to accept the office; and (b) that person is not otherwise an Ineligible Officebearer. [page 165] (5)

(6) (7)

(8)

If the person becomes Appointor under the preceding subclause, any other person who is an Appointor at that time ceases to be an Appointor. If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) those of my executors who are not Ineligible officebearers are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor and is not an Ineligible officebearer, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (9)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor. (10) If a sole Appointor who is the primary beneficiary of the trust

dies without appointing a new Appointor in her or his place: (a) if that Appointor is survived by a child or children, the child or children of that person is or are the Appointor; or (b) if that Appointor is not survived by a child or children, the legal personal representative or representatives of the Appointor is or are the Appointor.

The protector 8.22 An alternative to subclause (3) is to name the first Protector: see 9.33. An alternative to subclause (7) provides that a named person is disqualified from being the Protector: see 9.34. In this cause reference is made to the clause General powers of my executors and trustees: see 8.32 and Powers of the trustee: see 8.25. 19.

The Protector

Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3)

Subject to subclause (4), the primary beneficiary is the first Protector. [page 166]

(4)

(5)

(6)

(7)

If a person who would be or is a Protector: (a) is a minor; or (b) lacks or loses capacity — that person is disqualified from being a Protector, and the guardian or legal representative of the person is the Protector, but only until such time as that person attains majority or is no longer subject to guardianship, at which time the person is Protector. A person who is or has been disqualified from being a Protector and who is no longer disqualified and is able and willing to accept the office, becomes the Protector, and any other person who is at that time a Protector ceases to be a Protector. If there is no Protector: (a) my executors are the Protector; or (b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed. A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (8)

A Protector (including Joint Protectors) may, by unregistered deed or will, subject to any terms which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. (9) A Protector may resign. (10) If a sole Protector who is the primary beneficiary of the trust dies without appointing a new Protector in her or his place: (a) if that Protector is survived by a child or children, the

(b)

child or children of that person is or are the Protector; or if that Protector is not survived by a child or children, the legal personal representative or representatives of the Protector is or are the Protector.

Trustee of the trust: definition and appointment 8.23 A named person or persons could be nominated as the initial trustee or trustees (see 9.35). Alternatively, an institutional trustee could be appointed either initially or as a fall back (see 9.36). This clause refers to the clause Automatic disqualification of an Ineligible Officebearer (see 8.24). 20.

Trustee of the trust: definition and appointment

(1)

The trustee is the person who controls the trust pursuant to this Schedule. [page 167]

(2)

The trustee or trustees may be or include a professional trustee or one or more of my executors.

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors (excluding an executor who is an Ineligible officebearer) must nominate a trustee or trustees.

Eligibility to be the trustee (5) (6)

(7)

The eligibility of a person to be a trustee is subject to the clause Automatic disqualification of an Ineligible Officebearer. Where the primary beneficiary reaches the preservation age (and is not otherwise an Ineligible officebearer), the primary beneficiary is eligible to be appointed as the trustee or one of the trustees. A person who is not the primary beneficiary is not ineligible to be a trustee merely because he or she is under the preservation age.

Automatic disqualification of an ineligible officebearer 8.24 The standard provision offered here is at the core of protecting assets against relationship breakdown. The protection works by disqualifying the beneficiary from being Appointor or trustee, thus denying the beneficiary control over the trust. Weak level asset protection The clause set out here gives what might be called ‘weak’ or ‘standard’ level asset protection. The weak point is that although the beneficiary loses the right to be trustee or Appointor, he or she regains that right, and hence potential control over the trust, when they are no longer going through the crisis event (for instance, after reconciling or settling the divorce). Unfortunately, the party’s ability to regain control of the trust at a later time makes the argument at the time of crisis that the party no longer controls the trust unsustainable, and the asset protection is potentially compromised (see further Chapter 3 on asset protection and 7.27 on Ineligible Officebearers). Strong level asset protection

Asset protection can be strengthened by permanently disqualifying an Ineligible Officebearer from being a beneficiary of the trust. If this is done, the argument would be that the only possible way the primary beneficiary could benefit from the trust is indirectly, for example through distributions to their children. Since the ‘strong level’ version permanently disqualifies an Ineligible Officebearer from being a beneficiary of the trust, it is drastic, and a testator should not lightly adopt it. The version giving strong level asset protection is set out at 9.38. [page 168] Neither the weak nor the strong precedent terminates the beneficiary’s (or ex-beneficiary’s) right to be a Protector of the trust: retaining the Protectorship puts a restraint on the trustee’s power to ignore the beneficiary (or ex-beneficiary) altogether in the administration of the trust. The Appointor should be aware that there may be stamp duties implications if a trustee is removed and a new trustee is appointed who is a beneficiary: see, for example, in New South Wales Revenue Ruling DUT 037. 21.

Automatic disqualification of an Ineligible Officebearer

Ineligible Officebearers (1)

Each of the following is an Ineligible Officebearer: (a) the primary beneficiary, a spouse of a primary beneficiary or the issue of a primary beneficiary who meets one or more of the criteria in subclause (2); or (b) a company, if an individual specified in the preceding paragraph holds a controlling interest in the company and meets one or more of the criteria in subclause (2).

Criteria for disqualification (2)

The criteria referred to in subclause (1) are that the individual: (a) is the primary beneficiary and has not reached the preservation age; or (b) is married or has been living with a partner in a marriage-like relationship (however described) with a person of the same sex or different sex and begins to live separately and apart from her or his spouse or partner in a manner that constitutes a separation for the purposes of a law of the Commonwealth or a law of a state or territory; or (c) is unable to pay debts as and when they fall due, or is or becomes an undischarged bankrupt, is in liquidation, receivership or administration, or is unable in law to act or continue to act as trustee; or (d) is the subject of a declaration by a board or tribunal governing the appointment of guardians and administrators under Commonwealth, state, or territory law, made on the grounds of disability, infirmity, or lack of legal capacity; or (e) has been assessed by two health care professionals including a treating doctor who attest that the person cannot make decisions in relation to the person’s affairs or does not understand the nature or effect of the decisions the person makes in relation to the person’s affairs.

Automatic disqualification of an Ineligible Officebearer (3)

Where a person is or becomes an Ineligible Officebearer: (a) that person may not be appointed as trustee; (b) if that person is or has been appointed a trustee, that person is automatically removed as trustee and her, his or its rights, powers and duties as trustee are terminated; and

[page 169] (c)

if that person is or has been appointed as an Appointor, that person is automatically removed as an Appointor and her, his or its rights, powers and duties as Appointor are terminated.

Effect of becoming or ceasing to be an Ineligible Officebearer (4)

(5)

Removal of a trustee or an Appointor under this clause has no effect on actions or commitments that the trustee or the Appointor has already taken or made. A person who meets the definition of an Ineligible officebearer is not thereby rendered ineligible to be and to perform the functions of executor or Protector.

Powers of the trustee 8.25 •

The powers of the trustee are divided into two classes: unrestricted powers — powers that the trustee can exercise in her or his absolute discretion; and • restricted powers — powers that the trustee can exercise only with the consent of the Protector. Subclause (4)(b) removes the power of the trustee to alter the preservation age. A testator may wish to give the trustee the power (subject to the consent of the Protector) to change the preservation age of a primary beneficiary. The power to alter the preservation age should not be given lightly as the power could be used to prejudice the primary beneficiary unfairly. This version of subclause (4)(b) is set out in 9.39. This clause refers to the clause Streaming of income and capital (see 8.29) and to the clause General powers of my executors and trustees (see 8.32).

22.

Powers of the trustee

(1)

The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

(2)

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and (c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more or all of the income and capital beneficiaries. [page 170]

Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the capital beneficiaries; (b) alter the provisions of the trust, including adding, varying or excluding a beneficiary but not so as to alter the preservation age or the capital beneficiaries; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of

(d) (e) (f)

(g)

(h) (i) (j)

(k)

(l)

the trust fund in any beneficiary of the trust); carry on any trade or business; alter or revoke by deed a previous deed binding the future operations of the trust; exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate; make superannuation contributions on behalf of a beneficiary; where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and end the trust, and if they do so the trustees must ensure that the trust fund vests in the capital beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector.

How the trustee obtains written consent of the Protector (5)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them;

(b) (c) (d)

the Protector may give written consent to or veto the proposed action; the trustee may, with the Protector’s written approval, take the proposed action; and if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. [page 171]

(6)

The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

Investment of the fund 8.26 Subclause (2) of this clause refers to ss 14A(2) and 14C(1) of the Trustee Act 1925 (NSW). The testator may have assets in other Australian jurisdictions. Subclause (2) is sufficiently widely worded to ensure that the investment of the fund clause will operate correctly in all Australian jurisdictions. However, the will drafter may wish to make assurance doubly sure, and cite the legislation in the jurisdictions in which the testator has property — or all Australian jurisdictions. See 9.40 for the citations of corresponding provisions in other Australian jurisdictions. 23.

Investment of the fund

(1)

Subject to subclauses (2) and (3), the trustee may invest the

(2)

(3)

fund in any form of investment, and vary an investment at any time. Subject to the subclause (3), the trustee is under no duty to comply with any provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (NSW) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they must act in accordance with the provisions specified in the preceding subclause.

Ending of the trust and vesting of the balance 8.27 The testator may wish to cause the trust to end on the death of the primary beneficiary, even though the primary beneficiary leaves children. This would be unusual. However, if this is the intention, see 9.41 for the alternate clause. 24.

Ending of the trust and vesting of the balance

(1)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; or (c) when the primary beneficiary dies before attaining the preservation age, without being survived by a child or children. When the trust ends: (a) If the trust ends because the primary beneficiary dies before attaining the preservation age without being survived by a child or children, the balance becomes part of my estate and is distributed as if the primary beneficiary died before me; or

(2)

[page 172]

(b)

If the trust ends for any other reason, the balance of the trust fund vests in the capital beneficiary or beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 1

SCHEDULE OF GENERAL PROVISIONS Application of this schedule 8.28 25.

This schedule includes the general provisions of the will. Application of this Schedule

(1)

This Schedule applies in any event and applies to my executors and any trust created by my will. 8.29 This clause allows the executor or trustee to stream income and capital.

Streaming of income and capital 26.

Streaming of income and capital

(1)

My trustees or my executor, as the case may be, may treat a capital receipt as if it were income for the purposes of determining trust income in a particular income year; and in the absence of such a determination ‘trust income’, ‘income of the trust’ and ‘income of the trust estate’ have the same meaning as ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (or a provision of similar import). My executors and trustees may as they see fit recognise,

(2)

(3)

(4)

distinguish, separate, determine and allocate the following matters and create in the accounting records separate or appropriate accounts and ledgers to reflect those actions: (a) the elements of trust income (including but not limited to capital gains and franked dividends) according to type and source; (b) expenses and losses; (c) expenses related to each respective type of trust income including but not limited to: (i) in relation to capital gains, available capital losses; and (ii) in relation to franked dividends, allowable or available deductions (including ‘relevant expenses’), credits and rebates. Executors or trustees who are making a distribution to or for a beneficiary may as they see fit do so by paying, applying, setting aside or advancing income or capital from any particular category or sources that they have recorded in the trust accounts. Where executors or trustees set aside income or capital in accordance with this clause, that income or capital does not form part of the trust fund, but is, upon being set aside, held on separate temporary trust by those executors [page 173] or trustees, as the case may be, with power to invest, apply or deal with that property or income in their discretion until it is paid to or applied for the benefit of the beneficiary.

Executors and trustees: conflicts of interest 8.30

This clause ensures that neither the executor nor the

trustee is required to obtain independent legal advice or an order of the court before exercising a power or discretion, notwithstanding an actual or potential conflict of interest. The clause does not prevent the executor or trustee from seeking direction if they see fit to do so. The reason for the provision is that in reality many trustees are also beneficiaries, and where that is the case, conflicts of interest arise so often even when trustees are exercising powers properly that recourse to the court for each decision would be unacceptably unwieldy. 27.

Executors and trustees: conflicts of interest

(1)

No person, being one of my executors or trustees or a director or shareholder of a corporate executor or trustee, is required to obtain independent legal advice or an order of court before exercising a power or discretion conferred on her or him by this will or by law, or is precluded from exercising the power or discretion, merely because the person exercising the power or discretion: (a) has or may have a direct, indirect, or personal interest, whether as shareholder, director, member, or partner of any company or partnership, or otherwise, in the manner or result of exercising such power or discretion; or (b) may benefit directly or indirectly as a result of the exercise of any such power or discretion; or (c) is the trustee or controller of a superannuation fund of which I hold an interest in; or (d) is the sole executor or trustee.

Power of my executors in relation to superannuation death benefit 8.31

This clause empowers the executor to separate a

superannuation death benefit and pay it preferentially to a beneficiary who is a tax dependant of the testator. The clause also empowers the executor to hold payments payable to a testamentary trust in a sub-trust, with beneficiaries limited to tax dependants. The purpose is to minimise superannuation death benefits tax. (See Chapter 6 for discussion on superannuation death benefit taxes.) 28. Power of my executors in relation to superannuation death benefit (1)

If my estate receives a benefit that is a superannuation lump sum death benefit within the meaning of s 307-5 of the Income Tax Assessment [page 174] Act 1997 (Cth) (or a provision of similar import), and one or more of the primary beneficiaries of my will meets the definition of being my death benefits dependant within the meaning of s 320-195 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import): (a) I express the wish that, as far as possible, the superannuation lump sum death benefit be used to satisfy the share or shares of my estate which I intend for the benefit of that primary beneficiary or those primary beneficiaries; and (b) where the benefits would otherwise have been held in a discretionary testamentary trust for the primary beneficiary: (i) my executors are empowered to hold all or part of the superannuation lump sum death benefit in a separate superannuation proceeds will trust for that primary beneficiary; and

(ii)

the terms of that trust will be the terms the discretionary testamentary trust would have had except that the potential beneficiaries of the superannuation proceeds will trust are limited to those of the capital beneficiaries of the discretionary testamentary trust who are my death benefits dependants.

General powers of my executors and trustees 8.32 This clause refers to the clause Powers of the trustee (see 8.25). 29.

General powers of my executors and trustees

(1)

My executors and, subject to the clause Powers of the trustee, my trustees may in their discretion: (a) exercise any powers given to them by law; (b) exercise the powers of a trustee for sale of any property in my estate, and my executors and my trustees may without being liable for any loss (including liability for taxation on capital gain) caused by so doing: (i) postpone sale; (ii) retain in its form of investment at my death any part of my estate; or (iii) sell, by public auction or private sale, and for that purpose may extend credit; (c) determine whether receipts or outgoings are capital or income, or partly capital or income, so as to bind the beneficiaries, even though the receipts are from a company or corporation that has made a decision on the matter; (d) apply for the maintenance, education (including travel to broaden the mind), advancement or benefit of a

beneficiary the whole or any part of the capital and income of that part of my estate to which that beneficiary is entitled or may in future be entitled, and for those purposes: (i) make a payment or payments to a minor beneficiary’s parent or guardian or a person with whom the minor beneficiary resides; and (ii) accept the receipt of that payee as an absolute discharge; [page 175] (e) (f) (g)

(h)

(i)

(j)

make loans to beneficiaries on whatever terms they deem appropriate; acquire or lease property for occupation, use or enjoyment by a beneficiary; do any one or more of the following involving shares or securities: (i) concur in any scheme or arrangement involving or affecting the shares; (ii) exercise any voting power; or (iii) apply for and accept directorship of any corporation in which my estate is or may become interested or concerned; apply for, accept or take up securities of any description or denomination, bonus shares or other rights or benefits made available by a corporation in which my estate is or may become interested or concerned; borrow money, either with or without giving security, and enter into any mortgage, bill of sale, lien or security over any part of my estate, and such money borrowed is to be treated as part of my estate or trust property, as the case may be; lease any part of the real or personal property in my

(k) (l) (m)

(n)

(o)

estate: (i) for the periods and upon and subject to the covenants and conditions which my executors or my trustees, as the case may be, think fit; and (ii) either with or without provisions for renewal or otherwise; accept surrenders of leases or tenancies of my estate or any part of it; maintain, repair, improve, develop, alter, renovate, pull down, erect or re-erect any part of my estate; maintain, take out or participate in: (i) an insurance policy against risks affecting my estate; (ii) a life insurance policy in respect of any person; (iii) a policy or contract of health or accident insurance or benefit in respect of any person; (iv) a friendly society, trade union or association of employees benefit scheme in respect of any person; (v) a superannuation or pension scheme in relation to any person; and (vi) a funeral benefit or payment scheme in relation to any person; without the consent of any beneficiary, partition or appropriate any part of the real or personal property of the estate in or towards the satisfaction of a legacy or a share of any person or persons in my estate, and in doing so the value of any such property is that agreed to by those of my beneficiaries affected or, if my executors or my trustees, as the case may be, are satisfied that no value can be agreed in this way, the value is that determined by an independent valuer appointed by my executors for that purpose; determine (in the event of my executors or my trustees, as the case may be, disposing of or being deemed to have disposed of property) from which part or parts of

the capital or income of my estate they will pay any income tax liability flowing from the disposal or deemed disposal; and for that purpose they may determine what is capital and what is income, but I express the wish that, if it seems appropriate for [page 176]

(2)

(3)

my executors or my trustees, as the case may be, to do so, that the proceeds of such a disposal be used in the first instance; (p) carry on, either alone or in partnership with any person or persons, the whole or part of any trade or business in which I am engaged or interested at my death; (q) to the extent allowed by law, delegate a power or function, and execute a power of attorney or other instrument to make the delegation; and (r) appoint and empower nominees to act and hold property for my executors and trustees. Even though a person is or becomes or has been an executor or trustee, that person may buy or appropriate to herself or himself at a fair value any part of my estate or any trust fund deriving from it (either at public auction or by private contract or treaty) on the same terms my executors may grant to a purchaser from my estate. I express the wish that my executors and my trustees: (a) make available to those of my beneficiaries who inherit or are interested in any property all documents relevant to that property or the assessment of tax relating to that property; and (b) exercise their powers in such a way (subject to their discretion) that any person who cares for my child or children (whether as legal guardian or otherwise) is compensated for any costs they incur in providing that

(4)

(5)

care. My executors and my trustees acting in good faith: (a) may appoint accountants, administrators or advisors as my trustees believe appropriate for the responsible operation of the fund, and pay or recover the reasonable costs of these services from the fund; (b) are entitled to indemnity and reimbursement out of my estate or the trust fund (as the case may be) for their expenses, costs and liabilities of every kind arising out of the administration of, and litigation relating to, my estate and its trusts; and (c) may apply estate or trust property to satisfy their indemnity and secure their reimbursement. The indemnity under the preceding subclause: (a) is limited to the assets of my estate or the trust fund as the case may be; and (b) does not allow my executors or my trustees to recover any loss or reimbursement for any liability from any beneficiary.

Unanimity 8.33 This clause requires to two or more persons acting in an office to act unanimously. 30.

Unanimity

(1)

Unless otherwise specified: (a) joint legal representatives, including my executors, must act unanimously; [page 177]

(b) (c)

joint guardians of a person must act unanimously; and in any particular trust: (i) joint trustees must act unanimously; (ii) joint Appointors must act unanimously; and (iii) joint Protectors must act unanimously.

Interpretation 8.34

In relation to preservation age, see 7.26.

31.

Interpretation

(1)

Definitions (a) ‘children’: (i) means biological or adopted children; and (ii) includes a child; (b) ‘guardian’ includes guardians; (c) ‘Ineligible Officebearer’ means a person who meets the criteria of being an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer; (d) ‘legal representatives’ includes legal personal representative; (e) ‘my children’ means [NAME1] and [NAME2]; (f) ‘my estate’ includes my residuary estate if it is appropriate in the context, for instance if legacies or devises have been given; (g) ‘my wife’ means [WIFE]; (h) ‘parallel trusts’ means separate discretionary testamentary trusts set up for a particular primary beneficiary; (i) ‘preservation age’ means the age of 25 years; (j) ‘spouse’ (and ‘spouses’ has a corresponding meaning) in relation to a person means:

(2)

the husband or wife of the person at any time; (i) and (ii) the partner of a person, of the same sex or different sex (however described), with whom the person has been living at any time in a marriagelike relationship or domestic relationship; but (iii) does not include the former husband, wife or partner of a person where there has been a court order or binding financial agreement between the parties arising from the dissolution of the relationship; (k) ‘written notice’ means notification in writing, receipt of which has been acknowledged in writing by all the persons to whom the notice is to be given. The headings to clauses in this document are for the assistance of the reader only, and do not form a substantive part of the document.

Attestation 8.35 Alternative attestation clauses for special circumstances are set out in Chapter 31 of Hutley’s. [page 178] DATED [day and month] The testator signed in the presence of both of us being present at the same time, and we attested [her or his] signature in the presence of [her or him] and of each other. Testator

[year]

Witness 1: ……………… Full name: Occupation: Address:

Witness 2:……………… Full name: Occupation: Address:

EXPLANATORY DOCUMENT: CLAUSE-BYCLAUSE EXPLANATION 8.36 This section contains a clause-by-clause explanation of the standard clauses in the Model Testamentary Trust precedent. The explanation is in the form of a document intended to be given to clients and testators as a general explanatory document or guide, but it may also help will drafters to understand the precedent. This document is in lay person’s language. The will drafter is free to give the document as it stands to clients and testators, but may, if the will drafter chooses, compile a document made up of only the clauses which have been used in the testator’s individual will and give that to the testator. If any of the variations in Chapter 9 are used, the will drafter should review the explanatory notes.

EXPLANATION OF YOUR WILL Purpose of this document This clause-by-clause explanation is a general explanatory document or guide to your will. Key persons in your will are as follows: • testator — the person making the will; • executor — the person or persons that you appoint to administer your estate in accordance with the terms of the will; • trustee — the person that controls a testamentary trust

• •

created by your will; Appointor — the person who has the power to decide who the trustee of each trust is; and Protector — the person that holds consent powers over the trustee, for example the power to consent to distributions from a trust. [page 179]

In most circumstances, the same person will occupy the roles of executor, trustee, Appointor and Protector. Some of these roles are held by beneficiaries. However, your will has been specifically drafted to separate these roles so that the will can provide that in the event of particular crisis events such as divorce or separation, beneficiaries lose certain roles but retain others. The purpose is to maximise the level of asset protection that beneficiaries have over their inheritance.

Testimonium This identifies this document as your will, and gives your personal details.

Revocation clause This clause revokes all previous wills you have made, making this your only current will.

Recommendation that executors, trustees and primary beneficiaries seek advice

This clause suggests that executors, trustees and primary beneficiaries seek professional advice before the estate is administered. Understanding the tax and asset protection implications of the testamentary trusts you are creating will enable those who will be involved to make better decisions. The clause makes the cost of seeking such advice a testamentary expense; in other words, it will come out of the estate and will not have to be paid for by the individual who seeks the advice.

Presumption of survivorship This clause provides that where two persons die and the order of deaths cannot be ascertained, the older is presumed to have died before the younger.

Exclusion of requirement that beneficiaries survive the testator by 30 days This clause overrides the statutory presumption in some jurisdictions that for a person to take a benefit under the will, he or she must survive the testator by 30 days. The effect of this provision is that a person can benefit under the will if he or she survives the testator by any period, however short. The clause does not negate the requirement in your will that for certain purposes a beneficiary must reach a certain age, called the ‘preservation age’ in order to take control over their benefit. [page 180]

Power to disclaim A beneficiary may wish to disclaim a benefit under the will. Specialist advice should be sought. The power should be used advisedly as a disclaimer may create a disposal for tax, social security, family law or bankruptcy purposes.

Executors This clause appoints your chosen executors. No person who is appointed executor is obliged to accept the executorship or act in the office.

Absolute gifts This clause (if applicable) sets out the absolute gifts that you are making. These gifts will pass to the beneficiaries as simple, direct gifts, not via a discretionary testamentary trust.

Identification of primary beneficiaries This clause provides that each person identified as a beneficiary in the clause Gift provisions through testamentary trusts is a primary beneficiary. The effect of this is that the person is able, as primary beneficiary, to take her or his inheritance in a separate discretionary testamentary trust.

Creation of trusts This clause creates a separate discretionary testamentary trust for each primary beneficiary and provides that the rules for each trust

are set out in Schedule 1. Part of the creation process requires the executor to pay $10 to the trustee of each trust. This is a technical requirement. By creating these trusts you have given each of your primary beneficiaries the opportunity, subject to certain conditions, to have her or his gift transferred to the beneficiary’s own respective discretionary testamentary trust. This clause also gives the executor power to create multiple trusts (parallel trusts) for a primary beneficiary. This may be appropriate where it is desirable to quarantine particular assets from others.

Gift provisions through testamentary trusts This clause is one of the crucial clauses in the will. It is in this clause that you identify your beneficiaries and define the amounts or proportions of the estate given for their benefit. You created the discretionary testamentary trusts in the clause Creation of trusts. In the Gift provisions through testamentary trusts clause you define the gifts and you require your executors to pay those gifts to the trustees of the discretionary testamentary trusts for each beneficiary. [page 181] This clause provides that the executors must give each gift to the trustee of the respective discretionary testamentary trust for each primary beneficiary. The wording of this clause appears to require that the primary beneficiaries must take their benefits in a discretionary testamentary trust whether they like it or not. This is true for primary beneficiaries who are ‘Ineligible Officebearers’ — they

have no option but to take their benefits in a trust. Adult primary beneficiaries who are not Ineligible Officebearers by contrast are empowered to ask the executors to bypass the trust and give them their benefits absolutely, and the clause Primary beneficiary may request special distribution authorises the executor to grant the request and bypass the trust. Who is an ‘Ineligible Officebearer’? The term and its function are discussed below. Briefly, however, an Ineligible Officebearer is: • a person who has not reached the preservation age; • does not have capacity; • is in a state of separation from their spouse or partner; or • is unable to pay their debts as and when they fall due.

Primary beneficiary may request special distribution This clause authorises the executor, at the executor’s discretion and at the request of the primary beneficiary, to transfer all or part of the primary beneficiary’s benefit to the primary beneficiary absolutely or to a trust controlled by the primary beneficiary and not subject to any trust created by the will. The effect is, to make the trust optional if the primary beneficiary has reached the preservation age, has capacity, is not in a state of separation from their spouse or partner and is not unable to pay debts as and when they fall due (that is, is not an Ineligible Officebearer). The consent of the executor is required. Removing the decision from the primary beneficiary and giving it to the executor does not in fact limit the beneficiary’s freedom to enjoy her or his inheritance, because an executor would have no reason to force a primary beneficiary into a trust he or she did not want. If indeed an executor did such a thing, the primary beneficiary would as Appointor and Protector control the trust and

by controlling trusteeship be able to wind up the trust. (The offices of Appointor and Protector are described below.) The reason why the consent of the executor is required is to increase asset protection. If a threat of family law or bankruptcy proceedings looms over the primary beneficiary, the fact that the executor and not the primary beneficiary controls the trust helps protect the primary beneficiary against a family law claimant or creditor claiming access to the trust fund. Parallel trusts The clause also gives the primary beneficiary the ability to request that the allocation being made to her or him be held in multiple parallel trusts. One way in which parallel trusts might be used is to hold different types of assets in separate trusts. So, for example, risky business assets might be held [page 182] in one trust, while low-risk assets like, for example, a residence would be held in a separate trust.

Default gift to take effect if all other gifts of residue fail This clause (if applicable) will apply only in the very unlikely event that all the primary beneficiaries you have identified in the clause Gift provisions through testamentary trusts fail to survive you.

SCHEDULE 1: DISCRETIONARY TESTAMENTARY TRUST PROVISIONS General comment This Schedule sets out the rules that will apply to any Schedule 1 trust that is created by your will. Some of the rules in Schedule 1 confer powers on your Schedule 1 trustees, but not all the powers held by a Schedule 1 trustee are given in Schedule 1 itself. In addition to the Schedule 1 powers, a Schedule 1 trustee holds a number of powers provided in the clause General powers of my executors and trustees, which appears towards the end of the will. The Schedule 1 powers are specific to Schedule 1 trustees, while the powers given by the clause General powers of my executors and trustees are given not only to Schedule 1 trustees but also to your executors.

Application of the provisions in Schedule 1 This clause explains that each separate Schedule 1 trust created by the will is governed by the provisions of Schedule 1. The provisions of Schedule 1 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

Property of the trust The property of each trust includes the initial sum paid by your executor, any property transferred by your executor in accordance with the will, any property added or accumulated to the trust and the proceeds of any loans taken out by the trustee.

Beneficiaries of the trust The beneficiaries of each Schedule 1 trust are the income beneficiaries and the capital beneficiaries. The income beneficiaries are a very large class of people: the grandparents of the primary beneficiary, the grandparents of the spouse of the primary beneficiary, and all issue (that is, lineal descendants) of those people. Trusts and companies in which any beneficiary has an interest are also included in the class of beneficiaries. [page 183] The reason for casting the class of income beneficiaries so widely is that it gives maximum flexibility to the administration of the trust. The capital beneficiaries of the trust are limited to bloodline beneficiaries and associated entities in order to maximise asset protection. Neither the primary beneficiary nor any of the very large number of people who fall into the class of potential beneficiaries holds any right ever to receive anything from the trust. The trustee is explicitly empowered, in the trustee’s discretion, to refrain from ever making a distribution to the primary beneficiary or any other beneficiary.

The purposes of the trust This clause sets out the purposes of the trust. The purposes are set out widely and generally, to allow the trust to be used in any way that the primary beneficiary (who will probably be the trustee) may want the trust to be used. There is a restriction in the trust purposes clause which should be noted. Where the primary beneficiary is under the preservation age, the

trustee should preserve capital as far as to the trustee seems reasonable and limit its application to the primary beneficiary’s medical and dental treatment, education (including vocational training), reasonable maintenance and welfare.

The appointor The office of Appointor is crucial because the Appointor will be able to ‘hire and fire’ the trustee. The primary beneficiary will be the Appointor provided that he or she is not an ‘Ineligible Officebearer’ (An Ineligible Officebearer is a beneficiary who is below the preservation age, is separated from her or his spouse or partner, or is unable to pay debts as and when they fall due or has lost capacity.) If the primary beneficiary is an Ineligible Officebearer, those of your executors who are not Ineligible Officebearers will be Appointor or joint Appointors of the trust. Once a beneficiary becomes an Ineligible Officebearer, they are temporarily disqualified as Appointor of the trust. Once the Appointor reaches the preservation age or is no longer an Ineligible Officebearer, they are eligible to hold the office of Appointor once again. The Appointor may by deed appoint another Appointor to act with or instead of the Appointor. This means that if, for instance, the primary beneficiary were excluded as Appointor and your executors did not want to continue to hold the Appointorship, they could appoint a substitute. The Appointor can also pass the Appointorship on their death by will. In a sense the Appointor (acting with the Protector) holds the ‘keys’ to the trust. While the trustee holds the legal title to all trust assets, and makes all resolutions as to the operations of the trust, the Appointor can remove and replace the trustee at any time.

[page 184]

The protector The function of the Protector is to protect the interests of the primary beneficiary against untoward actions by the trustee. The Protector is therefore given a power of veto — the power to consent in writing or refuse consent — over any of a range of substantial actions by the trustee. The actions concerned are set out in the clause Powers of the trustee. The primary beneficiary will be the first Protector if he or she has attained the age of 18 and has full capacity. As with the office of Appointor, the primary beneficiary is able to transfer the office of Protector by deed or will. Unless he or she loses capacity, the primary beneficiary never loses the Protectorship, and this means that the primary beneficiary will always maintain a degree of control over the trust.

Trustee of the trust: definition and appointment This clause sets out who is the trustee of the trust. It provides that the trustee will be appointed by the Appointor. The trustee can be any person who is not an ‘Ineligible Officebearer’, including the primary beneficiary and the executor. The trustee can be a professional trustee.

Automatic disqualification of an ineligible officebearer This clause declares that beneficiaries whose assets might be at risk

are ‘Ineligible Officebearers’ and disqualifies them from being trustees and Appointors. If they are already trustees or Appointors, the clause automatically removes them from the offices of trustee or Appointor. The effect is to increase the primary beneficiary’s asset protection. A person will be an ‘Ineligible Officebearer’ if the person is the primary beneficiary, the spouse of the primary beneficiary or issue of the primary beneficiary and: • has not reached the preservation age; • is married or living in a de facto relationship but has become separated from her or his spouse or partner (and is therefore at risk of a family law property settlement); • is unable to pay debts as and when they fall due or is or becomes an undischarged bankrupt; or • is under a legal disability or has been declared by a board or tribunal governing the appointments of guardians and administrators as being disabled, infirm or lacking capacity, or has been assessed by two health care professionals, including a treating doctor, as being unable to make decisions in relation to their personal affairs. The Ineligible Officebearer’s disqualification from being Appointor or trustee is temporary (unless a permanent disqualification is considered to maximise asset protection). [page 185] A primary beneficiary who is Protector does not lose the Protectorship if he or she becomes an Ineligible Officebearer.

Powers of the trustee The trustees of the trusts are given all the powers necessary to

manage the trust property efficiently and properly. The powers are given in the clause Powers of the trustee, the clause General powers of my executors and trustees (which is in the Schedule of general provisions) and in the general law. Some of the powers of the trustee can be exercised at the trustee’s sole discretion (unrestricted powers), and others can be exercised only with the written consent of the Protector (restricted powers). Powers that require the written consent of the Protector are listed in the clause Powers of the trustee. They include trustee actions which have a substantive effect on the trust, such as making capital distributions, changing the terms of the trust or ending the trust.

Investment of the fund This clause details the investment powers that the trustee holds in relation to the trust. Subclause (1) provides that the trustee may invest in any form of investment. Subclause (2) provides that the trustee is exempted from the provisions of the various state and territory Trustee Acts, which require trustees making investments to act in accordance with certain principles of prudence. The reason for the clause as offered is that a primary beneficiary who has passed the preservation age and is operating the trust as trustee will have full control over the trust anyway, and it seems incongruous to place these statutory restrictions on the trustee’s power of investment. If the primary beneficiary has not reached the preservation age and someone other than the primary beneficiary is trustee, the Protector can provide notice to the trustee that they must act in accordance with those statutory requirements.

Ending of the trust and vesting of the balance This clause provides that the trust will end: • when the trustee (with the written consent of the Protector) resolves to end the trust; • if the primary beneficiary dies before attaining the preservation age and without being survived by issue; or • when the trust ends by operation of law. In practical terms this will generally mean that the trust ends when it has run for 80 years which, outside South Australia, is the maximum length of time that a trust is allowed to run. In South Australia trusts can operate indefinitely. [page 186] The clause provides that if the trust ends, the balance of the trust is distributed as follows: • if the trust ends because the primary beneficiary dies before attaining the preservation age and without being survived by a child or children, the remainder of the trust fund passes to the residuary beneficiaries of your will as if the primary beneficiary had failed to survive you. In practice this means that the trust fund can either pass to any other existing trusts created by your will or directly to your residuary beneficiaries; or • if the trust comes to an end for any other reason, the trust property vests in those capital beneficiaries whom the trustee specifies. In reality, the Appointor/Protector would make preparations in good time to vest the fund before the expiry date.

SCHEDULE OF OTHER PROVISIONS OF MY

WILL General comment This last part of the will contains clauses that apply to the general administration of your estate, as well as containing clauses which detail powers which are held both by your executors and each Schedule’s trustees.

Streaming of income and capital This clause applies to your executors as well as to the trustees of any testamentary trust created by your will. It allows them to ‘stream’ different types of income, such as capital gains or franked dividends, between different beneficiaries so as to get the best tax outcome. Recent amendments to tax law require that in order for a trustee of a trust (including an executor) to be able to ‘stream’ income, the trustee must hold certain express powers under the trust, and this clause provides the required powers. Subclause (1) empowers the trustee to determine what are capital and income receipts, and provides that in default of a determination as to what is income of the trust estate, income of the trust means ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (in lay terms, the ‘taxable income’ of the trust which includes capital gains). The legislation requires that to stream different types of income between beneficiaries, the trustee must be able to determine and record different types of income. Subclause (2) provides that power. The final subclause empowers the trustees to ‘set aside’ the distributions of income to beneficiaries, which means to hold it on separate trust for them.

Executors and trustees: conflicts of interest Ordinarily a trustee is prevented from exercising a trust power where he or she holds an interest in the outcome of the exercise of that power, because to do so [page 187] would be a conflict of interest. This clause provides that your executor and the trustees of any trusts created by your will are not precluded from exercising any power under the will merely because they have a direct or indirect interest in the outcome of the exercise of the power. The clause therefore removes any doubt that a primary beneficiary could use her or his power as Appointor to appoint themselves as trustee of their trust, or appoint a company they own or control as trustee: the primary beneficiary may indeed act in those ways. The clause Executors and trustees: conflicts of interest exempts both your executor and your trustees from having to obtain legal advice.

Powers of my executors in relation to superannuation death benefit On your death, the proceeds of superannuation may be paid directly into your estate. From your estate the benefits will be paid to or for the benefit of your beneficiaries. If the superannuation proceeds pass to a person who is a ‘death benefits dependant’ (commonly called a ‘tax dependant’, though this is not a term used in tax law) as defined in the tax law, no superannuation death benefits tax will be paid. However, there is a hitch. If the benefit were to pass to a person who is not a death benefits dependant, superannuation death benefits tax would be payable.

A death benefits dependant is basically a spouse, partner, minor or disabled child, or a dependant person (an adult independent child would not qualify). The executor seeking the tax-free option will be required to show that the ultimate beneficiary of the superannuation either was or is likely to be a death benefits dependant. If the proceeds of your superannuation are simply paid into a Schedule 1 trust fund and from there to beneficiaries, your executor may find it difficult to show that the ultimate beneficiary was a death benefits dependant. After all, there are many potential beneficiaries of the trust, and most of those beneficiaries will not be ‘death benefits dependants’. This clause empowers the executors to set aside parts or all of such superannuation to be held for death benefits dependants in a separate, different type of trust (a ‘superannuation proceeds will trust’). One superannuation proceeds will trust can be set up for each primary beneficiary who is a death benefits dependant, and only people who are death benefits dependants will be beneficiaries of the trust — in other respects the terms of each superannuation proceeds will trust will be the same as the Schedule 1 trust. The arrangement enables the trustee to prove that the superannuation benefits were paid to death benefits dependants only.

General powers of my executors and trustees This clause sets out general powers held by both your executor and also by the trustees of any testamentary trusts created by your will. Trustees of discretionary testamentary trusts may not exercise the powers in paragraphs: (e), (f), (g), (i), [page 188]

(j), (k), (l), (m), (n), (q) and (r) of this clause without the written consent of the Protector.

Unanimity This clause provides that decisions of joint guardians must be unanimous. The clause further provides that the decisions of joint trustees, joint Appointors and joint Protectors must be unanimous.

Interpretation This is the definitions section of the will.

EXAMPLE OF THE MODEL TESTAMENTARY TRUST PRECEDENT APPLIED TO HYPOTHETICAL FACTS 8.37 Below is an example of the Model Testamentary Trust precedent applied to hypothetical facts. The hypothetical circumstances are: • John Smith is the testator; • he wants to appoint his wife Jane Smith as executor; • if Jane refuses or is unable to act as executor, John wishes to appoint his children Sam and Ronald as executors on condition that they have both attained the preservation age of 25, and if they are unable to act as executors, he wishes to appoint his brother James; • John wants to give a specific gift of his Rolex watch to his brother James Smith and the residue of his estate to his wife Jane; • if Jane fails to survive him, John wishes to give the residue

•

equally to his children Sam and Ronald with provision for their children if one of them predeceases him; and if all of the above beneficiaries fail to survive him, John wishes to give his estate to the RSPCA.

Plan for the will The Plan for the will is set out below: 1. Revocation clause 2. Recommendation that executors, trustees and primary beneficiaries seek advice 3. Presumption of survivorship 4. Exclusion of requirement that beneficiaries survive the testator by 30 days 5. Power to disclaim 6. Executors 7. Absolute gifts 8. Identification of primary beneficiaries [page 189] 9. 10. 11. 12.

Creation of trusts Gift provisions through testamentary trusts Primary beneficiary may request special distribution Schedules in my will

SCHEDULE 1 — DISCRETIONARY TESTAMENTARY TRUST PROVISIONS 13. 14. 15.

Application of provisions in Schedule 1 The property of the trust Beneficiaries of the trust

16. 17. 18. 19. 20. 21. 22. 23.

The purposes of the trust The Appointor The Protector Trustee of the trust: definition and appointment Automatic disqualification of an Ineligible Officebearer Powers of the trustee Investment of the fund Ending of the trust and vesting of the balance

SCHEDULE OF GENERAL PROVISIONS 24. 25. 26. 27. 28. 29. 30.

Application of this Schedule Streaming of income and capital Executors and trustees: conflict of interest Power of my executors in relation to superannuation death benefit General powers of my executors and trustees Unanimity Interpretation

8.38 The example will is set out below. THIS WILL is made by me, JOHN SMITH of 1 Lonsdale Street, Braddon in the Australian Capital Territory, Retired. 1. (1)

Revocation I revoke all previous testamentary acts.

2. Recommendation that executors, trustees and primary beneficiaries seek advice (1)

My will has been drafted to maximise tax effectiveness and asset protection for my beneficiaries. I recommend that before my executors decide how to administer my estate, and before a primary beneficiary makes a decision on the most

appropriate way to take her or his inheritance, my [page 190] executors, trustees and each primary beneficiary investigate the benefits offered by this will in the light of appropriate professional legal, taxation and financial advice. 3. (1)

Presumption of survivorship Where: (a) a person has died and one or more deaths are presumed; or (b) two or more deaths are presumed; and (c) the order of deaths, whether proved or presumed, is uncertain, this will is to be construed as if the deaths, whether proved or presumed, had taken place in the following manner: first, the oldest; then, after a period of one day, the second oldest; then, after a period of one day, the third oldest; and so on to the youngest.

4. Exclusion of requirement that beneficiaries survive me by 30 days (1)

Excluding a requirement that a primary beneficiary attains their respective preservation age, no beneficiary is required to survive me by 30 days or any other period in order to take a benefit under my will, and this statement expresses a contrary intention for the purposes of statutory provisions which impose a general requirement that beneficiaries survive me for 30 days or any other period to inherit.

5. (1)

6. (1) (2)

(3)

(4)

(5)

7. (1)

Power to disclaim A person may disclaim an interest under this will or its trusts in whole or in part. Executors I appoint as my executor my wife JANE SMITH of 1 Lonsdale Street, Braddon in the Australian Capital Territory. If my wife refuses or is unable to act as my executor, I appoint as my executors my children SAM SMITH and RONALD SMITH on condition that they have both attained the preservation age. If neither of my children has attained the preservation age or if they refuse or are unable to act, I appoint as my executor my brother JAMES SMITH of 16 Northbourne Avenue, Canberra in the Australian Capital Terrritory. ‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1. Absolute gifts I give my Rolex watch to my brother JAMES SMITH. [page 191]

8. (1)

Identification of primary beneficiaries In the clause Gift provisions through testamentary trusts, my executors must give property to the trustee or trustees of

the trust or trusts for a certain person or persons, and, unless otherwise specified, I hereby define that person or each of those persons as a ‘primary beneficiary’. 9. (1)

(2) (3)

(4)

(5)

(6)

Creation of trusts My executors must set aside out of my estate a fund (the initial property fund) to provide the initial property of each trust created in this will. I create a separate discretionary testamentary trust for the primary benefit of each of my primary beneficiaries. The name of each trust must contain the words ‘discretionary testamentary trust for’ and the full name of the particular person for whose primary benefit that trust is created, or such other name as the trustee gives the trust. The initial property of each trust is $10, which must be paid by my executors out of the initial property fund, and the property of the trust includes property transferred to the trustee or trustees under the clause Gift provisions through testamentary trusts. Subject to the clause Primary beneficiary may request special distribution, my executors may in their absolute discretion create a specified number of parallel trusts for a primary beneficiary by splitting the initial property of a trust into as many parts as there are to be parallel trusts for that primary beneficiary. The provisions governing the trusts are set out in the Schedule or Schedules identified for each primary beneficiary respectively in the clause Gift provisions through testamentary trusts.

10.

Gift provisions through testamentary trusts

(1)

My executors must give the residue of my estate to the trustee

(2)

(3)

or trustees of the trust for my wife JANE SMITH who survives me. Subject to the preceding trust: (a) subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts created for each of my children SAM SMITH and RONALD SMITH who survive me; and (b) if a child of mine does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary, and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors [page 192] must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

11.

Primary beneficiary may request special distribution

(1)

A primary beneficiary who is not an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer may request that my executors exercise their powers in subclause (2). My executors may in their absolute discretion:

(2)

(3)

(a) set up a specified number of parallel trusts for a primary beneficiary; and/or (b) transfer some or all of a primary beneficiary’s share of my estate: (i) to the primary beneficiary absolutely provided they are not an Ineligible Officebearer; (ii) to the trustee or trustees of an existing trust of which the primary beneficiary is the trustee or appointor; or (iii) in different proportions between the parallel trusts created for the benefit of that primary beneficiary. If after the exercise of the discretion given to my executors in subclause (2) a balance of the allocated share of a primary beneficiary remains, my executors must transfer that balance equally to the trustee or trustees of the trusts created for that primary beneficiary.

12.

Default gift to take effect if all other gifts of residue fail

(1)

If after carrying out the other provisions of this will any part of my estate remains undisposed of and would otherwise pass on intestacy, my executors must give that part to RSPCA AUSTRALIA INC (ABN 99 668 654 249) of Unit 4/5, 6 Napier Close, Deakin in the Australian Capital Territory. Gifts made in the preceding subclause are made for the general purposes of the respective charity and the following terms apply: (a) if the named institution has amalgamated with another institution or institutions, this legacy shall take effect as if it had been made to the amalgamated institution; (b) if the named institution has changed its name or constitution or both, this legacy shall take effect as if it had been made to the institution with either, or both, the name or constitution as altered; (c) if the named institution has transferred all of its assets to

(2)

another charitable institution, this legacy shall take effect as if it had been made to the institution to which the assets have been transferred; (d) if the named institution has ceased to exist, then my trustees shall pay this legacy to such other charitable institution the object of which in the opinion of my trustees most closely resembles those of the named institution; and [page 193] (e) the receipt of the secretary, treasurer or other proper officer for the time being of the institution to which the legacy is paid will be a full discharge for my trustee. 13.

Schedules in my will

(1)

My will contains the following Schedules: (a) Schedule 1 — Discretionary Testamentary provisions; and (b) Schedule of General Provisions.

Trust

SCHEDULE 1: DISCRETIONARY TESTAMENTARY TRUST PROVISIONS 14.

Application of the provisions in Schedule 1

(1)

In Schedule 1, ‘the trust’ means each trust governed by Schedule 1. The provisions in Schedule 1 do not apply to any trustee other than a Schedule 1 trustee. The provisions in Schedule 1 prevail over any inconsistent

(2) (3)

provisions in the clause General powers of my executors and trustees. 15.

The property of the trust

(1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

16.

Beneficiaries of the trust

(1)

The beneficiaries of the trust are the income beneficiaries and the capital beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. A beneficiary that meets the criteria in subclause (2)(b) or (c) of the clause Automatic disqualification of an Ineligible Officebearer is excluded as a beneficiary of the trust while that beneficiary meets that or those criteria.

(2)

(3)

Income beneficiaries (4)

The income beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary;

[page 194] (b) the issue of the primary beneficiary; (c) a spouse of the primary beneficiary; (d) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (e) a spouse and the children of any of the persons specified in the preceding paragraphs; (f) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (g) a charity or charitable entity; and (h) an entity recognised as a deductible gift recipient entity under Australian taxation law. Capital beneficiaries (5)

The capital beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) the issue of a grandparent of the primary beneficiary; (d) the spouse of the primary beneficiary if the primary beneficiary dies leaving no surviving issue; (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder;

(f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law. 17.

The purposes of the trust

Primary beneficiary is over the preservation age (1)

Where the primary beneficiary is over the preservation age, the purposes of the trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes.

Primary beneficiary is under the preservation age (2)

Where the primary beneficiary is under the preservation age, I express the wish (without limiting the discretion of the trustee) that the trustee [page 195] preserve the capital of the fund and, as far as seems to them reasonable, limit its application to the primary beneficiary’s: (a) medical and dental treatment; (b) education (including vocational training); (c) reasonable maintenance and welfare; and (d) such other expenses which the trustee considers appropriate.

Trustee has absolute discretion

(3)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary.

18.

The Appointor

Powers of the Appointor (1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor.

Eligibility and appointment of the Appointor (2) (3)

(4)

(5)

(6)

Subject to subclause (3), the primary beneficiary is the first Appointor. If a person (including an executor) is or becomes an Ineligible Officebearer, that person is disqualified and does not become or ceases to be an Appointor. A person who is or would otherwise be entitled to be an Appointor, but is an Ineligible Officebearer because he or she is under the preservation age, becomes Appointor on reaching the preservation age if: (a) that person is able and willing to accept the office; and (b) that person is not otherwise an Ineligible Officebearer. If the person becomes Appointor under the preceding subclause, any other person who is an Appointor at that time ceases to be an Appointor. If an Appointor, not being a sole Appointor, ceases to be an

(7)

(8)

Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) those of my executors who are not Ineligible Officebearers are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor and is not an Ineligible Officebearer, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule. [page 196]

Succession of the office of Appointor (9)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor. (10) If a sole Appointor who is the primary beneficiary of the trust dies without appointing a new Appointor in her or his place: (a) if that Appointor is survived by a child or children, the child or children of that person is or are the Appointor; or (b) if that Appointor is not survived by a child or children, the legal personal representative or representatives of the Appointor is or are the Appointor.

19.

The Protector

Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3) (4)

(5)

(6)

(7)

Subject to subclause (4), the primary beneficiary is the first Protector. If a person who would be or is a Protector: (a) is a minor; or (b) lacks or loses capacity — that person is disqualified from being a Protector, and the guardian or legal representative of the person is the Protector, but only until such time as that person attains majority or is no longer subject to guardianship, at which time the person is Protector. A person who is or has been disqualified from being a Protector and who is no longer disqualified and is able and willing to accept the office, becomes the Protector, and any other person who is at that time a Protector ceases to be a Protector. If there is no Protector: (a) my executors are the Protector; or (b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed. A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

[page 197] Succession of the office of Protector (8)

A Protector (including Joint Protectors) may, by unregistered deed or will, subject to any terms which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. (9) A Protector may resign. (10) If a sole Protector who is the primary beneficiary of the trust dies without appointing a new Protector in her or his place: (a) if that Protector is survived by a child or children, the child or children of that person is or are the Protector; or (b) if that Protector is not survived by a child or children, the legal personal representative or representatives of the Protector is or are the Protector. 20.

Trustee of the trust: definition and appointment

(1)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional trustee or one or more of my executors.

(2)

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my

executors (excluding an executor who is an Ineligible Officebearer) must nominate a trustee or trustees. Eligibility to be the trustee (5)

(6)

(7)

21.

The eligibility of a person to be a trustee is subject to the clause Automatic disqualification of an Ineligible Officebearer. Where the primary beneficiary reaches the preservation age (and is not otherwise an Ineligible Officebearer), the primary beneficiary is eligible to be appointed as the trustee or one of the trustees. A person who is not the primary beneficiary is not ineligible to be a trustee merely because he or she is under the preservation age. Automatic disqualification of an Ineligible Officebearer

Ineligible Officebearers (1)

Each of the following is an Ineligible Officebearer: [page 198] (a) the primary beneficiary, a spouse of a primary beneficiary or the issue of a primary beneficiary who meets one or more of the criteria in subclause (2); or (b) a company, if an individual specified in the preceding paragraph holds a controlling interest in the company and meets one or more of the criteria in subclause (2).

Criteria for disqualification (2)

The criteria referred to in subclause (1) are that the

individual: (a) is the primary beneficiary and has not reached the preservation age; or (b) is married or has been living with a partner in a marriagelike relationship (however described) with a person of the same sex or different sex and begins to live separately and apart from her or his spouse or partner in a manner that constitutes a separation for the purposes of a law of the Commonwealth or a law of a state or territory; or (c) is unable to pay debts as and when they fall due, or is or becomes an undischarged bankrupt, is in liquidation, receivership or administration, or is unable in law to act or continue to act as trustee; or (d) is the subject of a declaration by a board or tribunal governing the appointment of guardians and administrators under Commonwealth, state, or territory law, made on the grounds of disability, infirmity, or lack of legal capacity; or (e) has been assessed by two health care professionals including a treating doctor who attest that the person cannot make decisions in relation to the person’s affairs or does not understand the nature or effect of the decisions the person makes in relation to the person’s affairs. Automatic disqualification of an Ineligible Officebearer (3)

Where a person is or becomes an Ineligible Officebearer: (a) that person may not be appointed as trustee; (b) if that person is or has been appointed a trustee, that person is automatically removed as trustee and her, his or its rights, powers and duties as trustee are terminated; and (c) if that person is or has been appointed as an Appointor,

that person is automatically removed as an Appointor and her, his or its rights, powers and duties as Appointor are terminated. Effect of becoming or ceasing to be an Ineligible Officebearer (4)

Removal of a trustee or an Appointor under this clause has no effect on actions or commitments that the trustee or the Appointor has already taken or made. [page 199]

(5)

A person who meets the definition of an Ineligible Officebearer is not thereby rendered ineligible to be and to perform the functions of executor or Protector.

22.

Powers of the trustee

(1)

The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

(2)

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and

(c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more or all of the income and capital beneficiaries. Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the capital beneficiaries; (b) alter the provisions of the trust, including adding, varying or excluding a beneficiary but not so as to alter the preservation age or the capital beneficiaries; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); (d) carry on any trade or business; (e) alter or revoke by deed a previous deed binding the future operations of the trust; (f) exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; (g) if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; [page 200] (h) make loans to guardians of beneficiaries on whatever

(i) (j)

(k)

(l)

terms the trustee thinks appropriate; make superannuation contributions on behalf of a beneficiary; where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and end the trust, and if they do so the trustees must ensure that the trust fund vests in the capital beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector.

How the trustee obtains written consent of the Protector (5)

(6)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written

consent has no effect on actions or commitments the trustee has already taken or made following the initial consent. 23.

Investment of the fund

(1)

Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. Subject to the subclause (3), the trustee is under no duty to comply with any provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (ACT) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they must act in accordance with the provisions specified in the preceding subclause.

(2)

(3)

[page 201] 24.

Ending of the trust and vesting of the balance

(1)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; or (c) when the primary beneficiary dies before attaining the preservation age, without being survived by a child or children. When the trust ends: (a) If the trust ends because the primary beneficiary dies before attaining the preservation age without being survived by a child or children, the balance becomes part of my estate and is distributed as if the primary beneficiary died before me; or

(2)

(b) If the trust ends for any other reason, the balance of the trust fund vests in the capital beneficiary or beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 1

SCHEDULE OF GENERAL PROVISIONS 25.

Application of this Schedule

(1)

This Schedule applies in any event and applies to my executors and any trust created by my will.

26.

Streaming of income and capital

(1)

My trustees or my executor, as the case may be, may treat a capital receipt as if it were income for the purposes of determining trust income in a particular income year; and in the absence of such a determination ‘trust income’, ‘income of the trust’ and ‘income of the trust estate’ have the same meaning as ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (or a provision of similar import). My executors and trustees may as they see fit recognise, distinguish, separate, determine and allocate the following matters and create in the accounting records separate or appropriate accounts and ledgers to reflect those actions: (a) the elements of trust income (including but not limited to capital gains and franked dividends) according to type and source; (b) expenses and losses; (c) expenses related to each respective type of trust income including but not limited to:

(2)

in relation to capital gains, available capital losses; and (ii) in relation to franked dividends, allowable or available deductions (including ‘relevant expenses’), credits and rebates. Executors or trustees who are making a distribution to or for a beneficiary may as they see fit do so by paying, applying, setting aside or advancing (i)

(3)

[page 202]

(4)

income or capital from any particular category or sources that they have recorded in the trust accounts. Where executors or trustees set aside income or capital in accordance with this clause, that income or capital does not form part of the trust fund, but is, upon being set aside, held on separate temporary trust by those executors or trustees, as the case may be, with power to invest, apply or deal with that property or income in their discretion until it is paid to or applied for the benefit of the beneficiary.

27.

Executors and trustees: conflicts of interest

(1)

No person, being one of my executors or trustees or a director or shareholder of a corporate executor or trustee, is required to obtain independent legal advice or an order of court before exercising a power or discretion conferred on her or him by this will or by law, or is precluded from exercising the power or discretion, merely because the person exercising the power or discretion: (a) has or may have a direct, indirect, or personal interest, whether as shareholder, director, member, or partner of any company or partnership, or otherwise, in the

manner or result of exercising such power or discretion; or (b) may benefit directly or indirectly as a result of the exercise of any such power or discretion; or (c) is the trustee or controller of a superannuation fund of which I hold an interest in; or (d) is the sole executor or trustee. 28. Power of my executors in relation to superannuation lump sum death benefit (1)

If my estate receives a benefit that is a superannuation lump sum death benefit within the meaning of s 307-5 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import), and one or more of the primary beneficiaries of my will meets the definition of being my death benefits dependant within the meaning of s 320-195 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import): (a) I express the wish that, as far as possible, the superannuation lump sum death benefit be used to satisfy the share or shares of my estate which I intend for the benefit of that primary beneficiary or those primary beneficiaries; and (b) where the benefits would otherwise have been held in a discretionary testamentary trust for the primary beneficiary: (i) my executors are empowered to hold all or part of the superannuation lump sum death benefit in a separate superannuation proceeds will trust for that primary beneficiary; and (ii) the terms of that trust will be the terms the discretionary testamentary trust would have had except that the potential

[page 203] beneficiaries of the superannuation proceeds will trust are limited to those of the capital beneficiaries of the discretionary testamentary trust who are my death benefits dependants. 29.

General powers of my executors and trustees

(1)

My executors and, subject to the clause Powers of the trustee, my trustees may in their discretion: (a) exercise any powers given to them by law; (b) exercise the powers of a trustee for sale of any property in my estate, and my executors and my trustees may without being liable for any loss (including liability for taxation on capital gain) caused by so doing: (i) postpone sale; (ii) retain in its form of investment at my death any part of my estate; or (iii) sell, by public auction or private sale, and for that purpose may extend credit; (c) determine whether receipts or outgoings are capital or income, or partly capital or income, so as to bind the beneficiaries, even though the receipts are from a company or corporation that has made a decision on the matter; (d) apply for the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary the whole or any part of the capital and income of that part of my estate to which that beneficiary is entitled or may in future be entitled, and for those purposes: (i) make a payment or payments to a minor beneficiary’s parent or guardian or a person with

(e) (f) (g)

(h)

(i)

whom the minor beneficiary resides; and (ii) accept the receipt of that payee as an absolute discharge; make loans to beneficiaries on whatever terms they deem appropriate; acquire or lease property for occupation, use or enjoyment by a beneficiary; do any one or more of the following involving shares or securities: (i) concur in any scheme or arrangement involving or affecting the shares; (ii) exercise any voting power; or (iii) apply for and accept directorship of any corporation in which my estate is or may become interested or concerned; apply for, accept or take up securities of any description or denomination, bonus shares or other rights or benefits made available by a corporation in which my estate is or may become interested or concerned; borrow money, either with or without giving security, and enter into any mortgage, bill of sale, lien or security over any part of my estate, and such money borrowed is to be treated as part of my estate or trust property, as the case may be; [page 204]

(j) lease any part of the real or personal property in my estate: (i) for the periods and upon and subject to the covenants and conditions which my executors or my trustees, as the case may be, think fit; and

(k) (l) (m)

(n)

(o)

(ii) either with or without provisions for renewal or otherwise; accept surrenders of leases or tenancies of my estate or any part of it; maintain, repair, improve, develop, alter, renovate, pull down, erect or re-erect any part of my estate; maintain, take out or participate in: (i) an insurance policy against risks affecting my estate; (ii) a life insurance policy in respect of any person; (iii) a policy or contract of health or accident insurance or benefit in respect of any person; (iv) a friendly society, trade union or association of employees benefit scheme in respect of any person; (v) a superannuation or pension scheme in relation to any person; and (vi) a funeral benefit or payment scheme in relation to any person; without the consent of any beneficiary, partition or appropriate any part of the real or personal property of the estate in or towards the satisfaction of a legacy or a share of any person or persons in my estate, and in doing so the value of any such property is that agreed to by those of my beneficiaries affected or, if my executors or my trustees, as the case may be, are satisfied that no value can be agreed in this way, the value is that determined by an independent valuer appointed by my executors for that purpose; determine (in the event of my executors or my trustees, as the case may be, disposing of or being deemed to have disposed of property) from which part or parts of the capital or income of my estate they will pay any income tax liability flowing from the disposal or deemed disposal; and for that purpose they may determine what is capital and what is income, but I express the wish that,

(2)

if it seems appropriate for my executors or my trustees, as the case may be, to do so, that the proceeds of such a disposal be used in the first instance; (p) carry on, either alone or in partnership with any person or persons, the whole or part of any trade or business in which I am engaged or interested at my death; (q) to the extent allowed by law, delegate a power or function, and execute a power of attorney or other instrument to make the delegation; and (r) appoint and empower nominees to act and hold property for my executors and trustees. Even though a person is or becomes or has been an executor or trustee, that person may buy or appropriate to herself or himself at a fair value any part of my estate or any trust fund deriving from it (either at public [page 205]

(3)

(4)

auction or by private contract or treaty) on the same terms my executors may grant to a purchaser from my estate. I express the wish that my executors and my trustees: (a) make available to those of my beneficiaries who inherit or are interested in any property all documents relevant to that property or the assessment of tax relating to that property; and (b) exercise their powers in such a way (subject to their discretion) that any person who cares for my child or children (whether as legal guardian or otherwise) is compensated for any costs they incur in providing that care. My executors and my trustees acting in good faith: (a) may appoint accountants, administrators or advisors as my trustees believe appropriate for the responsible

(5)

operation of the fund, and pay or recover the reasonable costs of these services from the fund; (b) are entitled to indemnity and reimbursement out of my estate or the trust fund (as the case may be) for their expenses, costs and liabilities of every kind arising out of the administration of, and litigation relating to, my estate and its trusts; and (c) may apply estate or trust property to satisfy their indemnity and secure their reimbursement. The indemnity under the preceding subclause: (a) is limited to the assets of my estate or the trust fund (as the case may be); and (b) does not allow my executors or my trustees to recover any loss or reimbursement for any liability from any beneficiary.

30.

Executors’ fees and commission

(1)

Any of my executors or trustees who practises a profession (and I note that this clause does not apply to those of the trustees whose remuneration is provided for in the clause Powers of the trustee): (a) is entitled to be paid out of the fund all usual and reasonable professional fees for work done by that executor or trustee or her or his firm (as executor, trustee or both) on the same basis as if he or she were not one of my executors but employed to act on behalf of my executors; and (b) may in addition apply to the court for commission for her or his pains and trouble.

31.

Unanimity

(1)

Unless otherwise specified:

(a) joint legal representatives, including my executors, must act unanimously; (b) joint guardians of a person must act unanimously; and (c) in any particular trust: (i) joint trustees must act unanimously; (ii) joint Appointors must act unanimously; and (iii) joint Protectors must act unanimously. [page 206] 32.

Interpretation

(1)

Definitions (a) ‘children’: (i) means biological or adopted children; and (ii) includes a child; (b) ‘guardian’ includes guardians; (c) ‘Ineligible Officebearer’ means a person who meets the criteria of being an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer; (d) ‘legal representatives’ includes legal personal representative; (e) ‘my children’ means SAM SMITH and RONALD SMITH; (f) ‘my estate’ includes my residuary estate if it is appropriate in the context, for instance if legacies or devises have been given; (g) ‘my wife’ means JANE SMITH; (h) ‘parallel trusts’ means separate discretionary testamentary trusts set up for a particular primary beneficiary; (i) ‘preservation age’ means the age of 25 years; (j) ‘spouse’ (and ‘spouses’ has a corresponding meaning) in

(2)

relation to a person means: (i) the husband or wife of the person at any time; and (ii) the partner of a person, of the same sex or different sex (however described), with whom the person has been living at any time in a marriage-like relationship or domestic relationship; but (iii) does not include the former husband, wife or partner of a person where there has been a court order or binding financial agreement between the parties arising from the dissolution of the relationship. (k) ‘written notice’ means notification in writing, receipt of which has been acknowledged in writing by all the persons to whom the notice is to be given. The headings to clauses in this document are for the assistance of the reader only, and do not form a substantive part of the document.

DATED 1 January 2016 The testator JOHN SMITH signed in the presence of both of us being present at the same time, and we attested his signature in the presence of him and of each other. Testator Witness 1:……………… Full name: Occupation: Address:

Witness 2: ……………… Full name: Occupation: Address:

[page 207]

9 VARIATIONS TO THE MODEL TESTAMENTARY TRUST AND A TRUST FOR A DISABLED PERSON

Introduction Variations to the Executors Clause Executors: wife or husband or partner and children as substitute Executors: children only Executors: children with substitute Executors: one child, with age restriction and substitute Disposal of the Body Clause Disposal of body: burial Disposal of body: cremation Guardianship Equalisation of Benefits Variations of the Absolute Gifts Clause Examples of common specific gifts Example of absolute gift to named persons in unequal shares, with provision for accrual and substitution Variations of the Gift Provisions Through Testamentary Trusts Clause Gifts of property or pecuniary amounts through a testamentary trust Shares for testator’s children only — no representation of predeceased children Gifts to children with representation of children Gifts to general beneficiaries Shares for siblings of testator Gifts Required to be Held on Trust Under Schedule 1 or Schedule 2 Absolute gifts given in the clause Gift provisions through testamentary trusts Variation for a Disabled Beneficiary

[page 208] Provision for a Special Disability Trust Option to create a special disability trust Variations of the Schedule 1 Appointor First Schedule 1 appointor is a named person Named person disqualified from being Schedule 1 appointor Substitute Schedule 1 appointor is a named person Variations of the Schedule 1 Protector First Schedule 1 protector is a named person Named person disqualified as Schedule 1 protector Trustee of the Trust: Definition and Appointment First trustee is a named person First trustee is an institutional trustee Institutional trustee as trustee of last resort Automatic Disqualification of an Ineligible Officebearer: Variations Variations of the Powers of the Trustee Legislation Cited in the Investment of the Fund Clause Variations of the Ending of the Trust and Vesting of the Balance Clause Certain Beneficiaries to Hold a Right of Residence Over Properties of Estate and Trusts Trust for Severely Disabled Person: Schedule 2 Trust Use and characteristics of the Schedule 2 trust Schedule 2 trust: summary of comments on use and characteristics Children of the severely disabled primary beneficiary prevented from inheriting under Schedule 2 Disabled beneficiary who has children: Schedule 2 trust not appropriate Schedule 2: Provisions of the Trust for [Name of Disabled Beneficiary] Application of the provisions in Schedule 2 The property of the Schedule 2 trust Beneficiaries of the Schedule 2 trust The purposes of the trust The Schedule 2 Appointor The protector Trustee of the Trust: Definition and Appointment First trustee is a named person First trustee is an institutional trustee Powers of the Schedule 2 Trustee

[page 209] Investment of the Schedule 2 Fund Ending of the Schedule 2 Trust Expression of My Wishes for the Administration of the [Name of Beneficiary] Trust Expression of My Wishes for the Administration of the [Name of Beneficiary] Trust Clause-By-Clause Explanation of the Schedule 2 Trust Precedent Purpose of this document Schedule 2 trust: executor may allocate part or all of the property provided for your beneficiary to a special disability trust Application of the provisions in Schedule 2 Property of the Schedule 2 trust Beneficiaries of the Schedule 2 trust The purpose of the Schedule 2 trust The Schedule 2 Appointor The Schedule 2 Protector Trustee of the Schedule 2 trust: definition and appointment Powers of the Schedule 2 trustee Investment of the fund Ending of the Schedule 2 trust and vesting of the balance

INTRODUCTION 9.1 •

•

•

This chapter includes the following: alternative provisions for the Model Testamentary Trust, which can be used with or instead of provisions in the Model Testamentary Trust precedent in Chapter 8; a precedent for a trust for a severely disabled person: Schedule 2 trust: see 9.47 together with a clause-by-clause explanatory document in non-technical language; and an explanatory document for the Schedule 2 trust. This document is a companion document to the Explanatory Document offered in Chapter 8, which explains the Model Testamentary Trust. The explanatory document in this chapter is directed to the testator as well as the will

drafter. The intention is that the will drafter can give the entire explanatory document to the testator to assist them with reading Schedule 2 of their will. Alternatively, the will drafter can select the paragraphs which will explain the individual testator’s provision for the person with a disability (in Schedule 2) clause by clause and collect them into a single document to give to them. [page 210]

VARIATIONS TO THE EXECUTORS CLAUSE 9.2 The variations set out below are for the identification of executors in the Executors clause. These are examples only. There are many variations for the appointment of executors, including the appointment of an institutional executor. Other forms may be adapted from the forms in Chapter 10 of C Birtles and R Neal, Hutley’s Australian Wills Precedents, 8th edn, 2014 (Hutley’s). If a form from Hutley’s is used, the words ‘and trustees’ must be deleted because the Model Testamentary Trust precedent (see Chapter 8) provides that only certain executors are trustees. Subclauses (3) and (4) of the Executors clause in the Model Testamentary Trust precedent in Chapter 8 are repeated here to show the context in which the variations operate. They will need to be renumbered accordingly depending on the variation used. (3)

(4)

‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1.

Executors: wife or husband or partner and children as substitute 9.3 [Number clause] Executors (1) I appoint as my executor my [wife (or) husband (or) partner NAME]. (2) If my [wife (or) husband (or) partner] refuses or is unable to act as my executor I appoint as my executors my children [(insert NAMES if required)]. [Use subclauses (3) and (4) of the Model Testamentary Trust precedent]

Executors: children only 9.4 [Number clause] Executors (1) I appoint as my executors my children [(insert NAMES if required)]. [Use with subclauses (3) and (4) of Model Testamentary Trust precedent which should be renumbered accordingly]

Executors: children with substitute 9.5 [Number clause] Executors (1) I appoint as my executors my children [(insert NAMES if required)]. (2) If no child of mine is able or willing to act or continue to act as my executor, I appoint as my executors [insert NAME].

[Use with subclauses (3) and (4) of Model Testamentary Trust precedent] [page 211]

Executors: one child, with age restriction and substitute 9.6 [Number clause] Executors (1) I appoint as my executor my [son (or) daughter NAME] on condition that [he (or) she] has attained the age of 25. (2) If [he (or) she] refuses or is unable to act as my executor or has not attained the age of 25, I appoint as my executor [insert NAME]. [Use with subclauses (3) and (4) of Model Testamentary Trust precedent]

DISPOSAL OF THE BODY CLAUSE 9.7 It is not usual to put disposal of the body provisions in the will, as it is possible that the will may not be found for some time after the death, and by then the wrong thing may have been done. Several subclauses are set out below. See Chapter 5 in Hutley’s for other disposal of the body clauses.

Disposal of body: burial 9.8 [Number clause] Disposal of my body (1) I wish to be buried near where I die.

(2)

It is not important to me that if I die overseas my body be brought back to Australia.

Disposal of body: cremation 9.9 [Number clause] Disposal of my body (1) I wish to be cremated near where I die. (2) If I am cremated overseas I desire but do not require that my ashes be returned to Australia.

GUARDIANSHIP 9.10 A testator who has minor children should consider appointing a testamentary guardian. (See Chapter 7 of Hutley’s for a discussion on guardianship and issues relating to appointing a guardian where the other parent survives.) [Number clause] Appointment of guardians (1) If my [husband or wife or partner] does not survive me, I appoint [relationship] [NAME] of [Guardian’s Address] as guardian of my minor children. [page 212]

EQUALISATION OF BENEFITS 9.11 A testator may intend to divide her or his wealth equally between a number of beneficiaries, for example the testator’s children. The testator may be concerned that equal division of her or his estate will not achieve this purpose because part of the

testator’s wealth may be in non-estate assets which will not be divided equally between the beneficiaries. The purpose of an equalisation clause is to secure equal division of the testator’s overall wealth, including estate and non-estate assets, by empowering the executor to adjust the share of the estate assets which each beneficiary receives to account for the share of the non-estate assets each beneficiary receives. Theoretically, such a clause can be drafted to cover an almost infinite range of non-estate assets. However, if the equalisation clause requires a wide range of non-estate assets to be taken into account, the executor’s task becomes very difficult or impossible because it will be difficult to identify and value the non-estate assets. Similarly, a general equalisation of benefits clause may create issues where there have been dispositions of specific gifts. This precedent is limited to superannuation only. Superannuation is a common non-estate asset. It is of considerable value and testators may not have control over its destination on their death. Not all testators who have superannuation will want to include an equalisation clause (and such a clause should only be used where an equal division of residue is being made), and for that reason the clause is offered as a variation and not as a standard provision in the Model Testamentary Trust precedent in Chapter 8. [Number clause] Equalisation of benefits (1) If my executor is required by this will to divide my estate into equal shares for my children, my executor must take into account any of my superannuation death benefits that a child of mine has received or will receive, and adjust that child’s share of my estate in such a way that all of my children receive an equal share of the combined total of my estate assets and my superannuation benefits.

VARIATIONS OF THE ABSOLUTE GIFTS CLAUSE

Examples of common specific gifts 9.12 This example does not provide for any shares to be held via discretionary testamentary trusts. [Number subclause] Absolute gifts (1) I give the sum of one hundred thousand dollars ($100,000) to [NAME] who survives me. (2) I give my property known as 123 Smith Street, Sydney in the State of New South Wales to [NAME] who survives me. [page 213]

Example of absolute gift to named persons in unequal shares, with provision for accrual and substitution 9.13 This example does not provide for any shares to be held via discretionary testamentary trusts. [Number subclause] Absolute gifts (1) (a) [My (or) my] executors must divide [specify gift] or treat it as being divided into [state total number of equal shares] equal shares (and the words ‘share’ or ‘shares’ in this paragraph refer to those equal shares); (b) [(if substitution is not desired, delete) ‘subject to paragraph (c),’] subject to paragraph (c), my executors must hold those shares for those of the following who survive me and have attained or attain their majority absolutely, as follows: (i) [name and address of beneficiary] _ share[s]; (ii) [name and address of beneficiary] _ share[s]; (iii) [name and address of beneficiary] _ share[s]; [It is vital that the total number of shares allocated must equal the

number stated in paragraph (a)] [If substitution is not desired, omit paragraph (c) and renumber paragraph (d)] (c) if a person referred to in paragraph (b) does not survive me or dies before attaining a vested interest, leaving children who survive me and have attained or attain their majority, then those children having attained or on attaining their respective majorities take equally the share which their parent would otherwise have taken; [Other forms of substitution may be used or substitution may be excluded. Commonly, the testator intends substitution of children to apply to only some of a list or class of original beneficiaries (for example, the testator would not want substitution of children to apply for the testator’s parents or friends, but would want substitution of children to apply to the testator’s siblings), with delayed vesting for all substitute beneficiaries, in which case (c) would read:] (c) if any of [list those original beneficiaries for whom substitution is to be made] does not survive me or dies before attaining a vested interest, leaving children who survive me and have attained or attain their majority, then those children having attained or on attaining their respective majorities take equally the share which their parent would otherwise have taken; and (d) if the trusts of a share or shares referred to in this paragraph lapse or fail because no person attains a vested interest in that share or those shares, then from the time of that lapse or failure that share is or those shares are added equally to the other share or shares, the trusts of which have not then so lapsed or failed, and this provision applies both to the original shares and to shares which have increased as a result of the application of this provision. [page 214]

VARIATIONS OF THE GIFT PROVISIONS THROUGH TESTAMENTARY TRUSTS CLAUSE 9.14 In these precedents, the clause Gift provisions through testamentary trusts (see 8.13) contains subclause (1) (and sometimes subclause (2)) which defines the gifts and shares of the estate or of residue given by the will; and subclause (3) which requires that gifts and shares of the estate or of residue given in the clause be held on trusts under Schedule 1 or Schedule 2 or another Schedule, as the case may be. The following are examples of subclauses that may be used to make up the Gift provisions through testamentary trusts clause to meet the testator’s individual needs. No matter what variation is being used, the will drafter should never refer to the whole of the estate. This is because the initial $10 to create each trust will always have been taken out from the estate before the distribution of any other gifts.

Gifts of property or pecuniary amounts through a testamentary trust 9.15 In some circumstances, the testator may desire to leave specific property or a pecuniary amount to a beneficiary through a testamentary trust. The below variation provides an example of such gifts. (1) My executors must give the sum of one hundred thousand dollars ($100,000) to the trustee or trustees of the trust for [NAME] who survives me. (2) My executors must give my property known as 1 Lonsdale Street, Canberra in the Australian Capital Territory to the trustee or trustees of the trust for [NAME] who survives me.

Shares for testator’s children only — no representation of predeceased children 9.16 This subclause would be unusual, but is offered because a testator may wish to exclude representation of predeceased children by children of those children. (1) (a) Subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts for each of my children [insert NAMES if required] who survive me; and (b) no issue of a child of mine is to substitute for a child of mine who dies before me or fails to survive me. [The appropriate subclause (2) would read:] (2) Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1. [page 215]

Gifts to children with representation of children 9.17 This is the most commonly used variation clause where the testator desires to leave the residue of their estate equally to children with representation for children of a predeceased child. (1) (a) Subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts for each of my children [insert NAMES if required] who

(2)

survives me; and (b) if a child of mine does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

Gifts to general beneficiaries 9.18 The testator may intend to leave gifts to more remote beneficiaries such as siblings, uncle and aunts or friends. Specific amounts or percentages [(If either prior gifts of the whole estate have been given or prior gifts of residue have been given, insert) Subject to the preceding trusts:] (a) [Subject (or) subject] to paragraph (b), my executors must transfer the following gifts to the trustee or trustees of the trusts for the following beneficiaries who survive me and have attained or attain their majority: (i) [Name and address and specify the gift or percentage] [Insert paragraph (b) which provides for substitution of some or all predeceased beneficiaries listed in (a)] [If all of the listed beneficiaries are to be represented, the following paragraph could be used:] (b) If a person referred to in paragraph (a) does not survive me

(‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. [If only some of the listed persons are to be represented, the following paragraph could be used:] (b) If any of [name those original beneficiaries for whom substitution is to be made] does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given [page 216] to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me.

Shares for siblings of testator 9.19 The testator may have no spouse or partner or children or grandchildren, or be aware that all those persons may predecease the testator. At this point the testator is considering providing for the failure of all the preceding gifts of residue. A common intention is that the testator’s siblings should inherit, with children of a predeceased sibling representing that sibling. The framing of a gift to siblings contains a trap. We quote from Hutley’s, para 27.29: Care must be taken in drafting corresponding wills of husband and wife or partners

in favour of each other, and containing a residuary gift to brothers and sisters or other persons. It is never satisfactory to put a gift of residue in the will of one spouse or partner ‘to my brothers and sisters’, and in the will of the other spouse or partner ‘to my brothers and sisters’. The reason is that (bearing in mind that ‘brothers and sisters’ does not include brothers-or sisters-in-law) if (for example) the testatrix dies first, the testator will inherit, and on his eventual death his siblings will take all to the exclusion of the siblings of the testatrix, and vice versa if the testator dies first. This gamble on the order of deaths will not be the intention of the testators. In order to achieve a fair distribution whichever testator dies first, the gifts to all siblings and siblings-in-law must appear in both wills.

Shares for siblings: variation (1): Shares for testator’s siblings with representation of predeceased siblings 9.20 [If there is no prior gift of residue, subclauses (1) and (2) would read:] (1) (a) Subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustees of the trusts for each of my brothers and sisters who survive me; and (b) if a person referred to in paragraph (a) does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children, and the same principle applies to each predeceased beneficiary who leaves children who survive me. (2) Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with [page 217]

those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

Shares for siblings: variation (2): Shares: half to siblings of testator and half to siblings of spouse or partner, with representation of predeceased siblings 9.21 (1) (a)

(2)

Subject to paragraph (b), as to one half of the residue of my estate, my executors must divide that half into equal shares and give those shares respectively to the trustee or trustees of the trusts for each of my brothers and sisters who survive me and as to the other half my executors must divide that half into equal shares and give those shares respectively to the trustee or trustees of the trusts for each of the brothers and sisters of my [wife (or) husband (or) partner] who survive me; (b) if a person referred to in paragraph (a) does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children, and the same principle applies to each predeceased beneficiary who leaves children who survive me; and (c) if the preceding trusts in this subclause fail as to one half, that half is added to the half the trusts of which have not then failed. Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my

executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

Shares for siblings: variation (3): Equal shares for siblings and children of predeceased siblings of testator and of spouse of testator 9.22 (1) (a)

(b)

Subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts for each of my brothers and sisters and the brothers and sisters of my [wife (or) husband (or) partner] who survive me; and if a person referred to in paragraph (a) does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the [page 218]

(2)

trusts for each of those children, and the same principle applies to each predeceased beneficiary who leaves children who survive me. Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request

special distribution and Schedule 1.

Shares for siblings: variation (4): Gift of residue to named persons in equal shares, with provision for accrual and substitution 9.23 (1) (a)

(b)

[Subject (or) subject] to paragraph (b), my executors must divide the residue of my estate into equal shares and transfer that share to the trustee or trustees of the trusts for each of the following who survive me: (i) [Name and address of beneficiary] If a person referred to in paragraph (a) does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children, and the same principle applies to each predeceased beneficiary who leaves children who survive me.

Shares for siblings: variation (5): Gift to named persons in unequal shares, with provision for accrual and substitution 9.24 (1) (a)

Subject to paragaphs (b) and (c), my executors must divide the residue of my estate into five (5) equal shares: (i) to give to the trustee or trustees of the trust for [Name] – two (2) shares;

(ii)

(b)

(c)

to give to the trustee or trustees of the trust for [Name] – two (2) shares; and (iii) to give to the trustee or trustees of the trust for [Name] – one (1) share. If any of [specify names] does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children, and the same principle applies to each predeceased beneficiary who leaves children who survive me. If the provisions relating to a share or shares referred to in this subclause lapse or fail because no person attains a vested interest in that share [page 219] or those shares, then from the time of that lapse or failure that share or those shares is or are added equally to the other share or shares the trusts of which have not then so lapsed or failed, and this provision applies both to the original shares and to shares which have increased as a result of the application of this provision.

GIFTS REQUIRED TO BE HELD ON TRUST UNDER SCHEDULE 1 OR SCHEDULE 2 9.25 Every will using the Model Testamentary Trust precedent contains a clause Gift provisions through testamentary trusts,

and that clause always contains a subclause which directs that the executor must deal with those gifts in accordance with the clause Primary beneficiary may request special distribution and a specific schedule. A basic version of subclause (3) is given in the clause Gift provisions through testamentary trusts in Chapter 8: see 8.13. Subclause (3) must be modified to meet the circumstances. As noted in Chapter 8, subclause (3) is essential and crucial, and without it the will is defective because subclause (3) indicates which gifts are to be held on trust (Schedule 1 trusts), which (if any) are to be held on a Schedule 2 trust for a disabled beneficiary and which gifts in the clause (if any) are given absolutely.

Absolute gifts given in the clause Gift provisions through testamentary trusts 9.26 It is possible to give some gifts absolutely and others through a discretionary testamentary trust in the clause Gift provisions through testamentary trusts. This may be done if the testator is giving to a list of people, some of whom are to take absolutely, and some through a discretionary testamentary trust. If the testator is giving benefits to a list of persons, some to take absolutely and some on trust, subclauses (1) and (2) (if applicable) must clearly indicate which gifts are to be on trust and which are absolute, and subclause (3) must be modified to agree with subclauses (1) and (2). If subclauses (1) and (2) contained absolute gifts, subclause (3) would read as follows: (3) (a) Subject to paragraph (b), where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1; and

Where in this clause I have given gifts and allocations of (b) shares of my estate absolutely, my executors must deal with the subject matter of those gifts and allocations accordingly. [For a will containing gifts through a discretionary testamentary trust, a Schedule 2 trust and absolute gifts, subclause (3) would read:] [page 220] (3)

(a)

(b)

(c)

Subject to paragraph (b), where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1; (i) subject to subparagraph (ii), my executors must deal with the subject matter of the provision I have made for [(identify person with a disability, eg)] in accordance with Schedule 2, and the provisions of that Schedule govern that trust; (ii) if [identify person with a disability] predeceases me, no issue of [hers (or) his] is to substitute for [her (or) him]; and Where in this clause I have given gifts and allocations of shares of my estate absolutely, my executors must deal with the subject matter of those gifts and allocations accordingly.

VARIATION FOR A DISABLED BENEFICIARY 9.27 Provision for a disabled person may take any number of forms. This example illustrates how the gift provisions can work together to meet the testator’s requirements.

[Number clause] Gift provisions through testamentary trusts (1) My executors must give fifty percent of the residue of my estate to the trustee or trustees of the trust for [NAME OF BENEFICIARY] who survives me. (2) My executors must give the rest and residue of my estate to the trustee or trustees of the trusts for each of my children [NAMES] who survive me. (3) (a) Where in this clause I have given gifts and allocations of my estate to the trustee or trustees of a trust for [NAME OF BENEFICIARY] my executors must deal with those gifts and allocations in accordance with Schedule 2; and (b) Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a beneficiary other than [NAME OF BENEFICIARY], my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

PROVISION FOR A SPECIAL DISABILITY TRUST 9.28 The testator may want to give the executor the power to create a special disability trust for a disabled beneficiary if there is a possibility that the beneficiary will qualify for one in the future. In the event that the beneficiary does not meet the requisite criteria to qualify for one, the testator will want to ensure that the beneficiary’s share of the estate is held in a more restrictive type of trust (a Schedule 2 trust) as opposed to the standard discretionary testamentary trust (Schedule 1 trust). See Chapter 4 for a discussion on special disability trusts. [page 221]

Option to create a special disability trust 9.29 Where it is intended to give the executor the option to create a special disability trust, the clause below can be inserted after the clause Gift provisions through testamentary trusts. It gives the executor the power to allocate part or all of a beneficiary’s share of the estate to a special disability trust or a Schedule 2 trust. [Number clause] Executor may allocate part or all of the property I have provided for [Name of beneficiary] to a special disability trust (1) My executors may allocate part or all of the property that I have provided for [NAME OF BENEFICIARY] to one or both of the following, in the proportions my executors in their absolute discretion think fit: (a) the trustee or trustees of the Schedule 2 trust created for the primary benefit of [NAME OF BENEFICIARY]; or (b) a Special Disability Trust created for the primary benefit of [NAME OF BENEFICIARY] in accordance with Pt 3.18A of the Social Security Act 1991 (Cth), or any equivalent legislative provision at the date of my death.

VARIATIONS OF THE SCHEDULE 1 APPOINTOR First Schedule 1 appointor is a named person 9.30 The alternative subclause (2) provides that the first Schedule 1 Appointor is a named person (instead of the primary beneficiary): (2) Subject to subclause (3), the first Appointor is [NAME]. It should be noted that the trustee will be the person chosen by the Appointor and that if an institution is made Appointor, it will be impossible for anyone other than the institution to remove the

trustee. It follows that the testator should think twice before appointing an institution as Appointor.

Named person disqualified from being Schedule 1 appointor 9.31 The alternative subclause (3) provides that a named person is disqualified from being Schedule 1 Appointor: (3) If a person (including an executor) is [NAME], or is or becomes an Ineligible Officebearer, that person is disqualified and does not become or ceases to be an Appointor.

Substitute Schedule 1 appointor is a named person 9.32 The alternative subclause (7) provides that the substitute for a disqualified sole Appointor is a named person, before the executors: (7) If there is no Appointor: (a) [NAME] becomes the Appointor; [page 222] (b)

(c)

if [NAME] is unable or unwilling to be, or is an Ineligible Officebearer, those of my executors who are not Ineligible Officebearers are or become the Appointors; and if I have no executor who is willing and able to be an Appointor and is not an Ineligible Officebearer, the court may appoint an Appointor.

VARIATIONS OF THE SCHEDULE 1 PROTECTOR First Schedule 1 protector is a named person 9.33 The alternative subclause (3) provides that the first Protector is a named person instead of the primary beneficiary: (3) Subject to subclause (4), the first Protector is [NAME].

Named person disqualified as Schedule 1 protector 9.34 The alternative subclause (7) provides that a named person is disqualified from being Protector: (7) (a) [NAME] is disqualified from being a Protector; and (b) if a person who would be or is the sole Protector: (i) is or becomes under a legal disability; or (ii) lacks or loses capacity: that person is disqualified from being Protector until the person regains legal capacity or is no longer under a disability, and until that time the person’s guardian or legal personal representative is the Protector.

TRUSTEE OF THE TRUST: DEFINITION AND APPOINTMENT First trustee is a named person 9.35 This new subclause (3) provides for named persons to be the first trustee: (3) (a) I appoint [NAME] and [NAME] as the trustee; and (b) if neither [NAME] nor [NAME] is willing, able and eligible to be a trustee, the trustee or trustees are those persons

appointed by the Appointor.

First trustee is an institutional trustee 9.36 An institutional trustee can be appointed as the first trustee. Subclause (3) would read: (3) (a) I appoint [THE PUBLIC TRUSTEE FOR (name jurisdiction)] as trustee; and (b) if THE PUBLIC TRUSTEE FOR (name jurisdiction) does not become trustee or, having become trustee ceases to be trustee, the trustee or trustees are those persons appointed by the Appointor. [page 223]

Institutional trustee as trustee of last resort 9.37 This version of subclause (4) provides that, as a last resort, an institutional trustee is appointed before application is made to the court: (4) (a) If the Schedule 1 Appointor does not nominate an eligible person as trustee, my executors (excluding an executor who is an Ineligible Officebearer) must nominate as trustee or trustees a person or persons who may be one or more of my executors; and (b) if there is still no trustee, I appoint [THE PUBLIC TRUSTEE FOR (name jurisdiction)] as trustee.

AUTOMATIC DISQUALIFICATION OF AN INELIGIBLE OFFICEBEARER: VARIATIONS

9.38 The clause Automatic disqualification of an Ineligible Officebearer (see 8.24) is at the core of the asset protection that the discretionary testamentary trust offers in relation to relationship breakdown. As noted in 8.24 and the discussion in Chapter 3, the asset protection offered by the precedent in the basic clause is only moderately strong. The version of the clause Automatic disqualification of an Ineligible Officebearer offered in this variation is what might be called ‘strong level’ asset protection. The stronger protection is achieved by providing that the beneficiary who becomes an Ineligible Officebearer because of relationship breakdown is permanently disqualified from being the beneficiary at all. This is in contrast to the temporary disqualification in the Beneficiaries of the trust clause (see 8.19). The version giving strong level asset protection consists of the addition of a new subclause (6) in the clause Automatic disqualification of an Ineligible Officebearer. The ‘strong level’ version is drastic, and a testator should not lightly adopt it. (6) Where a person is married or has been living with a partner in a marriage-like relationship (however described) with a person of the same sex or different sex and begins to live separately and apart from her or his spouse or partner in a manner that constitutes a separation for the purposes of a law of the Commonwealth or a law of a state or territory: (a) that person and that person’s spouse or partner may retain any capital or income of the trust already distributed; but (b) that person and that person’s spouse or partner is or are no longer beneficiaries of the trust; and (c) the trustee may not make any distribution of capital or income whatsoever from the trust to that person or that person’s spouse or partner, and, that person and their spouse or partner are from that time permanently excluded from receiving any capital or income from the trust.

[page 224]

VARIATIONS OF THE POWERS OF THE TRUSTEE 9.39 Subclause (4)(b) of the clause Powers of the trustee (see 8.25) gives the trustee power to ‘alter the provisions of the trust, including adding, varying or excluding a beneficiary but not so as to alter the preservation age or the capital beneficiaries’. This removes the power of the trustee to alter the preservation age or the capital beneficiaries. A testator may wish to give the trustee the power (subject to the consent of the Protector) to change the preservation age of a primary beneficiary or alter the capital beneficiaries. If so, subclause (4)(b) could be worded: (4) (b) alter the provisions of the trust, including the preservation age for a particular beneficiary or adding, varying or excluding an income or capital beneficiary.

LEGISLATION CITED IN THE INVESTMENT OF THE FUND CLAUSE 9.40 The clause Investment of the fund refers to specific trustee legislation in the jurisdiction of the testator. Although the legislation cited is the Trustee Act 1925 (NSW), the provision in subclause (2) of the clause Investment of the fund (see 8.26) is sufficiently wide to ensure that the clause will operate correctly in all Australian jurisdictions. However, the will drafter may wish to make assurance doubly sure, and cite the legislation in the jurisdictions in which the testator has property — or all Australian jurisdictions. The first relevant subclause is s 14A(2) of the Trustee Act 1925 (NSW):

(2) A trustee must, in exercising a power of investment: (a) if the trustee’s profession, business or employment is or includes acting as a trustee or investing money on behalf of other persons, exercise the care, diligence and skill that a prudent person engaged in that profession, business or employment would exercise in managing the affairs of other persons, or (b) if the trustee is not engaged in such a profession, business or employment, exercise the care, diligence and skill that a prudent person would exercise in managing the affairs of other persons.

The corresponding legislation in the other jurisdictions is: s 14A(2) of the Trustee Act 1925 (ACT); s 6(1) of the Trustee Act (NT); s 22(1) of the Trusts Act 1973 (Qld); s 7(1) of the Trustee Act 1936 (SA); s 7(1) of the Trustee Act 1898 (Tas); s 6(1) of the Trustee Act 1958 (Vic); s 18(1) of the Trustees Act 1962 (WA). The second relevant provision is s 14C(1) of the Trustee Act 1925 (NSW): 14C Matters to which trustee is to have regard when exercising power of investment (1) Without limiting the matters that a trustee may take into account when exercising a power of investment, a trustee must, so far as they

[page 225] are appropriate to the circumstances of the trust, if any, have regard to the following matters: (a) the purposes of the trust and the needs and circumstances of the beneficiaries, (b) the desirability of diversifying trust investments, (c) the nature of, and the risk associated with, existing trust investments and other trust property, (d) the need to maintain the real value of the capital or income of the trust, (e) the risk of capital or income loss or depreciation, (f) the potential for capital appreciation, (g) the likely income return and the timing of income return, (h) the length of the term of the proposed investment, (i) the probable duration of the trust, (j) the liquidity and marketability of the proposed investment during, and on the determination of, the term of the proposed investment, (k) the aggregate value of the trust estate,

the effect of the proposed investment in relation to the tax liability of the trust, (m) the likelihood of inflation affecting the value of the proposed investment or other trust property, (n) the costs (including commissions, fees, charges and duties payable) of making the proposed investment, (o) the results of a review of existing trust investments in accordance with section 14A (4). (l)

The corresponding legislation in the other jurisdictions is: s 14C(1) of the Trustee Act 1925 (ACT); s 8(2) of the Trustee Act (NT); s 24(1) of the Trusts Act 1973 (Qld); s 9(1) of the Trustee Act 1936 (SA); s 8(1) of the Trustee Act 1898 (Tas); s 8(1) of the Trustee Act 1958 (Vic); s 20(1) of the Trustees Act 1968 (WA).

VARIATIONS OF THE ENDING OF THE TRUST AND VESTING OF THE BALANCE CLAUSE 9.41 The testator may wish to cause the trust to end on the death of the primary beneficiary, but leaving children. This would be unusual. However, if this is the intention, paragraph (d) could be added to subclause (1). (d) when [NAME (or) the primary beneficiary] dies leaving children who survive [her (or) him (or) NAME].

CERTAIN BENEFICIARIES TO HOLD A RIGHT OF RESIDENCE OVER PROPERTIES OF ESTATE AND TRUSTS 9.42 The purpose of this clause is to provide for a case where a beneficiary might be allowed to reside in a property (owned by the estate or trust as [page 226]

the case may be) for a prolonged period of time, and then subsequently the property is transferred to her or him. The primary beneficiary may seek to rely on this clause to establish that, although not the legal owner during that period, they held an ownership interest in the property as he or she held a right to reside in the property under the will, and thus seek to gain access to a partial or full capital gains tax exemption (see 2.12). [Number clause] Certain beneficiaries to hold right of residence over properties of estate and trusts (1) Every beneficiary holds a right of residence in relation to any property owned by my estate during its administration, although my executors may temporarily or permanently void that right in the absolute discretion of my executors. (2) Every beneficiary holds a right of residence in relation to any property of the Schedule trust, although the Schedule trustee of that trust may temporarily or permanently void that right in the Schedule trustee’s absolute discretion.

TRUST FOR SEVERELY DISABLED PERSON: SCHEDULE 2 TRUST Use and characteristics of the Schedule 2 trust 9.43 This text offers a precedent for a trust specifically designed to meet the requirements of a testator who wishes to provide for a severely disabled person. The precedent forms Schedule 2 of the will. If a Schedule 2 trust is created, the testator should consider including in the will the clause Executor may allocate part or all the property I have provided for [name of disabled person] to a Special Disability Trust (see 9.29). The Schedule 1 trust is flexible and modular enough to be used to provide a discretionary testamentary trust for a primary

beneficiary who is a spendthrift or who has an addiction or a moderate disability. Often setting the preservation age at an age which will adequately protect the primary beneficiary by preventing her or him from controlling the trust is all that needs to be done. Why, then, do we offer a Schedule 2 trust for a severely disabled beneficiary? When should it be offered to a client? The testator providing for a primary beneficiary with a severe disability may have the following requirements: • The testator may want the executor to be able to transfer all or part of the available fund into a ‘special disability trust’ (see 9.29), keeping any balance in a testamentary trust that achieves the demands set out in the following points. • The testator may not want the trust to continue beyond the death of the primary beneficiary, but would prefer the trust to end at that time and the trust property pass to the other residuary beneficiaries [page 227]

•

of the estate as if the disabled primary beneficiary had predeceased the testator without leaving children. This requirement is common where the testator is certain that the primary beneficiary will not have children, and in any case the testator often prefers to benefit her or his own residuary beneficiaries rather than unknown children of the primary beneficiary. The Schedule 2 trust is designed to meet this need. By contrast, the Schedule 1 trust is specifically designed to allow the trust to continue beyond the death of the primary beneficiary. The testator will usually want assurance that the administrative consequences of the primary beneficiary’s

death will be as simple and straightforward as possible. The simplest arrangement is for the trust to end and the remainder of the fund to pass to the testator’s own residuary beneficiaries, and this is the arrangement for which the Schedule 2 trust provides. • By contrast, the Schedule 1 trust is designed to continue in operation after the primary beneficiary’s death. The trust terms provide that even if the primary beneficiary of the Schedule 1 trust fails to make arrangements for succession of the Appointorship and Protectorship in her or his own will, or if the primary beneficiary dies intestate, those offices will automatically pass either to the children of the primary beneficiary, or to the testator’s executor. These succession arrangements will usually be problematic and not desired for a severely disabled primary beneficiary who will usually die intestate, and not leave any obvious dependants or preferred beneficiaries. It follows that the Schedule 2 trust is, in this respect, better for a severely disabled primary beneficiary than the Schedule 1 discretionary testamentary trust. The testator is usually confident that the severely disabled primary beneficiary will not be the subject of family law or bankruptcy proceedings. This means that an Automatic disqualification of an Ineligible Officebearer clause is unnecessary and as such is not included in Schedule 2.

Schedule 2 trust: summary of comments on use and characteristics 9.44 It should be emphasised that this precedent should only be used for a primary beneficiary whose disability is so serious that it is most unlikely that the primary beneficiary will ever have children and the testator wants no provision to be made for any children that the primary beneficiary might possibly have.

If the testator is only concerned that a primary beneficiary be prevented from controlling their trust, but wants to allow the trust to succeed to issue of the beneficiary, then the Schedule 1 trust can be used, with a substantially raised preservation age. [page 228]

Children of the severely disabled primary beneficiary prevented from inheriting under Schedule 2 9.45 There are two aspects to the principle that the Schedule 2 trust prevents children of the primary beneficiary from representing the primary beneficiary on the primary beneficiary’s death: • If the primary beneficiary dies before the Schedule 2 trust has come into operation, leaving children, the benefits of the trust fund will not pass to those children because subclauses (1) and (2) of the Gift provisions through testamentary trusts clause provides that there is to be no substitution for a Schedule 2 primary beneficiary: see 9.26; and • If the primary beneficiary dies after the Schedule 2 trust has come into operation, leaving children, the benefits of the trust fund will not pass on to those children. Instead the fund will revert to the testator’s estate when the trust ends, to be distributed as if the primary beneficiary died before the testator leaving no children: subclause (2) of the clause Ending of the trust and vesting of the balance of the Schedule 2 trust (see 9.62) provides: (2) (a) If the trust ends because the primary beneficiary dies, the balance of the trust becomes part of my estate and is distributed as if the primary beneficiary died before me

leaving no children. This provision excludes the primary beneficiary’s children from succeeding directly to the benefit of the Schedule 2 trust, but the principle is given further strength. When the remainder of the fund returns to the testator’s estate for the benefit of the testator’s residuary beneficiaries, any children of the Schedule 2 primary beneficiary are excluded from sharing in it as representatives of the primary beneficiary in two ways. First, under subclause (2) just quoted, the fund vests as if the primary beneficiary had died before the testator leaving no children, and second, because Gift provisions through testamentary trusts subclauses (1) and (2) provide that there is to be no substitution for a predeceased Schedule 2 primary beneficiary. This would exclude the primary beneficiary’s children if the fund were treated under subclause (2) as if the primary beneficiary had died before the testator.

Disabled beneficiary who has children: Schedule 2 trust not appropriate 9.46 If the primary beneficiary does already have children, or if there is a reasonable possibility that he or she might have children, and the testator wishes to benefit those children, the testator should provide appropriately for those children in the will, generally by making the disabled beneficiary a beneficiary under Schedule 1 rather than under Schedule 2. [page 229]

SCHEDULE 2: PROVISIONS OF THE TRUST FOR [NAME OF DISABLED BENEFICIARY]

Application of the provisions in Schedule 2 9.47 In this clause, reference is made to clause General powers of my executors and trustees [Number clause] Application of the provisions in Schedule 2 (1) In Schedule 2, ‘the trust’ means each trust governed by Schedule 2. (2) The provisions in Schedule 2 do not apply to any trustee other than a Schedule 2 trustee. (3) The provisions in Schedule 2 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

The property of the Schedule 2 trust 9.48 This clauses defines the property of the Schedule 2 trust. [Number clause] The property of the trust (1) The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

Beneficiaries of the Schedule 2 trust 9.49 This clause sets out the beneficiaries of the trust. No distinction is made between income and capital beneficiaries. [Number clause] Beneficiaries of the trust

(1) (2)

(3)

The beneficiaries of the trust are the primary beneficiary [NAME OF DISABLED BENEFICIARY] and the potential beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. The potential beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the issue of the primary beneficiary; (b) a spouse of the primary beneficiary; (c) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (d) a spouse and the children of any of the persons specified in the preceding paragraphs; (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, [page 230]

(f) (g)

whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; a charity or charitable entity; and an entity recognised as a deductible gift recipient entity under Australian taxation law.

The purposes of the trust 9.50 This clause contains the purposes of the trust. [Number clause] The purposes of the trust

Primary purposes of the trust (1)

(2)

The primary purpose of the trust is to directly or indirectly provide for the ongoing care and maintenance of [NAME] for [her or his] lifetime and to give to the trustee the widest possible discretion in carrying out this purpose. I express the wish that the trustee use her or his powers to ensure that the primary beneficiary is provided at all times with pleasant, comfortable and appropriate accommodation.

Secondary purposes of the trust (3)

Other purposes for which the trustee holds the fund on trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes.

Trustee has absolute discretion (4)

(5)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary. I enclose with this will an expression of my wishes for the administration of the trust. I express the wish that in carrying out the purposes of the trust, the trustee respects those wishes, and do all that is reasonably appropriate to give effect to them; however, I note that this document is not part of my will and that it is not testamentary. It expresses my wishes only, and creates no legal obligation.

The Schedule 2 Appointor 9.51 The standard Schedule 2 Appointor clause is set out below [Number clause] Powers of the Appointor (1) The Appointor has the power to: (a) appoint one or more trustees; [page 231] (b) (c) (d)

appoint herself or himself trustee or sole trustee; remove one or more of the trustees; and resign as Appointor.

Eligibility and appointment of the Appointor (2) (3) (4)

(5)

My executors are the first Appointors. If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) my remaining executors are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless she or he is appointed under that Schedule.

Succession of the office of Appointor (6)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that:

(i) (ii)

the appointment is revocable or irrevocable; or the Appointor is restricted from passing her or his powers as Appointor.

First Schedule 2 Appointor a named person 9.52 An alternative for subclause (2) is to name the first Appointor. (2) The first Schedule 2 Appointor is [NAME]. It should be noted that the trustee will be the person chosen by the Appointor and that if an institution is made Appointor, it will be impossible for anyone other than the institution to remove the trustee. It follows that the testator should think twice before appointing an institution as Appointor.

Substitute Schedule 2 Appointor is a named person 9.53 An alternative for subclause (4) is to name the substitute Appointor: (4) If there is no Appointor: (a) [NAME] is the Appointor; (b) if [NAME] is unwilling or unable to act as Appointor, my executors are the Appointors; and (c) if I have no executor who is willing and able to be an Appointor, the court may appoint an Appointor. [page 232]

The protector 9.54 [Number clause]

The Protector

Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3) (4)

(5) (6)

(7)

Subject to subclause (4), the primary beneficiary’s guardian or legal personal representative is the first Protector. If a person who would be or is a Protector: (a) resigns or dies without appointing a new Protector in her or his place; (b) is or becomes under a legal disability; (c) lacks or loses capacity; or (d) is unable or unwilling to be Protector — my executors are the Protector until such time as a guardian or legal representative is appointed for the primary beneficiary and is willing and able to act, at which time that person will be the sole Protector. If a Protector, not being a sole Protector, ceases to be a Protector, the remaining Protector is the Protector. If there is no Protector: (a) my executors are the Protectors until such time as a guardian or legal representative is appointed for the primary beneficiary and is willing and able to act, at which time that person will be the sole Protector; or (b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed. A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector

(8)

(9)

A Protector (including Joint Protectors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. A Protector may resign. [page 233]

First Protector is a named person 9.55 The alternative subclause (3) provides that the first Protector is a named person (instead of the primary beneficiary’s guardian or legal personal representative): (3) Subject to subclause (4) the first Protector is [NAME].

Substitute Protector is a named person 9.56 The alternative subclause (6) provides that where there is a Protector, the Protector is a named person, before the executors: (6) If there is no Protector: (a) [NAME] becomes Protector; (b) if [NAME] is unable or unwilling to be Protector, my executors are the Protectors; or (c) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed.

TRUSTEE OF THE TRUST: DEFINITION AND APPOINTMENT 9.57 [Number clause] Trustee of the trust: definition and appointment (1) The trustee is the person who controls the trust pursuant to this Schedule. (2) The trustee or trustees may be or include a professional trustee or one or more of my executors. Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors must nominate a trustee or trustees.

First trustee is a named person 9.58 This alternative subclause (3) provides for named persons to be the first trustee: (3) (a) I appoint [NAME] and [NAME] as trustees; (b) if neither [NAME] nor [NAME] is willing or able to be a trustee, the trustee or Schedule trustees are those persons appointed by the Appointor.

First trustee is an institutional trustee 9.59 Subclause (3) would be varied, but paragraph (b) remains necessary because the Appointor retains the power to remove and appoint trustees. The varied subclause (3) would read:

[page 234] (3)

(a) (b)

I appoint [(say, THE PUBLIC TRUSTEE FOR (name jurisdiction)] as trustee; if THE PUBLIC TRUSTEE FOR [name jurisdiction] does not become trustee or, having become trustee ceases to be trustee, the trustee or trustees are those persons appointed by the Appointor.

POWERS OF THE SCHEDULE 2 TRUSTEE 9.60 [Number clause] Powers of the trustee (1) The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. (2) The resolutions of the trustee may be written or oral. Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and (c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more of the primary beneficiary or potential beneficiaries.

Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the primary beneficiary or potential beneficiaries; (b) alter the provisions of the trust but not so as to alter the beneficiaries of the trust; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); (d) carry on any trade or business; (e) alter or revoke by deed a previous deed binding the future operations of the trust; (f) exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; (g) if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at [page 235]

(h) (i) (j)

reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate; make superannuation contributions on behalf of a beneficiary; where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally

(5)

received as a capital receipt; (k) appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and (l) end the trust, and if they do so the trustees must ensure that the trust fund vests in the beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector. I express the wish that the trustee use her or his powers to ensure that the primary beneficiary is provided at all times with pleasant, comfortable and appropriate accommodation and, in pursuance of this, with the consent of the Protector, the trustee may in her or his absolute discretion: (a) acquire (either by purchase or lease) appropriate real property for occupation, use or enjoyment by the primary beneficiary alone or with some other person or persons; (b) grant to the primary beneficiary the right to occupy, use or enjoy real property, whether acquired for the purposes or not, alone or with some other person or persons; or (c) arrange comfortable, pleasant and appropriate accommodation for the primary beneficiary in a residential or retirement complex, and for the removal of doubt I emphasise that the trustee may in the trustee’s discretion refuse to give this or any right or benefit to the primary beneficiary.

How the trustee obtains written consent of the Protector (6)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them;

(b)

(7)

the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent. [page 236]

INVESTMENT OF THE SCHEDULE 2 FUND 9.61 Unlike Schedule 1, Schedule 2 imposes a requirement that the trustee must act in accordance with the relevant trustee legislation. [Number clause] Investment of the fund (1) Subject to subclause (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. (2) Subject to the subclause (3), the trustee is under a duty to comply with the provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (NSW) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). (3) The Protector may in their absolute discretion provide notice to the trustee that they are exempted from the provisions specified in the preceding subclause.

ENDING OF THE SCHEDULE 2 TRUST 9.62 [Number clause] Ending of the trust and vesting of the balance (1) The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; (c) when the primary beneficiary dies; or (d) when the court so orders, acting on its opinion that the primary purpose of the trust can no longer be substantially or effectively carried out or assisted by the application of the funds from the trust. (2) When the trust ends: (a) if the trust ends because the primary beneficiary dies, the balance of the trust becomes part of my estate and is distributed as if the primary beneficiary died before me leaving no children; or (b) if the trust ends for any other reason, the balance of the trust fund vests in the potential beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 2

EXPRESSION OF MY WISHES FOR THE ADMINISTRATION OF THE [NAME OF BENEFICIARY] TRUST 9.63 Subclause (5) of the clause The purposes of the trust (see 9.50) refers to a document Expression of my wishes for the administration of the [NAME OF BENEFICIARY] Trust to be enclosed with the will. An example of what such a document might contain

follows. The testator would be free to amend the document as seems to the testator appropriate. [page 237]

EXPRESSION OF MY WISHES FOR THE ADMINISTRATION OF THE [NAME OF BENEFICIARY] TRUST This document is not part of my will; it is not testamentary. It expresses my wishes only, and creates no legal obligations. I am free to amend or replace this document at any time. I now express my wishes about how my Schedule 2 trustee is to administer the trust in Schedule 2 of my will, acting in consultation with the Schedule 2 Protector. I wish, but I do not bind, you to exercise your powers in accordance with the following principles: (a) The capital and income of the Schedule 2 trust are primarily for the maintenance, education, benefit, advancement in life or wellbeing of [NAME of beneficiary with disability] in such ways as you think fit (whether or not there is any other fund available for the same purpose) and as far as is reasonable to support and assist [NAME of beneficiary with disability] to participate in society; (b) I wish that from time to time you consider the advice of professionals in the field of [NAME of beneficiary with disability]’s disability; (c) I wish that you, as you think appropriate, consider the effect of: (i) distributing income or capital of the Schedule 2 fund on Centrelink or other benefits to which my beneficiaries including [NAME of beneficiary with disability] are or may be or may become entitled; and (ii) any tax liability of [NAME of beneficiary with disability] or

(d)

(e)

any beneficiary or my estate; I wish that if [NAME of beneficiary with disability] shows signs of recovery, or if in the circumstances it is reasonable to do so, you pay such smaller or larger amounts of the Schedule 2 fund to [her (or) him] as [he (or) she] is able to manage. I further wish that if there is satisfactory evidence that [NAME of beneficiary with disability] has recovered sufficiently from [her (or) his] disability for it to be reasonable to do so, and [NAME of beneficiary with disability] asks you to do so, you pay some or all the balance of the Schedule 2 fund to [NAME of beneficiary with disability]; I wish that if it becomes clear that the Schedule 2 fund is larger than is necessary for the principal purpose of providing for [NAME of beneficiary with disability], and subject to the preservation of any reserve that you believe to be proper, you distribute the excess or the whole of the Schedule 2 fund between all or any of [(identify beneficiaries, or) my children and grandchildren (or) the persons mentioned in clause (number clause) of Schedule (number Schedule) of my will (or) the persons mentioned in the clause Beneficiaries of the Schedule 2 trust].

Decision-making principles I append relevant parts of s 4 of the Guardianship and Management of Property Act 1991 (ACT), amended to fit the present context. This passage expresses [page 238] decision-making principles which I regard as important, and which I wish, but do not bind, my Schedule 2 trustee to give effect to as seems to them reasonable. (1) The decision-making principles I wish to be followed by the Schedule 2 trustee are the following:

(a)

(2) (3)

(4)

[NAME of beneficiary with disability]’s wishes, as far as they can be worked out, should be given due weight unless making the decision in accordance with those wishes is likely to significantly adversely affect [NAME of beneficiary with disability]’s interests; (b) if giving effect to [NAME of beneficiary with disability]’s wishes is likely to significantly adversely affect [NAME of beneficiary with disability]’s interests — I wish the Schedule 2 trustee to give effect to [NAME of beneficiary with disability]’s wishes as far as possible without significantly adversely affecting [NAME of beneficiary with disability]’s interests; (c) if [NAME of beneficiary with disability]’s wishes cannot be given effect to at all — the interests of [NAME of beneficiary with disability] must be promoted; (d) [NAME of beneficiary with disability]’s life (including [NAME of beneficiary with disability]’s lifestyle) must be interfered with to the smallest extent necessary; (e) [NAME of beneficiary with disability] must be encouraged to look after [herself (or) himself] as far as possible; (f) [NAME of beneficiary with disability] must be encouraged to live in the general community, and take part in community activities, as far as possible. I wish that before making a decision, the Schedule 2 trustee consults with each carer of [NAME of beneficiary with disability]. However, I express the wish that the Schedule 2 trustee does not consult with a carer if the consultation would, in the Schedule 2 trustee’s opinion, adversely affect [NAME of beneficiary with disability]’s interests. These expressions of my wishes do not limit the consultation that the Schedule 2 trustee may carry out.

CLAUSE-BY-CLAUSE EXPLANATION OF THE SCHEDULE 2 TRUST PRECEDENT

Purpose of this document 9.64 This clause-by-clause explanation of the Schedule 2 precedent in this chapter is intended to be used in the same way as the clause-by-clause explanation given in Chapter 8 for the Model Testamentary Trust Precedent. Like that explanatory document, this document is intended to help will drafters to understand the precedent and to be given to testators as a general explanatory document or guide. This document is in lay person’s language. If a Schedule 2 trust is included in the will, the drafter could give this explanation to the client or testator [page 239] complete as it is, or compile a selection of explanations of relevant clauses and give that to the testator.

Schedule 2 trust: executor may allocate part or all of the property provided for your beneficiary to a special disability trust This clause empowers your executor to use her or his discretion to allocate the provision you have made for your beneficiary between the Schedule 2 trust, and, to the extent that it is available and appropriate, a special disability trust. The advantages and requirements of special disability trusts are constantly evolving, and this clause gives your executor the ability to put the most appropriate arrangements in place in the future, depending on whether or not the beneficiary is eligible to be a beneficiary of a special disability trust at that time.

Application of the provisions in Schedule 2 This clause explains that this trust created by your will is a Schedule 2 trust, and the Schedule 2 trustee is governed by the provisions of Schedule 2. Subclause (3) provides that the provisions of Schedule 2 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

Property of the Schedule 2 trust The property of the trust includes the original $10 paid by your executor, any property transferred by your executor in accordance with the will, any property added or accumulated to the trust and the proceeds of any loan taken out by the Schedule 2 trustee.

Beneficiaries of the Schedule 2 trust The beneficiaries of the Schedule 2 trust are the primary beneficiary of the trust and the potential beneficiaries. The class of potential beneficiaries in the Schedule 2 trust is cast extremely widely for the same reasons that it is in the Schedule 1 trust. While the Schedule 2 trust is created and intended to be primarily for the benefit and maintenance of the primary beneficiary, there may be tax advantages that can be gained by passing out income to other beneficiaries in certain circumstances.

The purpose of the Schedule 2 trust The purposes of the Schedule 2 trust are different from the purposes of the Schedule 1 trust. In particular, the first subclause states that the primary purpose of the Schedule 2 trust is to provide for the ongoing care and maintenance of the primary

beneficiary. In subclause (5) you express the wish that the trustee respects and does all that is reasonably appropriate to give effect to your wishes set out in the statement of wishes that you have prepared. [page 240]

The Schedule 2 Appointor The rules relating to the Schedule 2 Appointor differ from the rules relating to the Schedule 1 Appointor; in the Schedule 2 trust the primary beneficiary is excluded from being the Appointor, and your executors are the first Appointors. If all of your executors die or are unwilling to act as Appointor and have not appointed new Appointors, the court is able to appoint a new Appointor for the trust. However, like the Schedule 1 Appointor, the Schedule 2 Appointor can appoint additional or replacement Appointors by deed or will, and can apply terms and conditions to those appointments.

The Schedule 2 Protector This clause details the office of Protector of the Schedule 2 trust. The primary beneficiary’s legal guardian or legal personal representative will be the Protector of the trust. The Schedule 2 trustee may not carry out any substantive action, for example, make capital distributions, change the terms of the trust or end the trust without the written consent of the Schedule 2 Protector. The Schedule 2 Protector can appoint a new Schedule 2 Protector by deed or will to act with or instead of the Schedule 2 Protector.

Trustee of the Schedule 2 trust: definition and appointment This clause describes the trustee of the Schedule 2 trust, and provides that the Schedule 2 trustee will be appointed by the Appointor. The Schedule 2 trustee can be an executor or can be a professional trustee.

Powers of the Schedule 2 trustee This clause sets out the powers of the Schedule 2 trustee. In addition to the powers set out in this clause, the Schedule 2 trustee will also have all powers set out in the clause General powers of my executors and trustees, although, as mentioned above, the Schedule 2 trustee needs the Protector’s written consent to be able to exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of that clause.

Investment of the fund This clause sets out the investment powers of the Schedule 2 trustee. The clause is different from the corresponding Schedule 1 provision in that it imposes a requirement that the trustee acts in accordance with the prudence requirements of state and territory Trustee Acts, unless the Protector exempts the trustee. [page 241]

Ending of the Schedule 2 trust and vesting of the balance

This clause provides that the Schedule 2 trust ends on the first to occur of any of the following: • when the trust ends by operation of law (in practical terms, when the law against perpetuities operates to end the trust. This is 80 years in all jurisdictions outside South Australia); • when the Schedule 2 trustees resolve to end the trust (which requires the consent of the Schedule 2 Protector); • when the primary beneficiary dies; or • when the court so orders, acting on its opinion that the primary purpose of the Schedule 2 trust can no longer be substantially or effectively carried out. This clause also provides that if the trust comes to an end because the trustee has resolved with the consent of the Protector to end it, the trust property vests in the beneficiaries specified by the Schedule 2 trustee. If the trust ends because the primary beneficiary has died, the balance of the trust passes to your residuary beneficiaries in accordance with your will, as if the primary beneficiary of the Schedule 2 trust had predeceased you leaving no children.

[page 243]

10 EXAMPLES OF PRECEDENTS APPLIED

Introduction Example outlines Example 1 The hypothetical facts Testator’s instructions Plan for the will Schedule 1 — Discretionary Testamentary Trust Provisions Schedule of General Provisions Schedule 1: Discretionary Testamentary Trust Provisions Schedule of General Provisions Example 2 The hypothetical facts Testator’s instructions Schedule 1: Discretionary Testamentary Trust Provisions Schedule 2 — Trust for my Son Stephen Colbert Jones Schedule of General Provisions Example 3 Hypothetical facts Testator’s instructions Schedule 1: Discretionary Testamentary Trust Provisions Schedule of General Provisions Example 4 Hypothetical facts The testator’s instructions Division 1 — Provisions if my Wife Survives me

Division 2 — Provisions if my Wife does not Survive me Schedule 1: Discretionary Testamentary Trust Provisions Schedule 2 — Trust for my Son Andrew Prine Schedule of General Provisions

[page 244]

INTRODUCTION 10.1 This chapter provides some examples of how the precedents in the text would be applied to practical hypothetical situations.

Example outlines 10.2 The examples in this chapter are of complete wills, though some are in outline to save space. A summary of the examples follows.

Example 1 10.3 Perhaps the most common scenario in practice: a husband makes one or more specific gifts, to take effect whether or not his wife survives him, then gives the residue of his estate to his wife. If she fails to survive him, he gives the residue to their two children equally. All gifts except the initial specific gift or gifts are to be available through discretionary testamentary trusts.

Example 2 10.4 This example is a variation of the first, but if the testator’s wife fails to survive him, he wishes to give 10% of the residue of his estate to his wife’s sister, and the remainder of the residue equally between the testator’s two children. The testator’s

intention to give 10% of the residue to one beneficiary is not sound in that form, because by specifying the percentage the testator has divided the gift, and so prevented accrual between the beneficiaries. The drafter should suggest that the testator’s wish would be better realised by dividing the residue into twenty shares, giving two to the sister-in-law and nine shares each to the testator’s children in the usual form of gift in unequal shares. In this hypothetical problem, the testator’s son has been in a serious car accident, and is now severely brain damaged and requires constant care. All gifts except the initial specific gift are to be available through discretionary testamentary trusts. However, the gift for the son is to be held in a Schedule 2 trust for a disabled person.

Example 3 10.5 A husband makes a specific gift of a personal item to his brother, to take effect whether or not his wife survives him. The testator gives the residue of his estate to his wife. If his wife does not survive him, he gives $100,000 to his son from a previous marriage, and divides the residue of his estate equally between the three children of his present marriage. His intention is to exclude his son from his former marriage from sharing in the residue of his estate. One of his younger children has a drug addiction, so the testator wants that child’s preservation age to be set at 50. [page 245] All gifts except the initial specific gift are to be available through discretionary testamentary trusts.

Example 4 10.6 A husband, married late in life to a second spouse, has children from his first marriage. If his wife survives him, he gives

$200,000 each to the two sons of his first marriage, but one of those sons is an alcoholic, so the preservation age for that son is raised to 45. He gives the residue of his estate to his wife. If his wife does not survive him, he makes special arrangements for the executorship and the guardianship of his minor children, and he divides the residue of his estate between all five of his children in unequal shares. One of his children is severely disabled, and the testator decides to have the benefit for him put into a Schedule 2 trust. The arrangements differ markedly depending on whether the testator’s wife survives him or not, and for this reason the drafter suggests, and the testator accepts, that divisions be used. All gifts except the one for the disabled person are to be available through discretionary testamentary trusts. The gift for the disabled person is to be held on a Schedule 2 trust for a severely disabled person.

EXAMPLE 1 The hypothetical facts 10.7 • • • •

The specific facts for Example 1 are set out below: The testator’s name is MICHAEL DAVID JONES. Address and Occupation: 16 Roundabout Street, Ainslie in the Australian Capital Territory, Plumber. Testator is married to MARY KATE JONES. Testator and MARY have two children, ASHLEY KATE JONES aged 15 and STEPHEN COLBERT JONES aged 23.

Testator’s instructions

10.8 Executor: MARY JONES, and if she is unable to act, then any child of his who has attained the age of 25 is appointed as executor; but if no child has attained 25, then his choice of substitute executor is his brother JOHNATHON ROBERT JONES, and if he is unable or unwilling to act, THE PUBLIC TRUSTEE OF THE AUSTRALIAN CAPITAL TERRITORY of 221 London Circuit, Canberra in the Australian Capital Territory. Legacy: He wishes to give his gold Rolex watch to his son STEPHEN, whether or not MARY survives him. Residue: to MARY; and if MARY does not survive him, to ASHLEY and STEPHEN equally, all in standard discretionary testamentary trusts with preservation ages of 25. [page 246]

Plan for the will 10.9

The plan for the will is set out below:

1. Revocation clause 2. Recommendation that executors, trustees and primary beneficiaries seek advice 3. Presumption of survivorship 4. Exclusion of requirement that beneficiaries survive the testator by 30 days 5. Power to disclaim 6. Executors 7. Absolute gifts 8. Identification of primary beneficiaries 9. Creation of trusts 10. Gift provisions through testamentary trusts

11. Primary beneficiary may request special distribution 12. Schedules in my will

SCHEDULE 1 — DISCRETIONARY TESTAMENTARY TRUST PROVISIONS 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

Application of provisions in Schedule 1 The property of the trust Beneficiaries of the trust The purposes of the trust The Appointor The Protector Trustee of the trust: definition and appointment Automatic disqualification of an Ineligible Officebearer Powers of the trustee Investment of the fund Ending of the trust and vesting of the balance

SCHEDULE OF GENERAL PROVISIONS 24. 25. 26. 27. 28. 29. 30. 31.

Application of this Schedule Streaming of income and capital Executors and trustees: conflict of interest Power of my executors in relation to superannuation death lump sum benefit General powers of my executors and trustees Executors’ fees and commission Unanimity Interpretation

10.10

The will for Example 1 is set out below.

THIS WILL is made by me, MICHAEL DAVID JONES, of 16 Roundabout Street, Ainslie in the Australian Capital Territory, Plumber. [page 247]

1. Revocation (1)

I revoke all previous testamentary acts.

2. Recommendation that executors, trustees and primary beneficiaries seek advice (1)

My will has been drafted to maximise tax effectiveness and asset protection for my beneficiaries. I recommend that before my executors decide how to administer my estate, and before a primary beneficiary makes a decision on the most appropriate way to take her or his inheritance, my executors, trustees and each primary beneficiary investigate the benefits offered by this will in the light of appropriate professional legal, taxation and financial advice. At the time of signing this will, my financial advisor is CYCLONE FINANCIAL.

3. Presumption of survivorship (1)

Where: (a) a person has died and one or more deaths are presumed; or (b) two or more deaths are presumed; and (c) the order of deaths, whether proved or presumed, is uncertain, this will is to be construed as if the deaths, whether proved or presumed, had taken place in the following manner: first, the oldest; then, after a period of one day, the second oldest;

then, after a period of one day, the third oldest; and so on to the youngest.

4. Exclusion of requirement that beneficiaries survive me by 30 days (1)

Excluding a requirement that a primary beneficiary attains their respective preservation age, no beneficiary is required to survive me by 30 days or any other period in order to take a benefit under my will, and this statement expresses a contrary intention for the purposes of statutory provisions which impose a general requirement that beneficiaries survive me for 30 days or any other period to inherit.

5. Power to disclaim (1)

A person may disclaim an interest under this will or its trusts in whole or in part.

6. Executors (1) (2)

(3)

I appoint as my executor my wife MARY KATE JONES. If my wife refuses or is unable to act as my executor, I appoint as my executors such of my children ASHLEY KATE JONES and STEPHEN COLBERT JONES as have attained the age of 25 years. If both of my children refuse or are unable to act as executors of if they have both not attained the age of 25 years, I appoint as my executor my brother JOHNATHON ROBERT JONES. [page 248]

(4)

If no person previously mentioned in this clause is at the time of my death able and willing to act, I appoint as my executor THE PUBLIC TRUSTEE OF THE AUSTRALIAN

(5)

(6)

(7)

CAPITAL TERRITORY of 221 London Circuit, Canberra in the Australian Capital Territory. A child of mine who attains the age of 25 years after my death and is at that time able and willing to act, is entitled to act jointly with any person who is at that time acting as my executor. ‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1.

7. Absolute gifts (1)

My executors must give my gold Rolex watch to my son STEPHEN COLBERT JONES.

8. Identification of primary beneficiaries (1)

In the clause Gift provisions through testamentary trusts, my executors must give property to the trustee or trustees of the trust or trusts for a certain person or persons, and, unless otherwise specified, I hereby define that person or each of those persons as a ‘primary beneficiary’.

9. Creation of trusts (1)

(2) (3)

My executors must set aside out of my estate a fund (the initial property fund) to provide the initial property of each trust created in this will. I create a separate discretionary testamentary trust for the primary benefit of each of my primary beneficiaries. The name of each trust must contain the words ‘discretionary testamentary trust for’ and the full name of the particular person for whose primary benefit that trust is created, or such

(4)

(5)

(6)

other name as the trustee gives the trust. The initial property of each trust is $10, which must be paid by my executors out of the initial property fund, and the property of the trust includes property transferred to the trustee or trustees under the clause Gift provisions through testamentary trusts. Subject to the clause Primary beneficiary may request special distribution, my executors may in their absolute discretion create a specified number of parallel trusts for a primary beneficiary by splitting the initial property of a trust into as many parts as there are to be parallel trusts for that primary beneficiary. The provisions governing the trusts are set out in the Schedule or Schedules identified for each primary beneficiary respectively in the clause Gift provisions through testamentary trusts.

10. Gift provisions through testamentary trusts (1)

My executors must give the residue of my estate to the trustee or trustees of the trust for my wife MARY KATE JONES who survives me. [page 249]

(2)

Subject to the preceding trust: (a) subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts created for each of my children ASHLEY KATE JONES and STEPHEN COLBERT JONES who survive me; and (b) if a child of mine does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have

(3)

given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary, and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

11. Primary beneficiary may request special distribution (1)

(2)

(3)

A primary beneficiary who is not an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer may request that my executors exercise their powers in subclause (2). My executors may in their absolute discretion: (a) set up a specified number of parallel trusts for a primary beneficiary; and/or (b) transfer some or all of a primary beneficiary’s share of my estate: (i) to the primary beneficiary absolutely provided they are not an Ineligible Officebearer; (ii) to the trustee or trustees of an existing trust of which the primary beneficiary is the trustee or appointor; or (iii) in different proportions between the parallel trusts created for the benefit of that primary beneficiary. If after the exercise of the discretion given to my executors in subclause (2) a balance of the allocated share of a primary beneficiary remains, my executors must transfer that balance equally to the trustee or trustees of the trusts created for that primary beneficiary.

12. Schedules in my will

(1)

My will contains the following Schedules: (a) Schedule 1 — Discretionary Testamentary provisions; and (b) Schedule of General Provisions.

Trust

SCHEDULE 1: DISCRETIONARY TESTAMENTARY TRUST PROVISIONS 13. Application of the provisions in Schedule 1 (1)

In Schedule 1, ‘the trust’ means each trust governed by Schedule 1. [page 250]

(2) (3)

The provisions in Schedule 1 do not apply to any trustee other than a Schedule 1 trustee. The provisions in Schedule 1 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

14. The property of the trust (1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

15. Beneficiaries of the trust (1) (2)

(3)

The beneficiaries of the trust are the income beneficiaries and the capital beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. A beneficiary that meets the criteria in subclause (2)(b) or (c) of the clause Automatic disqualification of an Ineligible Officebearer is excluded as a beneficiary of the trust while that beneficiary meets that or those criteria.

Income beneficiaries (4)

The income beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) a spouse of the primary beneficiary; (d) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (e) a spouse and the children of any of the persons specified in the preceding paragraphs; (f) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (g) a charity or charitable entity; and (h) an entity recognised as a deductible gift recipient entity under Australian taxation law.

Capital beneficiaries (5)

The capital beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; [page 251] (c) the issue of a grandparent of the primary beneficiary; (d) the spouse of the primary beneficiary if the primary beneficiary dies leaving no surviving issue; (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law.

16. The purposes of the trust Primary beneficiary is over the preservation age (1)

Where the primary beneficiary is over the preservation age, the purposes of the trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes.

Primary beneficiary is under the preservation age (2)

Where the primary beneficiary is under the preservation age, I express the wish (without limiting the discretion of the trustee) that the trustee preserve the capital of the fund and, as far as seems to them reasonable, limit its application to the primary beneficiary’s: (a) medical and dental treatment; (b) education (including vocational training); (c) reasonable maintenance and welfare; and (d) such other expenses which the trustee considers appropriate.

Trustee has absolute discretion (3)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary.

17. The Appointor Powers of the Appointor (1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor.

Eligibility and appointment of the Appointor (2)

Subject to subclause (3), the primary beneficiary is the first Appointor.

[page 252] (3)

(4)

(5)

(6) (7)

(8)

If a person (including an executor) is or becomes an Ineligible Officebearer, that person is disqualified and does not become or ceases to be an Appointor. A person who is or would otherwise be entitled to be an Appointor, but is an Ineligible Officebearer because he or she is under the preservation age, becomes Appointor on reaching the preservation age if: (a) that person is able and willing to accept the office; and (b) that person is not otherwise an Ineligible Officebearer. If the person becomes Appointor under the preceding subclause, any other person who is an Appointor at that time ceases to be an Appointor. If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) those of my executors who are not Ineligible Officebearers are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor and is not an Ineligible Officebearer, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (9)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and

(b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor. (10) If a sole Appointor who is the primary beneficiary of the trust dies without appointing a new Appointor in her or his place: (a) if that Appointor is survived by a child or children, the child or children of that person is or are the Appointor; or (b) if that Appointor is not survived by a child or children, the legal personal representative or representatives of the Appointor is or are the Appointor.

18. The Protector Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3)

Subject to subclause (4), the primary beneficiary is the first Protector. [page 253]

(4)

If a person who would be or is a Protector: (a) is a minor; or (b) lacks or loses capacity —

(5)

(6)

(7)

that person is disqualified from being a Protector, and the guardian or legal representative of the person is the Protector, but only until such time as that person attains majority or is no longer subject to guardianship, at which time the person is Protector. A person who is or has been disqualified from being a Protector and who is no longer disqualified and is able and willing to accept the office, becomes the Protector, and any other person who is at that time a Protector ceases to be a Protector. If there is no Protector: (a) my executors are the Protector; or (b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed. A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (8)

A Protector (including joint Protectors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. (9) A Protector may resign. (10) If a sole Protector who is the primary beneficiary of the trust dies without appointing a new Protector in her or his place: (a) if that Protector is survived by a child or children, the child or children of that person is or are the Protector; or

(b) if that Protector is not survived by a child or children, the legal personal representative or representatives of the Protector is or are the Protector.

19. Trustee of the trust: definition and appointment (1) (2)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional trustee or one or more of my executors.

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors (excluding an executor who is an Ineligible Officebearer) must nominate a trustee or trustees. [page 254]

Eligibility to be the trustee (5)

(6)

(7)

The eligibility of a person to be a trustee is subject to the clause Automatic disqualification of an Ineligible Officebearer. Where the primary beneficiary reaches the preservation age (and is not otherwise an Ineligible Officebearer), the primary beneficiary is eligible to be appointed as the trustee or one of the trustees. A person who is not the primary beneficiary is not ineligible to be a trustee merely because he or she is under the preservation age.

20. Automatic disqualification of an Ineligible Officebearer Ineligible Officebearers (1)

Each of the following is an Ineligible Officebearer: (a) the primary beneficiary, a spouse of a primary beneficiary or the issue of a primary beneficiary who meets one or more of the criteria in subclause (2); or (b) a company, if an individual specified in the preceding paragraph holds a controlling interest in the company and meets one or more of the criteria in subclause (2).

Criteria for disqualification (2)

The criteria referred to in subclause (1) are that the individual: (a) is the primary beneficiary and has not reached the preservation age; or (b) is married or has been living with a partner in a marriagelike relationship (however described) with a person of the same sex or different sex and begins to live separately and apart from her or his spouse or partner in a manner that constitutes a separation for the purposes of a law of the Commonwealth or a law of a state or territory; or (c) is unable to pay debts as and when they fall due, or is or becomes an undischarged bankrupt, is in liquidation, receivership or administration, or is unable in law to act or continue to act as trustee; or (d) is the subject of a declaration by a board or tribunal governing the appointment of guardians and administrators under Commonwealth, state, or territory law, made on the grounds of disability, infirmity or lack of legal capacity; or (e) has been assessed by two health care professionals

including a treating doctor who attest that the person cannot make decisions in relation to the person’s affairs or does not understand the nature or effect of the decisions the person makes in relation to the person’s affairs. Automatic disqualification of an Ineligible Officebearer (3)

Where a person is or becomes an Ineligible Officebearer: (a) that person may not be appointed as trustee; (b) if that person is or has been appointed a trustee, that person is automatically removed as trustee and her, his or its rights, powers and duties as trustee are terminated; and [page 255] (c) if that person is or has been appointed as an Appointor, that person is automatically removed as an Appointor and her, his or its rights, powers and duties as Appointor are terminated.

Effect of becoming or ceasing to be an Ineligible Officebearer (4)

(5)

Removal of a trustee or an Appointor under this clause has no effect on actions or commitments that the trustee or the Appointor has already taken or made. A person who meets the definition of an Ineligible Officebearer is not thereby rendered ineligible to be and to perform the functions of executor or Protector.

21. Powers of the trustee (1)

The provisions in this clause which require the Protector’s

(2)

consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and (c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more or all of the income and capital beneficiaries.

Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the capital beneficiaries; (b) alter the provisions of the trust, including adding, varying or excluding a beneficiary but not so as to alter the preservation age or the capital beneficiaries; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); (d) carry on any trade or business; (e) alter or revoke by deed a previous deed binding the

future operations of the trust; (f) exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; [page 256] (g) if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; (h) make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate; (i) make superannuation contributions on behalf of a beneficiary; (j) where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; (k) appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and (l) end the trust, and if they do so the trustees must ensure that the trust fund vests in the capital beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector. How the trustee obtains written consent of the Protector (5)

Where the Protector’s written consent is required for an action by the trustee:

(6)

(a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

22. Investment of the fund (1)

(2)

(3)

Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. Subject to subclause (3), the trustee is under no duty to comply with any provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (ACT) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they must act in accordance with the provisions specified in the preceding subclause. [page 257]

23. Ending of the trust and vesting of the balance

(1)

(2)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; or (c) when the primary beneficiary dies before attaining the preservation age, without being survived by a child or children. When the trust ends: (a) If the trust ends because the primary beneficiary dies before attaining the preservation age without being survived by a child or children, the balance becomes part of my estate and is distributed as if the primary beneficiary died before me; or (b) If the trust ends for any other reason, the balance of the trust fund vests in the capital beneficiary or beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 1

SCHEDULE OF GENERAL PROVISIONS 24. Application of this Schedule (1)

This Schedule applies in any event and applies to my executors and any trust created by my will.

25. Streaming of income and capital (1)

My trustees or my executor, as the case may be, may treat a capital receipt as if it were income for the purposes of determining trust income in a particular income year; and in the absence of such a determination ‘trust income’, ‘income of the trust’ and ‘income of the trust estate’ have the same meaning as ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (or a provision of similar import).

(2)

(3)

My executors and trustees may as they see fit recognise, distinguish, separate, determine and allocate the following matters and create in the accounting records separate or appropriate accounts and ledgers to reflect those actions: (a) the elements of trust income (including but not limited to capital gains and franked dividends) according to type and source; (b) expenses and losses; (c) expenses related to each respective type of trust income including but not limited to: (i) in relation to capital gains, available capital losses; and (ii) in relation to franked dividends, allowable or available deductions (including ‘relevant expenses’), credits and rebates. Executors or trustees who are making a distribution to or for a beneficiary may as they see fit do so by paying, applying, setting aside or advancing income or capital from any particular category or sources that they have recorded in the trust accounts. [page 258]

(4)

Where executors or trustees set aside income or capital in accordance with this clause, that income or capital does not form part of the trust fund, but is, upon being set aside, held on separate temporary trust by those executors or trustees, as the case may be, with power to invest, apply or deal with that property or income in their discretion until it is paid to or applied for the benefit of the beneficiary.

26. Executors and trustees: conflicts of interest (1)

No person, being one of my executors or trustees or a director

or shareholder of a corporate executor or trustee, is required to obtain independent legal advice or an order of court before exercising a power or discretion conferred on her or him by this will or by law, or is precluded from exercising the power or discretion, merely because the person exercising the power or discretion: (a) has or may have a direct, indirect or personal interest, whether as shareholder, director, member or partner of any company or partnership, or otherwise, in the manner or result of exercising such power or discretion; or (b) may benefit directly or indirectly as a result of the exercise of any such power or discretion; or (c) is the trustee or controller of a superannuation fund of which I hold an interest in; or (d) is the sole executor or trustee.

27. Power of my executors in relation to superannuation lump sum death benefit (1)

If my estate receives a benefit that is a superannuation lump sum death benefit within the meaning of s 307-5 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import), and one or more of the primary beneficiaries of my will meets the definition of being my death benefits dependant within the meaning of s 320-195 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import): (a) I express the wish that, as far as possible, the superannuation lump sum death benefit be used to satisfy the share or shares of my estate which I intend for the benefit of that primary beneficiary or those primary beneficiaries; and (b) where the benefits would otherwise have been held in a discretionary testamentary trust for the primary

beneficiary: (i) my executors are empowered to hold all or part of the superannuation lump sum death benefit in a separate superannuation proceeds will trust for that primary beneficiary; and (ii) the terms of that trust will be the terms the discretionary testamentary trust would have had except that the potential beneficiaries of the superannuation proceeds will trust are limited to those of the capital beneficiaries of the discretionary testamentary trust who are my death benefits dependants. [page 259]

28. General powers of my executors and trustees (1)

My executors and, subject to the clause Powers of the trustee, my trustees may in their discretion: (a) exercise any powers given to them by law; (b) exercise the powers of a trustee for sale of any property in my estate, and my executors and my trustees may without being liable for any loss (including liability for taxation on capital gain) caused by so doing: (i) postpone sale; (ii) retain in its form of investment at my death any part of my estate; or (iii) sell, by public auction or private sale, and for that purpose may extend credit; (c) determine whether receipts or outgoings are capital or income, or partly capital or income, so as to bind the beneficiaries, even though the receipts are from a company or corporation that has made a decision on the matter;

(d) apply for the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary the whole or any part of the capital and income of that part of my estate to which that beneficiary is entitled or may in future be entitled, and for those purposes: (i) make a payment or payments to a minor beneficiary’s parent or guardian or a person with whom the minor beneficiary resides; and (ii) accept the receipt of that payee as an absolute discharge; (e) make loans to beneficiaries on whatever terms they deem appropriate; (f) acquire or lease property for occupation, use or enjoyment by a beneficiary; (g) do any one or more of the following involving shares or securities: (i) concur in any scheme or arrangement involving or affecting the shares; (ii) exercise any voting power; or (iii) apply for and accept directorship of any corporation in which my estate is or may become interested or concerned; (h) apply for, accept or take up securities of any description or denomination, bonus shares or other rights or benefits made available by a corporation in which my estate is or may become interested or concerned; (i) borrow money, either with or without giving security, and enter into any mortgage, bill of sale, lien or security over any part of my estate, and such money borrowed is to be treated as part of my estate or trust property, as the case may be; (j) lease any part of the real or personal property in my estate:

(i) for the periods and upon and subject to the covenants and conditions which my executors or my trustees, as the case may be, think fit; and (ii) either with or without provisions for renewal or otherwise; [page 260] (k) accept surrenders of leases or tenancies of my estate or any part of it; (l) maintain, repair, improve, develop, alter, renovate, pull down, erect or re-erect any part of my estate; (m) maintain, take out or participate in: (i) an insurance policy against risks affecting my estate; (ii) a life insurance policy in respect of any person; (iii) a policy or contract of health or accident insurance or benefit in respect of any person; (iv) a friendly society, trade union or association of employees benefit scheme in respect of any person; (v) a superannuation or pension scheme in relation to any person; and (vi) a funeral benefit or payment scheme in relation to any person; (n) without the consent of any beneficiary, partition or appropriate any part of the real or personal property of the estate in or towards the satisfaction of a legacy or a share of any person or persons in my estate, and in doing so the value of any such property is that agreed to by those of my beneficiaries affected or, if my executors or my trustees, as the case may be, are satisfied that no value can be agreed in this way, the value is that determined by an independent valuer appointed by my executors for that purpose;

(2)

(3)

(o) determine (in the event of my executors or my trustees, as the case may be, disposing of or being deemed to have disposed of property) from which part or parts of the capital or income of my estate they will pay any income tax liability flowing from the disposal or deemed disposal; and for that purpose they may determine what is capital and what is income, but I express the wish that, if it seems appropriate for my executors or my trustees, as the case may be, to do so, that the proceeds of such a disposal be used in the first instance; (p) carry on, either alone or in partnership with any person or persons, the whole or part of any trade or business in which I am engaged or interested at my death; (q) to the extent allowed by law, delegate a power or function, and execute a power of attorney or other instrument to make the delegation; and (r) appoint and empower nominees to act and hold property for my executors and trustees. Even though a person is or becomes or has been an executor or trustee, that person may buy or appropriate to herself or himself at a fair value any part of my estate or any trust fund deriving from it (either at public auction or by private contract or treaty) on the same terms my executors may grant to a purchaser from my estate. I express the wish that my executors and my trustees: (a) make available to those of my beneficiaries who inherit or are interested in any property all documents relevant to that property or the assessment of tax relating to that property; and (b) exercise their powers in such a way (subject to their discretion) that any person who cares for my child or children (whether as legal [page 261]

(4)

(5)

guardian or otherwise) is compensated for any costs they incur in providing that care. My executors and my trustees acting in good faith: (a) may appoint accountants, administrators or advisors as my trustees believe appropriate for the responsible operation of the fund, and pay or recover the reasonable costs of these services from the fund; (b) are entitled to indemnity and reimbursement out of my estate or the trust fund (as the case may be) for their expenses, costs and liabilities of every kind arising out of the administration of, and litigation relating to, my estate and its trusts; and (c) may apply estate or trust property to satisfy their indemnity and secure their reimbursement. The indemnity under the preceding subclause: (a) is limited to the assets of my estate or the trust fund (as the case may be); and (b) does not allow my executors or my trustees to recover any loss or reimbursement for any liability from any beneficiary.

29. Executors’ fees and commission (1)

Any of my executors or trustees who practises a profession (and I note that this clause does not apply to those of the trustees whose remuneration is provided for in the clause Powers of the trustee): (a) is entitled to be paid out of the fund all usual and reasonable professional fees for work done by that executor or trustee or her or his firm (as executor, trustee or both) on the same basis as if he or she were not one of my executors but employed to act on behalf of my executors; and

may in addition apply to the court for commission for (b) her or his pains and trouble.

30. Unanimity (1)

Unless otherwise specified: (a) joint legal representatives, including my executors, must act unanimously; (b) joint guardians of a person must act unanimously; and (c) in any particular trust: (i) joint trustees must act unanimously; (ii) joint Appointors must act unanimously; and (iii) joint Protectors must act unanimously.

31. Interpretation (1)

Definitions (a) ‘children’: (i) means biological or adopted children; and (ii) includes a child; (b) ‘guardian’ includes guardians; [page 262] (c) ‘Ineligible Officebearer’ means a person who meets the criteria of being an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer; (d) ‘legal representatives’ includes legal personal representative; (e) ‘my children’ means ASHLEY KATE JONES and STEPHEN COLBERT JONES; (f) ‘my estate’ includes my residuary estate if it is appropriate in the context, for instance if legacies or devises have

(2)

been given; (g) ‘my wife’ means MARY KATE JONES; (h) ‘parallel trusts’ means separate discretionary testamentary trusts set up for a particular primary beneficiary; (i) ‘preservation age’ means the age of 25 years; (j) ‘spouse’ (and ‘spouses’ has a corresponding meaning) in relation to a person means: (i) the husband or wife of the person at any time; and (ii) the partner of a person, of the same sex or different sex (however described), with whom the person has been living at any time in a marriage-like relationship or domestic relationship; but (iii) does not include the former husband, wife or partner of a person where there has been a court order or binding financial agreement between the parties arising from the dissolution of the relationship; (k) ‘written notice’ means notification in writing, receipt of which has been acknowledged in writing by all the persons to whom the notice is to be given. The headings to clauses in this document are for the assistance of the reader only, and do not form a substantive part of the document.

DATED The testator MICHAEL DAVID JONES signed in the presence of both of us being present at the same time, and we attested his signature in the presence of him and of each other. Testator Witness 1: ……………… Witness 2: ……………… Full name: Full name: Occupation: Occupation: Address: Address:

EXAMPLE 2 The hypothetical facts 10.11 The facts in this hypothetical example are the same as those given in Example 1, but in this case MICHAEL and MARY have three children: FRANK [page 263] EDWARD JONES aged 10, ASHLEY KATE JONES aged 15 and STEPHEN COLBERT JONES aged 23. In this example STEPHEN has been in a car accident. He has been left with serious and permanent brain damage and requires constant care. STEPHEN has no children that are known of, and given his condition he will not be having children. MICHAEL and MARY have given financial support to MARY’s sister JANICE GALE SMITH.

Testator’s instructions 10.12 Executor: MARY JONES, and if she is unable to act, then those of MICHAEL’S children FRANK EDWARD JONES and ASHLEY KATE JONES who have attained the age of 25; if neither is able to act, then MICHAEL’S brother JOHNATHON ROBERT JONES is to be his executor; if his brother is unable to act, then the PUBLIC TRUSTEE FOR THE AUSTRALIAN CAPITAL TERRITORY is to be his executor. Devolution of the estate: to MARY and if MARY does not survive him, to divide his estate into twenty equal parts and to give two of those parts to JANICE and six of those parts to each of

his children. The children of JANICE are NOT to represent her if she predeceases MICHAEL. The shares for FRANK EDWARD JONES and ASHLEY KATE JONES are to be held in standard Schedule 1 discretionary testamentary trusts with preservation ages of 25. STEPHEN’S share is to be held in a Schedule 2 trust for a disabled person. (If STEPHEN had children or might have children whom the testator would wish to benefit, STEPHEN’S benefit would be held for him in a Schedule 1 trust, not a Schedule 2 trust. Consideration would need to be given to whether some provisions of the Schedule 1 trust would need to be adjusted.) 10.13

The will for Example 2 is set out below.

THIS WILL is made by me, MICHAEL DAVID JONES of 16 Roundabout Street, Ainslie in the Australian Capital Territory, Plumber.

1. Revocation (1)

I revoke all previous testamentary acts.

2. Recommendation that executors, trustees and primary beneficiaries seek advice (1)

My will has been drafted to maximise tax effectiveness and asset protection for my beneficiaries. I recommend that before my executors decide how to administer my estate, and before a primary beneficiary makes a decision on the most appropriate way to take her or his inheritance, my executors, trustees and each primary beneficiary investigate the benefits offered by this will in the light of appropriate professional legal, taxation and financial advice. At the time of signing this will my financial advisor is CYCLONE FINANCIAL. [page 264]

3. Presumption of survivorship (1)

Where: (a) a person has died and one or more deaths are presumed; or (b) two or more deaths are presumed; and (c) the order of deaths, whether proved or presumed, is uncertain: this will is to be construed as if the deaths, whether proved or presumed, had taken place in the following manner: first, the oldest; then, after a period of one day, the second oldest; then, after a period of one day, the third oldest; and so on to the youngest.

4. Exclusion of requirement that beneficiaries survive me by 30 days (1)

Excluding a requirement that a primary beneficiary attains their respective preservation age, no beneficiary is required to survive me by 30 days or any other period in order to take a benefit under my will, and this statement expresses a contrary intention for the purposes of statutory provisions which impose a general requirement that beneficiaries survive me for 30 days or any other period to inherit.

5. Power to disclaim (1)

A person may disclaim an interest under this will or its trusts in whole or in part.

6. Executors (1) (2)

I appoint as my executor my wife MARY KATE JONES. If my wife refuses or is unable to act as my executor, I appoint as my executor or executors those of my children FRANK EDWARD JONES and ASHLEY KATE JONES who have attained the age of 25 years.

(3)

(4)

(5)

(6)

(7)

If neither FRANK EDWARD JONES nor ASHLEY KATE JONES has attained or attains that age, or if neither is willing or able to act, I appoint as my executor my brother JOHNATHON ROBERT JONES. If my brother refuses or is unable to act as my executor, I appoint as my executor THE PUBLIC TRUSTEE OF THE AUSTRALIAN CAPITAL TERRITORY of 221 London Circuit, Canberra in the Australian Capital Territory. A child of mine being FRANK EDWARD JONES or ASHLEY KATE JONES who attains the age of 25 years after my death and is at that time able and willing to act, is entitled to act jointly with any person who is at that time acting as my executor. ‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1.

7. Identification of primary beneficiaries (1)

In the clause Gift provisions through testamentary trusts my executors must give property to the trustee or trustees of the trust or trusts for [page 265] a certain person or persons, and, unless otherwise specified, I hereby define that person or each of those persons as a ‘primary beneficiary’.

8. Creation of trusts (1)

My executors must set aside out of my estate a fund (the

(2) (3)

(4)

(5)

(6)

initial property fund) to provide the initial property of each trust created in this will. I create a separate discretionary testamentary trust for the primary benefit of each of my primary beneficiaries. The name of each trust must contain the words ‘discretionary testamentary trust for’ and the full name of the particular person for whose primary benefit that trust is created, or such other name as the trustee gives the trust. The initial property of each trust is $10, which must be paid by my executors out of the initial property fund, and the property of the trust includes property transferred to the trustee or trustees under the clause Gift provisions through testamentary trusts. Subject to the clause Primary beneficiary may request special distribution, my executors may in their absolute discretion create a specified number of parallel trusts for a primary beneficiary by splitting the initial property of a trust into as many parts as there are to be parallel trusts for that primary beneficiary. The provisions governing the trusts are set out in the Schedule or Schedules identified for each primary beneficiary respectively in the clause Gift provisions through testamentary trusts.

9. Gift provisions through testamentary trusts (1)

(2)

My executors must give the residue of my estate to the trustee or trustees of the trust for my wife MARY KATE JONES who survives me. Subject to the preceding trust: (a) subject to paragraph (b), (c) and (d), my executors must divide the residue of my estate into twenty (20) equal shares: (i) to give to the trustee or trustees of the trust for my sister-in-law JANICE GALE SMITH – two (2) shares;

(ii) to give to the trustee or trustees of the trust for my son FRANK EDWARD JONES – six (6) shares; (iii) to give to the trustee or trustees of the trust for my daughter ASHLEY KATE JONES – six (6) shares; and (iv) to give to the trustee or trustees of the trust for my son STEPHEN COLBERT JONES – six (6) shares; (b) if any of the said FRANK EDWARD JONES and ASHLEY KATE JONES does not survive me (my ‘predeceased beneficiary’), leaving a child or children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children, and the same principle applies to each predeceased beneficiary who leaves children who survive me; [page 266] (c) if the provisions relating to a share or shares referred to in this subclause lapse or fail because no person attains a vested interest in that share or those shares, then from the time of that lapse or failure that share or those shares is or are added equally to the other share or shares the trusts of which have not then so lapsed or failed, and this provision applies both to the original shares and to shares which have increased as a result of the application of this provision; and (d) if my son STEPHEN COLBERT JONES does not survive me, no child or further issue of his is to take any share of the benefit that he would have taken had he survived me.

(3) (a) Where in this clause I have given gifts and allocations of my estate to the trustee or trustees of a trust for my son STEPHEN COLBERT JONES, my executors must deal with those gifts and allocations in accordance with Schedule 2; and (b) Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a beneficiary other than STEPHEN COLBERT JONES, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

10. Executor may allocate part or all of the property I have provided for my son STEPHEN COLBERT JONES to a Special Disability Trust (1)

My executors may allocate part or all of the property that I have provided for my son STEPHEN COLBERT JONES to one or both of the following, in the proportions my executors in their absolute discretion think fit: (a) The trustee or trustees of the Schedule 2 trust created for the primary benefit of STEPHEN COLBERT JONES; or (b) A special disability trust created for the primary benefit of STEPHEN COLBERT JONES in accordance with Pt 3.18A of the Social Security Act 1991 (Cth), or any equivalent legislative provision at the date of my death.

11. Primary beneficiary may request special distribution (1)

(2)

A primary beneficiary of a Schedule 1 trust who is not an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer may request that my executors exercise their powers in subclause (2). My executors may in their absolute discretion: (a) set up a specified number of parallel trusts for a primary beneficiary; and/or

(b) transfer some or all of a primary beneficiary’s share of my estate: (i) to the primary beneficiary absolutely provided they are not an Ineligible Officebearer; (ii) to the trustee or trustees of an existing trust of which the primary beneficiary is the trustee or appointor; or [page 267]

(3)

(iii) in different proportions between the parallel trusts created for the benefit of that primary beneficiary. If after the exercise of the discretion given to my executors in subclause (2) a balance of the allocated share of a primary beneficiary remains, my executors must transfer that balance equally to the trustee or trustees of the trusts created for that primary beneficiary.

12. Schedules in my will (1)

My will contains the following Schedules: (a) Schedule 1 — Discretionary Testamentary Trust provisions; (b) Schedule 2 — Trust for my son STEPHEN COLBERT JONES; and (c) Schedule of General Provisions.

SCHEDULE 1: DISCRETIONARY TESTAMENTARY TRUST PROVISIONS 13. Application of the provisions in Schedule 1 (1)

In Schedule 1, ‘the trust’ means each trust governed by Schedule 1.

(2) (3)

The provisions in Schedule 1 do not apply to any other trustee other than a Schedule 1 trustee. The provisions in Schedule 1 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

14. The property of the trust (1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

15. Beneficiaries of the trust (1) (2)

(3)

The beneficiaries of the trust are the income beneficiaries and the capital beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. A beneficiary that meets the criteria in subclause (2)(b) or (c) of the clause Automatic disqualification of an Ineligible Officebearer is excluded as a beneficiary of the trust while that beneficiary meets that or those criteria.

Income beneficiaries (4)

The income beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter:

(a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) a spouse of the primary beneficiary; [page 268] (d) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (e) a spouse and the children of any of the persons specified in the preceding paragraphs; (f) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (g) a charity or charitable entity; and (h) an entity recognised as a deductible gift recipient entity under Australian taxation law. Capital beneficiaries (5)

The capital beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) the issue of a grandparent of the primary beneficiary; (d) the spouse of the primary beneficiary if the primary beneficiary dies leaving no surviving issue; (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding

paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law.

16. The purposes of the trust Primary beneficiary is over the preservation age (1)

Where the primary beneficiary is over the preservation age, the purposes of the trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes.

Primary beneficiary is under the preservation age (2)

Where the primary beneficiary is under the preservation age, I express the wish (without limiting the discretion of the trustee) that the trustee preserve the capital of the fund and, as far as seems to them reasonable, limit its application to the primary beneficiary’s: (a) medical and dental treatment; (b) education (including vocational training); (c) reasonable maintenance and welfare; and (d) such other expenses which the trustee considers appropriate. [page 269]

Trustee has absolute discretion (3)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary.

17. The Appointor Powers of the Appointor (1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor.

Eligibility and appointment of the Appointor (2) (3)

(4)

(5)

Subject to subclause (3), the primary beneficiary is the first Appointor. If a person (including an executor) is or becomes an Ineligible Officebearer, that person is disqualified and does not become or ceases to be an Appointor. A person who is or would otherwise be entitled to be an Appointor, but is an Ineligible Officebearer because he or she is under the preservation age, becomes Appointor on reaching the preservation age if: (a) that person is able and willing to accept the office; and (b) that person is not otherwise an Ineligible Officebearer. If the person becomes Appointor under the preceding subclause, any other person who is an Appointor at that time ceases to be an Appointor.

(6) (7)

(8)

If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) those of my executors who are not Ineligible Officebearers are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor and is not an Ineligible Officebearer, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (9)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor. [page 270]

(10) If a sole Appointor who is the primary beneficiary of the trust dies without appointing a new Appointor in her or his place: (a) if that Appointor is survived by a child or children, the child or children of that person is or are the Appointor; or (b) if that Appointor is not survived by a child or children,

the legal personal representative or representatives of the Appointor is or are the Appointor.

18. The Protector Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3) (4)

(5)

(6)

Subject to subclause (4), the primary beneficiary is the first Protector. If a person who would be or is a Protector: (a) is a minor; or (b) lacks or loses capacity — that person is disqualified from being a Protector, and the guardian or legal representative of the person is the Protector, but only until such time as that person attains majority or is no longer subject to guardianship, at which time the person is the Protector. A person who is or has been disqualified from being a Protector and who is no longer disqualified and is able and willing to accept the office, becomes the Protector, and any other person who is at that time a Protector ceases to be a Protector. If there is no Protector: (a) my executors are the Protector; or (b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed.

(7)

A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (8)

(9)

A Protector (including joint Protectors) may, by unregistered deed or will, subject to any terms which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. A Protector may resign. [page 271]

(10) If a sole Protector who is the primary beneficiary of the trust dies without appointing a new Protector in her or his place: (a) if that Protector is survived by a child or children, the child or children of that person is or are the Protector; or (b) if that Protector is not survived by a child or children, the legal personal representative or representatives of the Protector is or are the Protector.

19. Trustee of the trust: definition and appointment (1) (2)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional trustee or one or more of my executors.

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors (excluding an executor who is an Ineligible Officebearer) must nominate a trustee or trustees.

Eligibility to be the trustee (5)

(6)

(7)

The eligibility of a person to be a trustee is subject to the clause Automatic disqualification of an Ineligible Officebearer. Where the primary beneficiary reaches the preservation age (and is not otherwise an Ineligible Officebearer), the primary beneficiary is eligible to be appointed as the trustee or one of the trustees. A person who is not the primary beneficiary is not ineligible to be a trustee merely because he or she is under the preservation age.

20. Automatic disqualification of an Ineligible Officebearer Ineligible Officebearers (1)

Each of the following is an Ineligible Officebearer: (a) the primary beneficiary, a spouse of a primary beneficiary or the issue of a primary beneficiary who meets one or more of the criteria in subclause (2); or (b) a company, if an individual specified in the preceding paragraph holds a controlling interest in the company and meets one or more of the criteria in subclause (2).

Criteria for disqualification

(2)

The criteria referred to in subclause (1) are that the individual: (a) is the primary beneficiary and has not reached the preservation age; or (b) is married or has been living with a partner in a marriagelike relationship (however described) with a person of the same sex or different sex and begins to live separately and apart from her or his spouse or partner in a manner that constitutes a separation for the purposes of a law of the Commonwealth or a law of a state or territory; or [page 272] (c) is unable to pay debts as and when they fall due, or is or becomes an undischarged bankrupt, is in liquidation, receivership or administration, or is unable in law to act or continue to act as trustee; or (d) is the subject of a declaration by a board or tribunal governing the appointment of guardians and administrators under Commonwealth, state or territory law, made on the grounds of disability, infirmity or lack of legal capacity; or (e) has been assessed by two health care professionals including a treating doctor who attest that the person cannot make decisions in relation to the person’s affairs or does not understand the nature or effect of the decisions the person makes in relation to the person’s affairs.

Automatic disqualification of an Ineligible Officebearer (3)

Where a person is or becomes an Ineligible Officebearer: (a) that person may not be appointed as trustee;

(b) if that person is or has been appointed a trustee, that person is automatically removed as trustee and her, his or its rights, powers and duties as trustee are terminated; and (c) if that person is or has been appointed as an Appointor, that person is automatically removed as an Appointor and her, his or its rights, powers and duties as Appointor are terminated. Effect of becoming or ceasing to be an Ineligible Officebearer (4)

(5)

Removal of a trustee or an Appointor under this clause has no effect on actions or commitments that the trustee or the Appointor has already taken or made. A person who meets the definition of an Ineligible Officebearer is not thereby rendered ineligible to be and to perform the functions of executor or Protector.

21. Powers of the trustee (1)

(2)

The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and

(c)

refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more or all of the income and capital beneficiaries. [page 273]

Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the capital beneficiaries; (b) alter the provisions of the trust, including adding, varying or excluding a beneficiary but not so as to alter the preservation age or the capital beneficiaries; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); (d) carry on any trade or business; (e) alter or revoke by deed a previous deed binding the future operations of the trust; (f) exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; (g) if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; (h) make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate;

(i) make superannuation contributions on behalf of a beneficiary; (j) where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; (k) appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and (l) end the trust, and if they do so the trustees must ensure that the trust fund vests in the capital beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector. How the trustee obtains written consent of the Protector (5)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action [page 274] but has not done so, the trustee may take the action, in

(6)

accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

22. Investment of the fund (1)

(2)

(3)

Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. Subject to the subclause (3), the trustee is under no duty to comply with any provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (ACT) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they must act in accordance with the provisions specified in the preceding subclause.

23. Ending of the trust and vesting of the balance (1)

(2)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; or (c) when the primary beneficiary dies before attaining the preservation age, without being survived by a child or children. When the trust ends: (a) If the trust ends because the primary beneficiary dies before attaining the preservation age without being survived by a child or children, the balance becomes part of my estate and is distributed as if the primary beneficiary died before me; or (b) If the trust ends for any other reason, the balance of the

trust fund vests in the capital beneficiary or beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 1

SCHEDULE 2 — TRUST FOR MY SON STEPHEN COLBERT JONES 24. Application of the provisions in Schedule 2 (1) (2) (3)

In Schedule 2, ‘the trust’ means each trust governed by Schedule 2. The provisions in Schedule 2 do not apply to any trustee other than a Schedule 2 trustee. The provisions in Schedule 2 prevail over any inconsistent provisions in the clause General powers of my executors and trustees. [page 275]

25. The property of the Schedule 2 trust (1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

26. The beneficiaries of the trust

(1) (2)

(3)

The beneficiaries of the trust are the primary beneficiary STEPHEN COLBERT JONES and the potential beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. The potential beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the issue of the primary beneficiary; (b) a spouse of the primary beneficiary; (c) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (d) a spouse and the children of any of the persons specified in the preceding paragraphs; (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law.

27. The purposes of the trust Primary purposes of the trust (1)

(2)

The primary purpose of the trust is to directly or indirectly provide for the ongoing care and maintenance of STEPHEN COLBERT JONES for his lifetime and to give to the trustee the widest possible discretion in carrying out this purpose. I express the wish that the trustee use her or his powers to ensure that the primary beneficiary is provided at all times

with pleasant, comfortable and appropriate accommodation. Secondary purposes of the trust (3)

Other purposes for which the trustee holds the fund on trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or beneficiaries; and to give to the trustee the widest possible [page 276] discretion in using the powers of the trustee in carrying out those purposes.

Trustee has absolute discretion (4)

(5)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary. I enclose with this will an expression of my wishes for the administration of the trust. I express the wish that in carrying out the purposes of the trust, the trustee respects those wishes, and do all that is reasonably appropriate to give effect to them; however, I note that this document is not part of my will and that it is not testamentary. It expresses my wishes only, and creates no legal obligation.

28. The Appointor Powers of the Appointor

(1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor.

Eligibility and appointment of the Appointor (2) (3) (4)

(5)

My executors are the first Appointors. If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) my remaining executors are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (6)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor. [page 277]

29. The Protector Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3) (4)

(5) (6)

Subject to subclause (4), the primary beneficiary’s guardian or legal personal representative is the first Protector. If a person who would be or is a Protector: (a) resigns or dies without appointing a new Protector in her or his place; (b) is or becomes under a legal disability; (c) lacks or loses capacity; or (d) is unable or unwilling to be Protector — my executors are the Protector until such time as a guardian or legal representative is appointed for the primary beneficiary and is willing and able to act, at which time that person will be the sole Protector. If a Protector, not being a sole Protector, ceases to be a Protector, the remaining Protector is the Protector. If there is no Protector: (a) my executors are the Protectors until such time as a guardian or legal representative is appointed for the primary beneficiary and is willing and able to act, at which time that person will be the sole Protector; or (b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed.

(7)

A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (8)

(9)

A Protector (including joint Protectors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. A Protector may resign.

30. Trustee of the trust: definition and appointment (1) (2)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional trustee or one or more of my executors. [page 278]

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors must nominate a trustee or trustees.

31. Powers of the trustee (1)

The provisions in this clause which require the Protector’s

(2)

consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and (c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more of the primary beneficiary or potential beneficiaries.

Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the primary beneficiary or potential beneficiaries; (b) alter the provisions of the trust but not so as to alter beneficiaries of the trust; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); (d) carry on any trade or business; (e) alter or revoke by deed a previous deed binding the

(f)

(g)

(h) (i)

future operations of the trust; exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate; make superannuation contributions on behalf of a beneficiary; [page 279]

(5)

(j) where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; (k) appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and (l) end the trust, and if they do so the trustees must ensure that the trust fund vests in the beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector. I express the wish that the trustee use her or his powers to ensure that the primary beneficiary is provided at all times with pleasant, comfortable and appropriate accommodation and, in pursuance of this, with the consent of the Protector, the trustee may in her or his absolute discretion:

(a) acquire (either by purchase or lease) appropriate real property for occupation, use or enjoyment by the primary beneficiary alone or with some other person or persons; (b) grant to the primary beneficiary the right to occupy, use or enjoy real property, whether acquired for the purposes or not, alone or with some other person or persons; or (c) arrange comfortable, pleasant and appropriate accommodation for the primary beneficiary in a residential or retirement complex, and for the removal of doubt, I emphasise that the trustee may in the trustee’s discretion refuse to give this or any right or benefit to the primary beneficiary. How the trustee obtains written consent of the Protector (6)

(7)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

32. Investment of the fund (1)

(2)

Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. Subject to the subclause (3), the trustee is under a duty to comply with the provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (ACT) (or any [page 280]

(3)

equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they are exempted from the provisions specified in the preceding subclause.

33. Ending of the trust and vesting of the balance (1)

(2)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; (c) when the primary beneficiary dies; or (d) when the court so orders, acting on its opinion that the primary purpose of the trust can no longer be substantially or effectively carried out or assisted by the application of the funds from the trust. When the trust ends: (a) if the trust ends because the primary beneficiary dies, the balance of the trust becomes part of my estate and is distributed as if the primary beneficiary died before me leaving no children; or (b) if the trust ends for any other reason, the balance of the

trust fund vests in the potential beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 2

SCHEDULE OF GENERAL PROVISIONS 34. Application of this Schedule (1)

This Schedule applies in any event and applies to my executors and any trust created by my will.

35. Streaming of income and capital (1)

(2)

My trustees or my executor, as the case may be, may treat a capital receipt as if it were income for the purposes of determining trust income in a particular income year; and in the absence of such a determination ‘trust income’, ‘income of the trust’ and ‘income of the trust estate’ have the same meaning as ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (or a provision of similar import). My executors and trustees may as they see fit recognise, distinguish, separate, determine and allocate the following matters and create in the accounting records separate or appropriate accounts and ledgers to reflect those actions: (a) the elements of trust income (including but not limited to capital gains and franked dividends) according to type and source; (b) expenses and losses; (c) expenses related to each respective type of trust income including but not limited to: (i) in relation to capital gains, available capital losses; and [page 281]

(3)

(4)

(ii) in relation to franked dividends, allowable or available deductions (including ‘relevant expenses’), credits and rebates. Executors or trustees who are making a distribution to or for a beneficiary may as they see fit do so by paying, applying, setting aside or advancing income or capital from any particular category or sources that they have recorded in the trust accounts. Where executors or trustees set aside income or capital in accordance with this clause, that income or capital does not form part of the trust fund, but is, upon being set aside, held on separate temporary trust by those executors or trustees, as the case may be, with power to invest, apply or deal with that property or income in their discretion until it is paid to or applied for the benefit of the beneficiary.

36. Executors and trustees: conflicts of interest (1)

No person, being one of my executors or trustees or a director or shareholder of a corporate executor or trustee, is required to obtain independent legal advice or an order of court before exercising a power or discretion conferred on her or him by this will or by law, or is precluded from exercising the power or discretion, merely because the person exercising the power or discretion: (a) has or may have a direct, indirect or personal interest, whether as shareholder, director, member or partner of any company or partnership, or otherwise, in the manner or result of exercising such power or discretion; or (b) may benefit directly or indirectly as a result of the exercise of any such power or discretion; or (c) is the trustee or controller of a superannuation fund of which I hold an interest in; or (d) is the sole executor or trustee.

37. Power of my executors in relation to superannuation lump sum death benefit (1)

If my estate receives a benefit that is a superannuation lump sum death benefit within the meaning of s 307-5 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import), and one or more of the primary beneficiaries of my will meets the definition of being my death benefits dependant within the meaning of s 320-195 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import): (a) I express the wish that, as far as possible, the superannuation lump sum death benefit be used to satisfy the share or shares of my estate which I intend for the benefit of that primary beneficiary or those primary beneficiaries; (b) where the benefits would otherwise have been held in a discretionary testamentary trust for the primary beneficiary: (i) my executors are empowered to hold all or part of the superannuation lump sum death benefit in a separate superannuation proceeds will trust for that primary beneficiary; and [page 282] (ii) the terms of that trust will be the terms the discretionary testamentary trust would have had except that the potential beneficiaries of the superannuation proceeds will trust are limited to those of the capital beneficiaries of the discretionary testamentary trust who are my death benefits dependants.

38. General powers of my executors and trustees (1)

My executors and, subject to the clause Powers of the trustee, my trustees may in their discretion: (a) exercise any powers given to them by law; (b) exercise the powers of a trustee for sale of any property in my estate, and my executors and my trustees may without being liable for any loss (including liability for taxation on capital gain) caused by so doing: (i) postpone sale; (ii) retain in its form of investment at my death any part of my estate; or (iii) sell, by public auction or private sale, and for that purpose may extend credit; (c) determine whether receipts or outgoings are capital or income, or partly capital or income, so as to bind the beneficiaries, even though the receipts are from a company or corporation that has made a decision on the matter; (d) apply for the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary the whole or any part of the capital and income of that part of my estate to which that beneficiary is entitled or may in future be entitled, and for those purposes: (i) make a payment or payments to a minor beneficiary’s parent or guardian or a person with whom the minor beneficiary resides; and (ii) accept the receipt of that payee as an absolute discharge; (e) make loans to beneficiaries on whatever terms they deem appropriate; (f) acquire or lease property for occupation, use or enjoyment by a beneficiary;

(g) do any one or more of the following involving shares or securities: (i) concur in any scheme or arrangement involving or affecting the shares; (ii) exercise any voting power; or (iii) apply for and accept directorship of any corporation in which my estate is or may become interested or concerned; (h) apply for, accept or take up securities of any description or denomination, bonus shares or other rights or benefits made available by a corporation in which my estate is or may become interested or concerned; (i) borrow money, either with or without giving security, and enter into any mortgage, bill of sale, lien or security over any part of my [page 283]

(j)

(k) (l) (m)

estate, and such money borrowed is to be treated as part of my estate or trust property, as the case may be; lease any part of the real or personal property in my estate: (i) for the periods and upon and subject to the covenants and conditions which my executors or my trustees, as the case may be, think fit; and (ii) either with or without provisions for renewal or otherwise; accept surrenders of leases or tenancies of my estate or any part of it; maintain, repair, improve, develop, alter, renovate, pull down, erect or re-erect any part of my estate; maintain, take out or participate in:

(n)

(o)

(p)

(q)

(i) an insurance policy against risks affecting my estate; (ii) a life insurance policy in respect of any person; (iii) a policy or contract of health or accident insurance or benefit in respect of any person; (iv) a friendly society, trade union or association of employees benefit scheme in respect of any person; (v) a superannuation or pension scheme in relation to any person; and (vi) a funeral benefit or payment scheme in relation to any person; without the consent of any beneficiary, partition or appropriate any part of the real or personal property of the estate in or towards the satisfaction of a legacy or a share of any person or persons in my estate, and in doing so the value of any such property is that agreed to by those of my beneficiaries affected or, if my executors or my trustees, as the case may be, are satisfied that no value can be agreed in this way, the value is that determined by an independent valuer appointed by my executors for that purpose; determine (in the event of my executors or my trustees, as the case may be, disposing of or being deemed to have disposed of property) from which part or parts of the capital or income of my estate they will pay any income tax liability flowing from the disposal or deemed disposal; and for that purpose they may determine what is capital and what is income, but I express the wish that, if it seems appropriate for my executors or my trustees, as the case may be, to do so, that the proceeds of such a disposal be used in the first instance; carry on, either alone or in partnership with any person or persons, the whole or part of any trade or business in which I am engaged or interested at my death; to the extent allowed by law, delegate a power or

(2)

function, and execute a power of attorney or other instrument to make the delegation; and (r) appoint and empower nominees to act and hold property for my executors and trustees. Even though a person is or becomes or has been an executor or trustee, that person may buy or appropriate to herself or himself at a fair value any part of my estate or any trust fund deriving from it (either at public [page 284]

(3)

(4)

auction or by private contract or treaty) on the same terms my executors may grant to a purchaser from my estate. I express the wish that my executors and my trustees: (a) make available to those of my beneficiaries who inherit or are interested in any property all documents relevant to that property or the assessment of tax relating to that property; and (b) exercise their powers in such a way (subject to their discretion) that any person who cares for my child or children (whether as legal guardian or otherwise) is compensated for any costs they incur in providing that care. My executors and my trustees acting in good faith: (a) may appoint accountants, administrators or advisors as my trustees believe appropriate for the responsible operation of the fund, and pay or recover the reasonable costs of these services from the fund; (b) are entitled to indemnity and reimbursement out of my estate or the trust fund (as the case may be) for their expenses, costs and liabilities of every kind arising out of the administration of, and litigation relating to, my estate and its trusts; and

(5)

(c) may apply estate or trust property to satisfy their indemnity and secure their reimbursement. The indemnity under the preceding subclause: (a) is limited to the assets of my estate or the trust fund (as the case may be); and (b) does not allow my executors or my trustees to recover any loss or reimbursement for any liability from any beneficiary.

39. Executors’ fees and commission (1)

Any of my executors or trustees who practises a profession (and I note that this clause does not apply to those of the trustees whose remuneration is provided for in the clause Powers of the trustee): (a) is entitled to be paid out of the fund all usual and reasonable professional fees for work done by that executor or trustee or her or his firm (as executor, trustee or both) on the same basis as if he or she were not one of my executors but employed to act on behalf of my executors; and (b) may in addition apply to the court for commission for her or his pains and trouble.

40. Unanimity (1)

Unless otherwise specified: (a) joint legal representatives, including my executors, must act unanimously; (b) joint guardians of a person must act unanimously; and (c) in any particular trust: (i) joint trustees must act unanimously; (ii) joint Appointors must act unanimously; and (iii) joint Protectors must act unanimously.

[page 285]

41. Interpretation (1)

Definitions (a) ‘children’: (i) means biological or adopted children; and (ii) includes a child; (b) ‘guardian’ includes guardians; (c) ‘Ineligible Officebearer’ means a person who meets the criteria of being an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer; (d) ‘legal representatives’ includes legal personal representative; (e) ‘my children’ means FRANK EDWARD JONES, ASHLEY KATE JONES and STEPHEN COLBERT JONES; (f) ‘my estate’ includes my residuary estate if it is appropriate in the context, for instance if legacies or devises have been given; (g) ‘my wife’ means MARY KATE JONES; (h) ‘parallel trusts’ means separate discretionary testamentary trusts set up for a particular primary beneficiary; (i) ‘preservation age’ means the age of 25 years; (j) ‘spouse’ (and ‘spouses’ has a corresponding meaning) in relation to a person means: (i) the husband or wife of the person at any time; and (ii) the partner of a person, of the same sex or different sex (however described), with whom the person has been living at any time in a marriage-like relationship or domestic relationship; but (iii) does not include the former husband, wife or partner of a person where there has been a court order or

(2)

binding financial agreement between the parties arising from the dissolution of the relationship; (k) ‘written notice’ means notification in writing, receipt of which has been acknowledged in writing by all the persons to whom the notice is to be given. The headings to clauses in this document are for the assistance of the reader only, and do not form a substantive part of the document.

DATED The testator MICHAEL DAVID JONES signed in the presence of both of us being present at the same time, and we attested his signature in the presence of him and of each other. Testator Witness 1: ……………… Witness 2: ……………… Full name: Full name: Occupation: Occupation: Address: Address:

[page 286]

EXAMPLE 3 Hypothetical facts 10.14 The specific facts for Example 3 are: • The testator’s name is STEVEN EARLE. • Address and Occupation: 10 Copperhead Road, Newtown in the State of New South Wales, Musician. • Testator is married to JANE JUNE EARLE. • Testator has four children: TRAVIS EARLE aged 40, his son from his previous marriage; JUSTIN EARLE aged 30, his son

from his present marriage with JANE. JUSTIN has been a drug addict for over five years; KAREN EARLE aged 28, his daughter, also from his present marriage; and CANDICE EARLE aged 25, his daughter, also from his present marriage.

Testator’s instructions 10.15 The testator’s instructions are as follows: If Jane survives him: Executor: JANE, and if she is unable to act, then he would like to appoint his children KAREN and CANDICE to be his executors; Legacies: He wishes to give his guitar collection to his brother SANDY EARLE to take effect in any event; and Residue: if JANE survives him, all to her through a discretionary testamentary trust. If Jane does not survive him: Legacy: $100,000 to TRAVIS EARLE through a discretionary testamentary trust; Residue: estate equally between his children JUSTIN, KAREN and CANDICE through discretionary testamentary trusts; and TRAVIS EARLE is to be excluded from the residue. Preservation age: 25 for all except JUSTIN. Preservation age for JUSTIN: 50. The testator’s family is a blended family. However, the testator’s requirements, and hence the will structure, are relatively straightforward. It has therefore been decided not to use divisions. 10.16 The will for Example 3 is set out below. THIS WILL is made by me, STEVEN EARLE of 10 Copperhead Road, Newtown in the State of New South Wales, Musician.

1. Revocation

(1)

I revoke all previous testamentary acts.

2. Recommendation that executors, trustees and primary beneficiaries seek advice (1)

My will has been drafted to maximise tax effectiveness and asset protection for my beneficiaries. I recommend that before my executors [page 287] decide how to administer my estate, and before a primary beneficiary makes a decision on the most appropriate way to take her or his inheritance, my executors, trustees and each primary beneficiary investigate the benefits offered by this will in the light of appropriate professional legal, taxation and financial advice.

3. Presumption of survivorship (1)

Where: (a) a person has died and one or more deaths are presumed; or (b) two or more deaths are presumed; and (c) the order of deaths, whether proved or presumed, is uncertain, this will is to be construed as if the deaths, whether proved or presumed, had taken place in the following manner: first, the oldest; then, after a period of one day, the second oldest; then, after a period of one day, the third oldest; and so on to the youngest.

4. Exclusion of requirement that beneficiaries survive me by 30 days

(1)

Excluding a requirement that a primary beneficiary attains their respective preservation age, no beneficiary is required to survive me by 30 days or any other period in order to take a benefit under my will, and this statement expresses a contrary intention for the purposes of statutory provisions which impose a general requirement that beneficiaries survive me for 30 days or any other period to inherit.

5. Power to disclaim (1)

A person may disclaim an interest under this will or its trusts in whole or in part.

6. Executors (1) (2)

(3)

(4)

I appoint as my executor my wife JANE JUNE EARLE. If my wife refuses or is unable to act as my executor, I appoint as my executors my daughters KAREN EARLE and CANDICE EARLE. ‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1.

7. Absolute gifts (1)

I give my guitar collection to my brother SANDY EARLE who survives me.

8. Identification of primary beneficiaries (1)

In the clause Gift provisions through testamentary trusts, my executors must give property to the trustee or trustees of the trust or trusts for a certain person or persons, and, unless otherwise specified, I hereby define that person or each of those persons as a ‘primary beneficiary’.

[page 288]

9. Creation of trusts (1)

(2) (3)

(4)

(5)

(6)

My executors must set aside out of my estate a fund (the initial property fund) to provide the initial property of each trust created in this will. I create a separate discretionary testamentary trust for the primary benefit of each of my primary beneficiaries. The name of each trust must contain the words ‘discretionary testamentary trust for’ and the full name of the particular person for whose primary benefit that trust is created, or such other name as the trustee gives the trust. The initial property of each trust is $10, which must be paid by my executors out of the initial property fund, and the property of the trust includes property transferred to the trustee or trustees under the clause Gift provisions through testamentary trusts. Subject to the clause Primary beneficiary may request special distribution, my executors may in their absolute discretion create a specified number of parallel trusts for a primary beneficiary by splitting the initial property of a trust into as many parts as there are to be parallel trusts for that primary beneficiary. The provisions governing the trusts are set out in the Schedule or Schedules identified for each primary beneficiary respectively in the clause Gift provisions through testamentary trusts.

10. Gift provisions through testamentary trusts (1)

My executors must give the residue of my estate to the trustee or trustees of the trust for my wife JANE JUNE EARLE who

(2)

(3)

survives me. If my wife JANE JUNE EARLE fails to survive me: (a) my executors must give the sum of $100,000 to the trustee or trustees of the trust for my son TRAVIS EARLE who survives me; and (b) (i) subject to paragraph (ii) and (iii), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts created for each of my children JUSTIN EARLE, KAREN EARLE and CANDICE EARLE who survive me; (ii) if a child of mine does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary, and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me; and (iii) neither my son TRAVIS EARLE nor any of his issue are to share in the residue of my estate under paragraph (b). Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1. [page 289]

11. Primary beneficiary may request special distribution (1)

A primary beneficiary who is not an Ineligible Officebearer

(2)

(3)

under the clause Automatic disqualification of an Ineligible Officebearer may request that my executors exercise their powers in subclause (2). My executors may in their absolute discretion: (a) set up a specified number of parallel trusts for a primary beneficiary; and/or (b) transfer some or all of a primary beneficiary’s share of my estate: (i) to the primary beneficiary absolutely provided they are not an Ineligible Officebearer; (ii) to the trustee or trustees of an existing trust of which the primary beneficiary is the trustee or appointor; or (iii) in different proportions between the parallel trusts created for the benefit of that primary beneficiary. If after the exercise of the discretion given to my executors in subclause (2) a balance of the allocated share of a primary beneficiary remains, my executors must transfer that balance equally to the trustee or trustees of the trusts created for that primary beneficiary.

12. Schedules in my will (1)

My will contains the following Schedules: (a) Schedule 1 — Discretionary Testamentary provisions; and (b) Schedule of General Provisions.

Trust

SCHEDULE 1: DISCRETIONARY TESTAMENTARY TRUST PROVISIONS 13. Application of the provisions in Schedule 1 (1)

In Schedule 1, ‘the trust’ means each trust governed by Schedule 1.

(2) (3)

The provisions in Schedule 1 do not apply to any trustee other than a Schedule 1 trustee. The provisions in Schedule 1 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

14. The property of the trust (1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

15. Beneficiaries of the trust (1)

The beneficiaries of the trust are the income beneficiaries and the capital beneficiaries. [page 290]

(2)

(3)

To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. A beneficiary that meets the criteria in subclause (2)(b) or (c) of the clause Automatic disqualification of an Ineligible Officebearer is excluded as a beneficiary of the trust while that beneficiary meets that or those criteria.

Income beneficiaries (4)

The income beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) a spouse of the primary beneficiary; (d) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (e) a spouse and the children of any of the persons specified in the preceding paragraphs; (f) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (g) a charity or charitable entity; and (h) an entity recognised as a deductible gift recipient entity under Australian taxation law.

Capital beneficiaries (5)

The capital beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) the issue of a grandparent of the primary beneficiary; (d) the spouse of the primary beneficiary if the primary beneficiary dies leaving no surviving issue; (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding

paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law.

16. The purposes of the trust Primary beneficiary is over the preservation age (1)

Where the primary beneficiary is over the preservation age, the purposes of the trust are directly or indirectly to provide for or promote [page 291] the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes.

Primary beneficiary is under the preservation age (2)

Where the primary beneficiary is under the preservation age, I express the wish (without limiting the discretion of the trustee) that the trustee preserve the capital of the fund and, as far as seems to them reasonable, limit its application to the primary beneficiary’s: (a) medical and dental treatment; (b) education (including vocational training); (c) reasonable maintenance and welfare; and (d) such other expenses which the trustee considers

appropriate. Trustee has absolute discretion (3)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary.

17. The Appointor Powers of the Appointor (1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor.

Eligibility and appointment of the Appointor (2) (3)

(4)

(5)

Subject to subclause (3), the primary beneficiary is the first Appointor. If a person (including an executor) is or becomes an Ineligible Officebearer, that person is disqualified and does not become or ceases to be an Appointor. A person who is or would otherwise be entitled to be an Appointor, but is an Ineligible Officebearer because he or she is under the preservation age, becomes Appointor on reaching the preservation age if: (a) that person is able and willing to accept the office; and (b) that person is not otherwise an Ineligible Officebearer. If the person becomes Appointor under the preceding

(6) (7)

subclause, any other person who is an Appointor at that time ceases to be an Appointor. If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) those of my executors who are not Ineligible Officebearers are or become Appointors; or [page 292]

(8)

(b) if I have no executor who is willing and able to be an Appointor and is not an Ineligible Officebearer, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (9)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor. (10) If a sole Appointor who is the primary beneficiary of the trust dies without appointing a new Appointor in her or his place: (a) if that Appointor is survived by a child or children, the child or children of that person is or are the Appointor;

or (b) if that Appointor is not survived by a child or children, the legal personal representative or representatives of the Appointor is the Appointor.

18. The Protector Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3) (4)

(5)

(6)

Subject to subclause (4), the primary beneficiary is the first Protector. If a person who would be or is a Protector: (a) is a minor; or (b) lacks or loses capacity — that person is disqualified from being a Protector, and the guardian or legal representative of the person is the Protector, but only until such time as that person attains majority or is no longer subject to guardianship, at which time the person is Protector. A person who is or has been disqualified from being a Protector and who is no longer disqualified and is able and willing to accept the office, becomes the Protector, and any other person who is at that time a Protector ceases to be a Protector. If there is no Protector: (a) my executors are the Protector; or (b) if I have no executor who is willing and able to be a

Protector, application may be made to the court for a Protector to be appointed. [page 293] (7)

A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (8)

A Protector (including joint Protectors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. (9) A Protector may resign. (10) If a sole Protector who is the primary beneficiary of the trust dies without appointing a new Protector in her or his place: (a) if that Protector is survived by a child or children, the child or children of that person is or are the Protector; or (b) if that Protector is not survived by a child or children, the legal personal representative or representatives of the Protector is or are the Protector.

19. Trustee of the trust: definition and appointment (1) (2)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional

trustee or one or more of my executors. Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors (excluding an executor who is an Ineligible Officebearer) must nominate a trustee or trustees.

Eligibility to be the trustee (5)

(6)

(7)

The eligibility of a person to be a trustee is subject to the clause Automatic disqualification of an Ineligible Officebearer. Where the primary beneficiary reaches the preservation age (and is not otherwise an Ineligible Officebearer), the primary beneficiary is eligible to be appointed as the trustee or one of the trustees. A person who is not the primary beneficiary is not ineligible to be a trustee merely because he or she is under the preservation age.

20. Automatic disqualification of an Ineligible Officebearer Ineligible Officebearers (1)

Each of the following is an Ineligible Officebearer: (a) the primary beneficiary, a spouse of a primary beneficiary or the issue of a primary beneficiary who meets one or more of the criteria in subclause (2); or [page 294]

(b) a company, if an individual specified in the preceding paragraph holds a controlling interest in the company and meets one or more of the criteria in subclause (2). Criteria for disqualification (2)

The criteria referred to in subclause (1) are that the individual: (a) is the primary beneficiary and has not reached the preservation age; or (b) is married or has been living with a partner in a marriagelike relationship (however described) with a person of the same sex or different sex and begins to live separately and apart from her or his spouse or partner in a manner that constitutes a separation for the purposes of a law of the Commonwealth or a law of a state or territory; or (c) is unable to pay debts as and when they fall due, or is or becomes an undischarged bankrupt, is in liquidation, receivership or administration, or is unable in law to act or continue to act as trustee; or (d) is the subject of a declaration by a board or tribunal governing the appointment of guardians and administrators under Commonwealth, state or territory law, made on the grounds of disability, infirmity or lack of legal capacity; or (e) has been assessed by two health care professionals including a treating doctor who attest that the person cannot make decisions in relation to the person’s affairs or does not understand the nature or effect of the decisions the person makes in relation to the person’s affairs.

Automatic disqualification of an Ineligible Officebearer (3)

Where a person is or becomes an Ineligible Officebearer:

(a) that person may not be appointed as trustee; (b) if that person is or has been appointed a trustee, that person is automatically removed as trustee and her, his or its rights, powers and duties as trustee are terminated; and (c) if that person is or has been appointed as an Appointor, that person is automatically removed as an Appointor and her, his or its rights, powers and duties as Appointor are terminated. Effect of becoming or ceasing to be an Ineligible Officebearer (4)

(5)

Removal of a trustee or an Appointor under this clause has no effect on actions or commitments that the trustee or the Appointor has already taken or made. A person who meets the definition of an Ineligible Officebearer is not thereby rendered ineligible to be and to perform the functions of executor or Protector.

21. Powers of the trustee (1)

(2)

The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral. [page 295]

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses;

(b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and (c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more or all of the income and capital beneficiaries. Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the capital beneficiaries; (b) alter the provisions of the trust, including adding, varying or excluding a beneficiary but not so as to alter the preservation age or the capital beneficiaries; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); (d) carry on any trade or business; (e) alter or revoke by deed a previous deed binding the future operations of the trust; (f) exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; (g) if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; (h) make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate;

(i) make superannuation contributions on behalf of a beneficiary; (j) where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; (k) appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and (l) end the trust, and if they do so the trustees must ensure that the trust fund vests in the capital beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector. [page 296] How the trustee obtains written consent of the Protector (5)

(6)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw

written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

22. Investment of the fund (1)

(2)

(3)

Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. Subject to the subclause (3), the trustee is under no duty to comply with any provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (NSW) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they must act in accordance with the provisions specified in the preceding subclause.

23. Ending of the trust and vesting of the balance (1)

(2)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; or (c) when the primary beneficiary dies before attaining the preservation age, without being survived by a child or children. When the trust ends: (a) If the trust ends because the primary beneficiary dies before attaining the preservation age without being survived by a child or children, the balance becomes part of my estate and is distributed as if the primary beneficiary died before me; or (b) If the trust ends for any other reason, the balance of the trust fund vests in the capital beneficiary or beneficiaries specified by the trustee acting under the powers given in this will.

End of Schedule 1 [page 297]

SCHEDULE OF GENERAL PROVISIONS 24. Application of this Schedule (1)

This Schedule applies in any event and applies to my executors and any trust created by my will.

25. Streaming of income and capital (1)

(2)

My trustees or my executor, as the case may be, may treat a capital receipt as if it were income for the purposes of determining trust income in a particular income year; and in the absence of such a determination ‘trust income’, ‘income of the trust’ and ‘income of the trust estate’ have the same meaning as ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (or a provision of similar import). My executors and trustees may as they see fit recognise, distinguish, separate, determine and allocate the following matters and create in the accounting records separate or appropriate accounts and ledgers to reflect those actions: (a) the elements of trust income (including but not limited to capital gains and franked dividends) according to type and source; (b) expenses and losses; (c) expenses related to each respective type of trust income including but not limited to: (i) in relation to capital gains, available capital losses; and (ii) in relation to franked dividends, allowable or available deductions (including ‘relevant expenses’),

(3)

(4)

credits and rebates. Executors or trustees who are making a distribution to or for a beneficiary may as they see fit do so by paying, applying, setting aside or advancing income or capital from any particular category or sources that they have recorded in the trust accounts. Where executors or trustees set aside income or capital in accordance with this clause, that income or capital does not form part of the trust fund, but is, upon being set aside, held on separate temporary trust by those executors or trustees, as the case may be, with power to invest, apply or deal with that property or income in their discretion until it is paid to or applied for the benefit of the beneficiary.

26. Executors and trustees: conflicts of interest (1)

No person, being one of my executors or trustees or a director or shareholder of a corporate executor or trustee, is required to obtain independent legal advice or an order of court before exercising a power or discretion conferred on her or him by this will or by law, or is precluded from exercising the power or discretion, merely because the person exercising the power or discretion: (a) has or may have a direct, indirect or personal interest, whether as shareholder, director, member or partner of any company or partnership, or otherwise, in the manner or result of exercising such power or discretion; or [page 298] (b) may benefit directly or indirectly as a result of the exercise of any such power or discretion; or (c) is the trustee or controller of a superannuation fund of

which I hold an interest in; or (d) is the sole executor or trustee.

27. Power of my executors in relation to superannuation lump sum death benefit (1)

If my estate receives a benefit that is a superannuation lump sum death benefit within the meaning of s 307-5 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import), and one or more of the primary beneficiaries of my will meets the definition of being my death benefits dependant within the meaning of s 320-195 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import): (a) I express the wish that, as far as possible, the superannuation lump sum death benefit be used to satisfy the share or shares of my estate which I intend for the benefit of that primary beneficiary or those primary beneficiaries; and (b) where the benefits would otherwise have been held in a discretionary testamentary trust for the primary beneficiary: (i) my executors are empowered to hold all or part of the superannuation lump sum death benefit in a separate superannuation proceeds will trust for that primary beneficiary; and (ii) the terms of that trust will be the terms the discretionary testamentary trust would have had except that the potential beneficiaries of the superannuation proceeds will trust are limited to those of the capital beneficiaries of the discretionary testamentary trust who are my death benefits dependants.

28. General powers of my executors and trustees

(1)

My executors and, subject to the clause Powers of the trustee, my trustees may in their discretion: (a) exercise any powers given to them by law; (b) exercise the powers of a trustee for sale of any property in my estate, and my executors and my trustees may without being liable for any loss (including liability for taxation on capital gain) caused by so doing: (i) postpone sale; (ii) retain in its form of investment at my death any part of my estate; or (iii) sell, by public auction or private sale, and for that purpose may extend credit; (c) determine whether receipts or outgoings are capital or income, or partly capital or income, so as to bind the beneficiaries, even though the receipts are from a company or corporation that has made a decision on the matter; (d) apply for the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary the whole or [page 299] any part of the capital and income of that part of my estate to which that beneficiary is entitled or may in future be entitled, and for those purposes: (i) make a payment or payments to a minor beneficiary’s parent or guardian or a person with whom the minor beneficiary resides; and (ii) accept the receipt of that payee as an absolute discharge; (e) make loans to beneficiaries on whatever terms they deem appropriate;

(f) acquire or lease property for occupation, use or enjoyment by a beneficiary; (g) do any one or more of the following involving shares or securities: (i) concur in any scheme or arrangement involving or affecting the shares; (ii) exercise any voting power; or (iii) apply for and accept directorship of any corporation in which my estate is or may become interested or concerned; (h) apply for, accept or take up securities of any description or denomination, bonus shares or other rights or benefits made available by a corporation in which my estate is or may become interested or concerned; (i) borrow money, either with or without giving security, and enter into any mortgage, bill of sale, lien or security over any part of my estate, and such money borrowed is to be treated as part of my estate or trust property, as the case may be; (j) lease any part of the real or personal property in my estate: (i) for the periods and upon and subject to the covenants and conditions which my executors or my trustees, as the case may be, think fit; and (ii) either with or without provisions for renewal or otherwise; (k) accept surrenders of leases or tenancies of my estate or any part of it; (l) maintain, repair, improve, develop, alter, renovate, pull down, erect or re-erect any part of my estate; (m) maintain, take out or participate in: (i) an insurance policy against risks affecting my estate; (ii) a life insurance policy in respect of any person;

(iii) a policy or contract of health or accident insurance or benefit in respect of any person; (iv) a friendly society, trade union or association of employees benefit scheme in respect of any person; (v) a superannuation or pension scheme in relation to any person; and (vi) a funeral benefit or payment scheme in relation to any person; (n) without the consent of any beneficiary, partition or appropriate any part of the real or personal property of the estate in or towards the satisfaction of a legacy or a share of any person or persons in my estate, and in doing so the value of any such property is that agreed [page 300] to by those of my beneficiaries affected or, if my executors or my trustees, as the case may be, are satisfied that no value can be agreed in this way, the value is that determined by an independent valuer appointed by my executors for that purpose; (o) determine (in the event of my executors or my trustees, as the case may be, disposing of or being deemed to have disposed of property) from which part or parts of the capital or income of my estate they will pay any income tax liability flowing from the disposal or deemed disposal; and for that purpose they may determine what is capital and what is income, but I express the wish that, if it seems appropriate for my executors or my trustees, as the case may be, to do so, that the proceeds of such a disposal be used in the first instance; (p) carry on, either alone or in partnership with any person or persons, the whole or part of any trade or business in

(2)

(3)

(4)

which I am engaged or interested at my death; (q) to the extent allowed by law, delegate a power or function, and execute a power of attorney or other instrument to make the delegation; and (r) appoint and empower nominees to act and hold property for my executors and trustees. Even though a person is or becomes or has been an executor or trustee, that person may buy or appropriate to herself or himself at a fair value any part of my estate or any trust fund deriving from it (either at public auction or by private contract or treaty) on the same terms my executors may grant to a purchaser from my estate. I express the wish that my executors and my trustees: (a) make available to those of my beneficiaries who inherit or are interested in any property all documents relevant to that property or the assessment of tax relating to that property; and (b) exercise their powers in such a way (subject to their discretion) that any person who cares for my child or children (whether as legal guardian or otherwise) is compensated for any costs they incur in providing that care. My executors and my trustees acting in good faith: (a) may appoint accountants, administrators or advisors as my trustees believe appropriate for the responsible operation of the fund, and pay or recover the reasonable costs of these services from the fund; (b) are entitled to indemnity and reimbursement out of my estate or the trust fund (as the case may be) for their expenses, costs and liabilities of every kind arising out of the administration of, and litigation relating to, my estate and its trusts; and (c) may apply estate or trust property to satisfy their indemnity and secure their reimbursement.

(5)

The indemnity under the preceding subclause: (a) is limited to the assets of my estate or the trust fund (as the case may be); and (b) does not allow my executors or my trustees to recover any loss or reimbursement for any liability from any beneficiary. [page 301]

29. Executors’ fees and commission (1)

Any of my executors or trustees who practises a profession (and I note that this clause does not apply to those of the trustees whose remuneration is provided for in the clause Powers of the trustee): (a) is entitled to be paid out of the fund all usual and reasonable professional fees for work done by that executor or trustee or her or his firm (as executor, trustee or both) on the same basis as if he or she were not one of my executors but employed to act on behalf of my executors; and (b) may in addition apply to the court for commission for her or his pains and trouble.

30. Unanimity (1)

Unless otherwise specified: (a) joint legal representatives, including my executors, must act unanimously; (b) joint guardians of a person must act unanimously; and (c) in any particular trust: (i) joint trustees must act unanimously; (ii) joint Appointors must act unanimously; and (iii) joint Protectors must act unanimously.

31. Interpretation (1)

Definitions (a) ‘children’: (i) means biological or adopted children; and (ii) includes a child; (b) ‘guardian’ includes guardians; (c) ‘Ineligible Officebearer’ means a person who meets the criteria of being an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer; (d) ‘legal representatives’ includes legal personal representative; (e) ‘my children’ means TRAVIS EARLE, JUSTIN EARLE, KAREN EARLE and CANDICE EARLE; (f) ‘my estate’ includes my residuary estate if it is appropriate in the context, for instance if legacies or devises have been given; (g) ‘my wife’ means JANE JUNE EARLE; (h) ‘parallel trusts’ means separate discretionary testamentary trusts set up for a particular primary beneficiary; (i) ‘preservation age’ means the age of 50 years for my son JUSTIN EARLE and the age of 25 years for all other beneficiaries; (j) ‘spouse’ (and ‘spouses’ has a corresponding meaning) in relation to a person means: (i) the husband or wife of the person at any time; and (ii) the partner of a person, of the same sex or different sex (however described), with whom the person has been living at any time in a marriage-like relationship or domestic relationship; but [page 302]

(2)

(iii) does not include the former husband, wife or partner of a person where there has been a court order or binding financial agreement between the parties arising from the dissolution of the relationship; (k) ‘written notice’ means notification in writing, receipt of which has been acknowledged in writing by all the persons to whom the notice is to be given. The headings to clauses in this document are for the assistance of the reader only, and do not form a substantive part of the document.

DATED The testator STEVEN EARLE signed in the presence of both of us being present at the same time, and we attested his signature in the presence of him and of each other. Testator Witness 1: ……………… Witness 2: ……………… Full name: Full name: Occupation: Occupation: Address: Address:

EXAMPLE 4 Hypothetical facts 10.17 The specific facts for Example 4 are: • The testator is JOHN PRINE aged 50. • Address and Occupation: 28 Sweet Road, Truman in the Australian Capital Territory, Chief Executive Officer. • Testator’s estate is $5,000,000. • Testator is married to WINNIE PRINE. • The testator and WINNIE have three children: ANDREW PRINE aged 9, BRIAN PRINE aged 7 and CHRIS PRINE aged

• • •

2. ANDREW is severely disabled. The testator was formerly married to EDITH PRINE; she died in 1997. The testator and EDITH had two children: IAN PRINE aged 28 and JACK PRINE aged 25 and an alcoholic.

The testator’s instructions 10.18 The testator’s instructions are as follows: If WINNIE survives the testator: Executor: WINNIE. [page 303] Legacies: through a discretionary testamentary trust: $200,000 to IAN PRINE and $200,000 to JACK PRINE with preservation age raised to 45 years. Residue: to WINNIE. If WINNIE does not survive him: Executor: brother LEO PRINE and if he is unable or unwilling, the Public Trustee of the Australian Capital Territory. Residue: divide into 10 shares: one share to JACK PRINE with preservation age raised to 45 years; one share to IAN PRINE; two shares to ANDREW PRINE; three shares to BRIAN PRINE; and three shares to CHRIS PRINE. ANDREW’S share to be held for him on Schedule 2 trust. This will also empower the executor to choose whether to put ANDREW’S share into a special disability trust, or into the Schedule 2 trust or to put part of ANDREW’S share into the

Schedule 2 trust and part of his share into a special disability trust. 10.19 The will for Example 4 is set out below. THIS WILL is made by me, JOHN PRINE of 28 Sweet Road, Truman in the Australian Capital Territory, Chief Executive Officer.

1. Revocation (1)

I revoke all previous testamentary acts.

2. Recommendation that executors, trustees and primary beneficiaries seek advice (1)

My will has been drafted to maximise tax effectiveness and asset protection for my beneficiaries. I recommend that before my executors decide how to administer my estate, and before a primary beneficiary makes a decision on the most appropriate way to take her or his inheritance, my executors, trustees and each primary beneficiary investigate the benefits offered by this will in the light of appropriate professional legal, taxation and financial advice.

3. Presumption of survivorship (1)

Where: (a) a person has died and one or more deaths are presumed; or (b) two or more deaths are presumed; and (c) the order of deaths, whether proved or presumed, is uncertain, this will is to be construed as if the deaths, whether proved or presumed, had taken place in the following manner: first, the oldest; then, after a period of one day, the second oldest; then, after a period of one day, the third oldest; and so on to the youngest.

4. Exclusion of requirement that beneficiaries survive me by 30 days (1)

Excluding a requirement that a primary beneficiary attains their respective preservation age, no beneficiary is required to survive me by 30 days or any other period in order to take a benefit under my will, and this statement expresses a contrary intention for the purposes of statutory [page 304] provisions which impose a general requirement that beneficiaries survive me for 30 days or any other period to inherit.

5. Power to disclaim (1)

A person may disclaim an interest under this will or its trusts in whole or in part.

6. Executor may allocate part or all of the property I have provided for my son ANDREW PRINE to a Special Disability Trust (1)

My executors may allocate part or all of the property that I have provided for my son ANDREW PRINE to one or both of the following, in the proportions my executors in their absolute discretion think fit: (a) The trustee or trustees of the Schedule 2 trust created for the primary benefit of ANDREW PRINE; or (b) A special disability trust created for the primary benefit of ANDREW PRINE in accordance with Pt 3.18A of the Social Security Act 1991 (Cth), or any equivalent legislative provision at the date of my death.

7. Two separate divisions in my will

(1)

My will contains two divisions, which apply as follows: (a) if my wife survives me, Division 1 applies; and (b) if my wife does not survive me, Division 2 applies.

DIVISION 1 — PROVISIONS IF MY WIFE SURVIVES ME 8. Executors (1) (2) (3)

(4)

(5)

I appoint as my executor my wife WINNIE PRINE. If my wife refuses or is unable to act as my executor, I appoint as my executor my brother LEO PRINE. If my brother LEO PRINE refuses or is unable to act as my executor, I appoint as my executor the PUBLIC TRUSTEE OF THE AUSTRALIAN CAPITAL TERRITORY of 221 London Circuit, Canberra in the Australian Capital Territory. ‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1.

9. Identification of primary beneficiaries (1)

In the clause Gift provisions through testamentary trusts, my executors must give property to the trustee or trustees of the trust or trusts for a certain person or persons, and, unless otherwise specified, I hereby define that person or each of those persons as a ‘primary beneficiary’. [page 305]

10. Creation of trusts (1)

(2) (3)

(4)

(5)

(6)

My executors must set aside out of my estate a fund (the initial property fund) to provide the initial property of each trust created in this will. I create a separate discretionary testamentary trust for the primary benefit of each of my primary beneficiaries. The name of each trust must contain the words ‘discretionary testamentary trust for’ and the full name of the particular person for whose primary benefit that trust is created, or such other name as the trustee gives the trust. The initial property of each trust is $10, which must be paid by my executors out of the initial property fund, and the property of the trust includes property transferred to the trustee or trustees under the clause Gift provisions through testamentary trusts. Subject to the clause Primary beneficiary may request special distribution, my executors may in their absolute discretion create a specified number of parallel trusts for a primary beneficiary by splitting the initial property of a trust into as many parts as there are to be parallel trusts for that primary beneficiary. The provisions governing the trusts are set out in the Schedule or Schedules identified for each primary beneficiary respectively in the clause Gift provisions through testamentary trusts.

11. Gift provisions through testamentary trusts (1)

Subject to subclause (2), my executors must give the sum of $200,000 each to: (a) the trustee or trustees of the trust for JACK PRINE who survives me; and (b) the trustee or trustees of the trust for IAN PRINE who survives me.

(2)

(3)

(4)

If JACK PRINE or IAN PRINE does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. My executors must give the residue of my estate to the trustee or trustees of the trust for my wife WINNIE PRINE who survives me. Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a beneficiary, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

12. Primary beneficiary may request special distribution (1)

A primary beneficiary who is not an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer may request that my executors exercise their powers in subclause (2). [page 306]

(2)

My executors may in their absolute discretion: (a) set up a specified number of parallel trusts for a primary beneficiary; and/or (b) transfer some or all of a primary beneficiary’s share of my estate: (i) to the primary beneficiary absolutely provided they are not an Ineligible Officebearer; (ii) to the trustee or trustees of an existing trust of which

(3)

the primary beneficiary is the trustee or appointor; or (iii) in different proportions between the parallel trusts created for the benefit of that primary beneficiary. If after the exercise of the discretion given to my executors in subclause (2) a balance of the allocated share of a primary beneficiary remains, my executors must transfer that balance equally to the trustee or trustees of the trusts created for that primary beneficiary.

13. Schedules in my will (1)

My will contains the following Schedules: (a) Schedule 1 — Discretionary Testamentary provisions; and (b) Schedule of General Provisions. End of Division 1

Trust

DIVISION 2 — PROVISIONS IF MY WIFE DOES NOT SURVIVE ME 14. Executors (1) (2)

(3)

(4)

I appoint as my executor my brother LEO PRINE. If my brother LEO PRINE refuses or is unable to act as my executor, I appoint as my executor the PUBLIC TRUSTEE OF THE AUSTRALIAN CAPITAL TERRITORY of 221 London Circuit, Canberra in the Australian Capital Territory. ‘My executors’ means the persons named or referred to in this clause while acting, and my personal representatives for the time being. My executors are also trustees in respect of property in my estate which has not been transferred to the trustee as defined in Schedule 1.

15. Guardianship (1)

I appoint my brother LEO PRINE as guardian of my minor children.

16. Identification of primary beneficiaries (1)

In the clause Gift provisions through testamentary trusts, my executors must give property to the trustee or trustees of the trust or trusts for a certain person or persons, and, unless otherwise specified, I hereby define that person or each of those persons as a ‘primary beneficiary’. [page 307]

17. Creation of trusts (1)

(2) (3)

(4)

(5)

My executors must set aside out of my estate a fund (the initial property fund) to provide the initial property of each trust created in this will. I create a separate discretionary testamentary trust for the primary benefit of each of my primary beneficiaries. The name of each trust must contain the words ‘discretionary testamentary trust for’ and the full name of the particular person for whose primary benefit that trust is created, or such other name as the trustee gives the trust. The initial property of each trust is $10, which must be paid by my executors out of the initial property fund, and the property of the trust includes property transferred to the trustee or trustees under the clause Gift provisions through testamentary trusts. Subject to the clause Primary beneficiary may request special distribution, my executors may in their absolute discretion create a specified number of parallel trusts for a primary beneficiary by splitting the initial property of a trust into as

(6)

many parts as there are to be parallel trusts for that primary beneficiary. The provisions governing the trusts are set out in the Schedule or Schedules identified for each primary beneficiary respectively in the clause Gift provisions through testamentary trusts.

18. Gift provisions through testamentary trusts (1)

(a)

subject to paragraphs (b) and (c), my executors must divide the residue of my estate into ten (10) equal shares: (i) to give to the trustee or trustees of the trust for my son JACK PRINE — one (1) share; (ii) to give to the trustee or trustees of the trust for my son IAN PRINE — one (1) share; (iii) to give to the trustee or trustees of the trust for my son ANDREW PRINE — two (2) shares; (iv) to give to the trustee or trustees of the trust for my son BRIAN PRINE — three (3) shares; and (v) to give to the trustee or trustees of the trust for my son CHRIS PRINE — three (3) shares; (b) if any of JACK PRINE, IAN PRINE, BRIAN PRINE or CHRIS PRINE does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me; (c) if the provisions relating to a share or shares referred to in this subclause lapse or fail because no person attains a vested interest in that share or those shares, then from the time of that lapse or failure, that share or those shares is or are added equally to the

[page 308] other share or shares the trusts of which have not then so lapsed or failed, and this provision applies both to the original shares and to shares which have increased as a result of the application of this provision. (2) (a) Where in this clause I have given gifts and allocations of my estate to the trustee or trustees of a trust for my son ANDREW PRINE, my executors must deal with those gifts and allocations in accordance with Schedule 2; and (b) Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a beneficiary other than ANDREW PRINE, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

19. Primary beneficiary may request special distribution (1)

(2)

A primary beneficiary who is not an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer may request that my executors exercise their powers in subclause (2). My executors may in their absolute discretion: (a) set up a specified number of parallel trusts for a primary beneficiary; and/or (b) transfer some or all of a primary beneficiary’s share of my estate: (i) to the primary beneficiary absolutely provided they are not an Ineligible Officebearer; (ii) to the trustee or trustees of an existing trust of which the primary beneficiary is the trustee or appointor; or (iii) in different proportions between the parallel trusts created for the benefit of that primary beneficiary.

(3)

If after the exercise of the discretion given to my executors in subclause (2) a balance of the allocated share of a primary beneficiary remains, my executors must transfer that balance equally to the trustee or trustees of the trusts created for that primary beneficiary.

20. Schedules in my will (1)

My will contains the following Schedules: (a) Schedule 1 — Discretionary Testamentary Trust provisions; (b) Schedule 2 — Trust for ANDREW PRINE provisions; and (c) Schedule of General Provisions.

SCHEDULE 1: DISCRETIONARY TESTAMENTARY TRUST PROVISIONS 21. Application of the provisions in Schedule 1 (1) (2)

In Schedule 1, ‘the trust’ means each trust governed by Schedule 1. The provisions in Schedule 1 do not apply to any trustee other than a Schedule 1 trustee. [page 309]

(3)

The provisions in Schedule 1 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

22. The property of the trust (1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial

property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

23. Beneficiaries of the trust (1) (2)

(3)

The beneficiaries of the trust are the income beneficiaries and the capital beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. A beneficiary that meets the criteria in subclause (2)(b) or (c) of the clause Automatic disqualification of an Ineligible Officebearer is excluded as a beneficiary of the trust while that beneficiary meets that or those criteria.

Income beneficiaries (4)

The income beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) a spouse of the primary beneficiary; (d) the issue of a grandparent of: (i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (e) a spouse and the children of any of the persons specified in the preceding paragraphs;

subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (g) a charity or charitable entity; and (h) an entity recognised as a deductible gift recipient entity under Australian taxation law. (f)

Capital beneficiaries (5)

The capital beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) the issue of a grandparent of the primary beneficiary; (d) the spouse of the primary beneficiary if the primary beneficiary dies leaving no surviving issue; [page 310] (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law.

24. The purposes of the trust

Primary beneficiary is over the preservation age (1)

Where the primary beneficiary is over the preservation age, the purposes of the trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes.

Primary beneficiary is under the preservation age (2)

Where the primary beneficiary is under the preservation age, I express the wish (without limiting the discretion of the trustee) that the trustee preserve the capital of the fund and, as far as seems to them reasonable, limit its application to the primary beneficiary’s: (a) medical and dental treatment; (b) education (including vocational training); (c) reasonable maintenance and welfare; and (d) such other expenses which the trustee considers appropriate.

Trustee has absolute discretion (3)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary.

25. The Appointor Powers of the Appointor (1)

The Appointor has the power to:

(a) (b) (c) (d)

appoint one or more trustees; appoint herself or himself trustee or sole trustee; remove one or more of the trustees; and resign as Appointor.

Eligibility and appointment of the Appointor (2) (3)

Subject to subclause (3), the primary beneficiary is the first Appointor. If a person (including an executor) is or becomes an Ineligible Officebearer, that person is disqualified and does not become or ceases to be an Appointor. [page 311]

(4)

(5)

(6) (7)

A person who is or would otherwise be entitled to be an Appointor, but is an Ineligible Officebearer because he or she is under the preservation age, becomes Appointor on reaching the preservation age if: (a) that person is able and willing to accept the office; and (b) that person is not otherwise an Ineligible Officebearer. If the person becomes Appointor under the preceding subclause, any other person who is an Appointor at that time ceases to be an Appointor. If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) those of my executors who are not Ineligible Officebearers are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor and is not an Ineligible Officebearer, the court may appoint an Appointor.

(8)

A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (9)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor. (10) If a sole Appointor who is the primary beneficiary of the trust dies without appointing a new Appointor in her or his place: (a) if that Appointor is survived by a child or children, the child or children of that person is or are the Appointor; or (b) if that Appointor is not survived by a child or children, the legal personal representative or representatives of the Appointor is the Appointor.

26. The Protector Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3) (4)

Subject to subclause (4), the primary beneficiary is the first Protector. If a person who would be or is a Protector: (a) is a minor; or [page 312]

(5)

(6)

(7)

(b) lacks or loses capacity — that person is disqualified from being a Protector, and the guardian or legal representative of the person is the Protector, but only until such time as that person attains majority or is no longer subject to guardianship, at which time the person is Protector. A person who is or has been disqualified from being a Protector and who is no longer disqualified and is able and willing to accept the office, becomes the Protector, and any other person who is at that time a Protector ceases to be a Protector. If there is no Protector: (a) my executors are the Protector; or (b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed. A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (8)

A Protector (including joint Protectors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Protector or

Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. (9) A Protector may resign. (10) If a sole Protector who is the primary beneficiary of the trust dies without appointing a new Protector in her or his place: (a) if that Protector is survived by a child or children, the child or children of that person is or are the Protector; or (b) if that Protector is not survived by a child or children, the legal personal representative or representatives of the Protector is or are the Protector.

27. Trustee of the trust: definition and appointment (1) (2)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional trustee or one or more of my executors.

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors (excluding an executor who is an Ineligible Officebearer) must nominate a trustee or trustees.

Eligibility to be the trustee (5)

The eligibility of a person to be a trustee is subject to the clause Automatic disqualification of an Ineligible

Officebearer. [page 313] (6)

(7)

Where the primary beneficiary reaches the preservation age (and is not otherwise an Ineligible Officebearer), the primary beneficiary is eligible to be appointed as the trustee or one of the trustees. A person who is not the primary beneficiary is not ineligible to be a trustee merely because he or she is under the preservation age.

28. Automatic disqualification of an Ineligible Officebearer Ineligible Officebearers (1)

Each of the following is an Ineligible Officebearer: (a) the primary beneficiary, a spouse of a primary beneficiary or the issue of a primary beneficiary who meets one or more of the criteria in subclause (2); or (b) a company, if an individual specified in the preceding paragraph holds a controlling interest in the company and meets one or more of the criteria in subclause (2).

Criteria for disqualification (2)

The criteria referred to in subclause (1) are that the individual: (a) is the primary beneficiary and has not reached the preservation age; or (b) is married or has been living with a partner in a marriagelike relationship (however described) with a person of the same sex or different sex and begins to live separately

and apart from her or his spouse or partner in a manner that constitutes a separation for the purposes of a law of the Commonwealth or a law of a state or territory; or (c) is unable to pay debts as and when they fall due, or is or becomes an undischarged bankrupt, is in liquidation, receivership or administration, or is unable in law to act or continue to act as trustee; or (d) is the subject of a declaration by a board or tribunal governing the appointment of guardians and administrators under Commonwealth, state or territory law, made on the grounds of disability, infirmity or lack of legal capacity; or (e) has been assessed by two health care professionals including a treating doctor who attest that the person cannot make decisions in relation to the person’s affairs or does not understand the nature or effect of the decisions the person makes in relation to the person’s affairs. Automatic disqualification of an Ineligible Officebearer (3)

Where a person is or becomes an Ineligible Officebearer: (a) that person may not be appointed as trustee; (b) if that person is or has been appointed a trustee, that person is automatically removed as trustee and her, his or its rights, powers and duties as trustee are terminated; and (c) if that person is or has been appointed as an Appointor, that person is automatically removed as an Appointor and her, his or its rights, powers and duties as Appointor are terminated. [page 314]

Effect of becoming or ceasing to be an Ineligible Officebearer (4)

(5)

Removal of a trustee or an Appointor under this clause has no effect on actions or commitments that the trustee or the Appointor has already taken or made. A person who meets the definition of an Ineligible Officebearer is not thereby rendered ineligible to be and to perform the functions of executor or Protector.

29. Powers of the trustee (1)

(2)

The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and (c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more or all of the income and capital beneficiaries.

Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund

(b)

(c)

(d) (e) (f)

(g)

to any one or more of the capital beneficiaries; alter the provisions of the trust, including adding, varying or excluding a beneficiary but not so as to alter the preservation age or the capital beneficiaries; bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); carry on any trade or business; alter or revoke by deed a previous deed binding the future operations of the trust; exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; [page 315]

(h) make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate; (i) make superannuation contributions on behalf of a beneficiary; (j) where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; (k) appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the

holding of that property; and (l) end the trust, and if they do so the trustees must ensure that the trust fund vests in the capital beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector. How the trustee obtains written consent of the Protector (5)

(6)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

30. Investment of the fund (1)

(2)

Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. Subject to the subclause (3), the trustee is under no duty to comply with any provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (ACT) (or any equivalent provision or legal

(3)

requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they must act in accordance with the provisions specified in the preceding subclause.

31. Ending of the trust and vesting of the balance (1)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; [page 316]

(2)

(b) when the trustee acting under the powers given in this will ends the trust; or (c) when the primary beneficiary dies before attaining the preservation age, without being survived by a child or children. When the trust ends: (a) If the trust ends because the primary beneficiary dies before attaining the preservation age without being survived by a child or children, the balance becomes part of my estate and is distributed as if the primary beneficiary died before me; or (b) If the trust ends for any other reason, the balance of the trust fund vests in the capital beneficiary or beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 1

SCHEDULE 2 — TRUST FOR MY SON ANDREW PRINE

32. Application of the provisions in Schedule 2 (1) (2) (3)

In Schedule 2, ‘the trust’ means each trust governed by Schedule 2. The provisions in Schedule 2 do not apply to any trustee other than a Schedule 2 trustee. The provisions in Schedule 2 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

33. The property of the Schedule 2 trust (1)

The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

34. The beneficiaries of the trust (1) (2)

(3)

The beneficiaries of the trust are the primary beneficiary ANDREW PRINE and the potential beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust. The potential beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the issue of the primary beneficiary; (b) a spouse of the primary beneficiary; (c) the issue of a grandparent of:

(i) the primary beneficiary; or (ii) a spouse of the primary beneficiary; (d) a spouse and the children of any of the persons specified in the preceding paragraphs; [page 317] (e) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (f) a charity or charitable entity; and (g) an entity recognised as a deductible gift recipient entity under Australian taxation law.

35. The purposes of the trust Primary purposes of the trust (1)

(2)

The primary purpose of the trust is to directly or indirectly provide for the ongoing care and maintenance of ANDREW PRINE for his lifetime and to give to the trustee the widest possible discretion in carrying out this purpose. I express the wish that the trustee use her or his powers to ensure that the primary beneficiary is provided at all times with pleasant, comfortable and appropriate accommodation.

Secondary purposes of the trust (3)

Other purposes for which the trustee holds the fund on trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary or

beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes. Trustee has absolute discretion (4)

(5)

The purposes of the trust as stated in this clause are to be read in their general meaning, and in no way limit the discretion of the trustee to decide from time to time whether or not to provide a benefit or benefits to any beneficiary. I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any beneficiary. I enclose with this will an expression of my wishes for the administration of the trust. I express the wish that in carrying out the purposes of the trust, the trustee respects those wishes, and do all that is reasonably appropriate to give effect to them; however, I note that this document is not part of my will and that it is not testamentary. It expresses my wishes only, and creates no legal obligation.

36. The Appointor Powers of the Appointor (1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor. [page 318]

Eligibility and appointment of the Appointor (2)

My executors are the first Appointors.

(3) (4)

(5)

If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) my remaining executors are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (6)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor.

37. The Protector Powers of the Protector (1) (2)

The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (4) of the clause Powers of the trustee.

Eligibility and appointment of the Protector

(3) (4)

(5) (6)

Subject to subclause (4), the primary beneficiary’s guardian or legal personal representative is the first Protector. If a person who would be or is a Protector: (a) resigns or dies without appointing a new Protector in her or his place; (b) is or becomes under a legal disability; (c) lacks or loses capacity; or (d) is unable or unwilling to be Protector — my executors are the Protector until such time as a guardian or legal representative is appointed for the primary beneficiary and is willing and able to act, at which time that person will be the sole Protector. If a Protector, not being a sole Protector, ceases to be a Protector, the remaining Protector is the Protector. If there is no Protector: (a) my executors are the Protectors until such time as a guardian or legal representative is appointed for the primary beneficiary and is willing and able to act, at which time that person will be the sole Protector; or [page 319]

(7)

(b) if I have no executor who is willing and able to be a Protector, application may be made to the court for a Protector to be appointed. A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (8)

A Protector (including joint Protectors) may, by unregistered deed or will, subject to any restrictions which apply to them:

(9)

(a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. A Protector may resign.

38. Trustee of the trust: definition and appointment (1) (2)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional trustee or one or more of my executors.

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors must nominate a trustee or trustees.

39. Powers of the trustee (1)

(2)

The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

Unrestricted powers of the trustee (3)

The trustee may exercise any of the following powers in the absolute discretion of the trustee: (a) subject to paragraph (4)(j), make distributions of income

of the fund, to such of those income beneficiaries and in such amounts and at such times as the trustee chooses; (b) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by law; and (c) refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more of the primary beneficiary or potential beneficiaries. [page 320] Restricted powers of the trustee (4)

If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the capital of the fund to any one or more of the primary beneficiary or potential beneficiaries; (b) alter the provisions of the trust but not so as to alter beneficiaries of the trust; (c) bind by deed the future operations of the trust (including future distributions of income or capital of the trust fund, or future vesting of trust income or capital of the trust fund in any beneficiary of the trust); (d) carry on any trade or business; (e) alter or revoke by deed a previous deed binding the future operations of the trust; (f) exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; (g) if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she

(5)

may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; (h) make loans to guardians of beneficiaries on whatever terms the trustee thinks appropriate; (i) make superannuation contributions on behalf of a beneficiary; (j) where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; (k) appoint one or more separate trustees over any part of the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and (l) end the trust, and if they do so the trustees must ensure that the trust fund vests in the beneficiaries in the shares and amounts determined by the trustee and agreed to by the Protector. I express the wish that the trustee use her or his powers to ensure that the primary beneficiary is provided at all times with pleasant, comfortable and appropriate accommodation and, in pursuance of this, with the consent of the Protector, the trustee may in her or his absolute discretion: (a) acquire (either by purchase or lease) appropriate real property for occupation, use or enjoyment by the primary beneficiary alone or with some other person or persons; (b) grant to the primary beneficiary the right to occupy, use or enjoy real property, whether acquired for the purposes or not, alone or with some other person or persons; or (c) arrange comfortable, pleasant and appropriate accommodation for the primary beneficiary in a residential or retirement complex,

and for the removal of doubt, I emphasise that the trustee may in the trustee’s discretion refuse to give this or any right or benefit to the primary beneficiary. [page 321] How the trustee obtains written consent of the Protector (6)

(7)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

40. Investment of the fund (1)

(2)

Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time. Subject to the subclause (3), the trustee is under a duty to comply with the provisions of s 14A(2) or s 14C(1) of the

(3)

Trustee Act 1925 (ACT) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they are exempted from the provisions specified in the preceding subclause.

41. Ending of the trust and vesting of the balance (1)

(2)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; (c) when the primary beneficiary dies; or (d) when the court so orders, acting on its opinion that the primary purpose of the trust can no longer be substantially or effectively carried out or assisted by the application of the funds from the trust. When the trust ends: (a) if the trust ends because the primary beneficiary dies, the balance of the trust becomes part of my estate and is distributed as if the primary beneficiary died before me leaving no children; or (b) if the trust ends for any other reason, the balance of the trust fund vests in the potential beneficiaries specified by the trustee acting under the powers given in this will. End of Schedule 2 [page 322]

SCHEDULE OF GENERAL PROVISIONS 42. Application of this Schedule (1)

This Schedule applies in any event and applies to my

executors and any trust created by my will.

43. Streaming of income and capital (1)

(2)

(3)

(4)

My trustees or my executor, as the case may be, may treat a capital receipt as if it were income for the purposes of determining trust income in a particular income year; and in the absence of such a determination ‘trust income’, ‘income of the trust’ and ‘income of the trust estate’ have the same meaning as ‘net income’ under s 95 of the Income Tax Assessment Act 1936 (Cth) (or a provision of similar import). My executors and trustees may as they see fit recognise, distinguish, separate, determine and allocate the following matters and create in the accounting records separate or appropriate accounts and ledgers to reflect those actions: (a) the elements of trust income (including but not limited to capital gains and franked dividends) according to type and source; (b) expenses and losses; (c) expenses related to each respective type of trust income including but not limited to: (i) in relation to capital gains, available capital losses; and (ii) in relation to franked dividends, allowable or available deductions (including ‘relevant expenses’), credits and rebates. Executors or trustees who are making a distribution to or for a beneficiary may as they see fit do so by paying, applying, setting aside or advancing income or capital from any particular category or sources that they have recorded in the trust accounts. Where executors or trustees set aside income or capital in accordance with this clause, that income or capital does not form part of the trust fund, but is, upon being set aside, held on separate temporary trust by those executors or trustees, as

the case may be, with power to invest, apply or deal with that property or income in their discretion until it is paid to or applied for the benefit of the beneficiary.

44. Executors and trustees: conflicts of interest (1)

No person, being one of my executors or trustees or a director or shareholder of a corporate executor or trustee, is required to obtain independent legal advice or an order of court before exercising a power or discretion conferred on her or him by this will or by law, or is precluded from exercising the power or discretion, merely because the person exercising the power or discretion: (a) has or may have a direct, indirect or personal interest, whether as shareholder, director, member or partner of any company or partnership, or otherwise, in the manner or result of exercising such power or discretion; or [page 323] (b) may benefit directly or indirectly as a result of the exercise of any such power or discretion; or (c) is the trustee or controller of a superannuation fund of which I hold an interest in; or (d) is the sole executor or trustee.

45. Power of my executors in relation to superannuation lump sum death benefit (1)

If my estate receives a benefit that is a superannuation lump sum death benefit within the meaning of s 307-5 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import), and one or more of the primary beneficiaries of my will meets the definition of being my death benefits

dependant within the meaning of s 320-195 of the Income Tax Assessment Act 1997 (Cth) (or a provision of similar import): (a) I express the wish that, as far as possible, the superannuation lump sum death benefit be used to satisfy the share or shares of my estate which I intend for the benefit of that primary beneficiary or those primary beneficiaries; and (b) where the benefits would otherwise have been held in a discretionary testamentary trust for the primary beneficiary: (i) my executors are empowered to hold all or part of the superannuation lump sum death benefit in a separate superannuation proceeds will trust for that primary beneficiary; and (ii) the terms of that trust will be the terms the discretionary testamentary trust would have had except that the potential beneficiaries of the superannuation proceeds will trust are limited to those of the capital beneficiaries of the discretionary testamentary trust who are my death benefits dependants.

46. General powers of my executors and trustees (1)

My executors and, subject to the clause Powers of the trustee, my trustees may in their discretion: (a) exercise any powers given to them by law; (b) exercise the powers of a trustee for sale of any property in my estate, and my executors and my trustees may without being liable for any loss (including liability for taxation on capital gain) caused by so doing: (i) postpone sale; (ii) retain in its form of investment at my death any part of my estate; or

sell, by public auction or private sale, and for that purpose may extend credit; (c) determine whether receipts or outgoings are capital or income, or partly capital or income, so as to bind the beneficiaries, even though the receipts are from a company or corporation that has made a decision on the matter; (iii)

[page 324] (d) apply for the maintenance, education (including travel to broaden the mind), advancement or benefit of a beneficiary the whole or any part of the capital and income of that part of my estate to which that beneficiary is entitled or may in future be entitled, and for those purposes: (i) make a payment or payments to a minor beneficiary’s parent or guardian or a person with whom the minor beneficiary resides; and (ii) accept the receipt of that payee as an absolute discharge; (e) make loans to beneficiaries on whatever terms they deem appropriate; (f) acquire or lease property for occupation, use or enjoyment by a beneficiary; (g) do any one or more of the following involving shares or securities: (i) concur in any scheme or arrangement involving or affecting the shares; (ii) exercise any voting power; or (iii) apply for and accept directorship of any corporation in which my estate is or may become interested or concerned;

(h) apply for, accept or take up securities of any description or denomination, bonus shares or other rights or benefits made available by a corporation in which my estate is or may become interested or concerned; (i) borrow money, either with or without giving security, and enter into any mortgage, bill of sale, lien or security over any part of my estate, and such money borrowed is to be treated as part of my estate or trust property, as the case may be; (j) lease any part of the real or personal property in my estate: (i) for the periods and upon and subject to the covenants and conditions which my executors or my trustees, as the case may be, think fit; and (ii) either with or without provisions for renewal or otherwise; (k) accept surrenders of leases or tenancies of my estate or any part of it; (l) maintain, repair, improve, develop, alter, renovate, pull down, erect or re-erect any part of my estate; (m) maintain, take out or participate in: (i) an insurance policy against risks affecting my estate; (ii) a life insurance policy in respect of any person; (iii) a policy or contract of health or accident insurance or benefit in respect of any person; (iv) a friendly society, trade union or association of employees benefit scheme in respect of any person; (v) a superannuation or pension scheme in relation to any person; and (vi) a funeral benefit or payment scheme in relation to any person; (n) without the consent of any beneficiary, partition or appropriate any part of the real or personal property of

the estate in or towards the [page 325]

(2)

satisfaction of a legacy or a share of any person or persons in my estate, and in doing so the value of any such property is that agreed to by those of my beneficiaries affected or, if my executors or my trustees, as the case may be, are satisfied that no value can be agreed in this way, the value is that determined by an independent valuer appointed by my executors for that purpose; (o) determine (in the event of my executors or my trustees, as the case may be, disposing of or being deemed to have disposed of property) from which part or parts of the capital or income of my estate they will pay any income tax liability flowing from the disposal or deemed disposal; and for that purpose they may determine what is capital and what is income, but I express the wish that, if it seems appropriate for my executors or my trustees, as the case may be, to do so, that the proceeds of such a disposal be used in the first instance; (p) carry on, either alone or in partnership with any person or persons, the whole or part of any trade or business in which I am engaged or interested at my death; (q) to the extent allowed by law, delegate a power or function, and execute a power of attorney or other instrument to make the delegation; and (r) appoint and empower nominees to act and hold property for my executors and trustees. Even though a person is or becomes or has been an executor or trustee, that person may buy or appropriate to herself or himself at a fair value any part of my estate or any trust fund

(3)

(4)

(5)

deriving from it (either at public auction or by private contract or treaty) on the same terms my executors may grant to a purchaser from my estate. I express the wish that my executors and my trustees: (a) make available to those of my beneficiaries who inherit or are interested in any property all documents relevant to that property or the assessment of tax relating to that property; and (b) exercise their powers in such a way (subject to their discretion) that any person who cares for my child or children (whether as legal guardian or otherwise) is compensated for any costs they incur in providing that care. My executors and my trustees acting in good faith: (a) may appoint accountants, administrators or advisors as my trustees believe appropriate for the responsible operation of the fund, and pay or recover the reasonable costs of these services from the fund; (b) are entitled to indemnity and reimbursement out of my estate or the trust fund (as the case may be) for their expenses, costs and liabilities of every kind arising out of the administration of, and litigation relating to, my estate and its trusts; and (c) may apply estate or trust property to satisfy their indemnity and secure their reimbursement. The indemnity under the preceding subclause: (a) is limited to the assets of my estate or the trust fund (as the case may be); and [page 326] (b) does not allow my executors or my trustees to recover any loss or reimbursement for any liability from any

beneficiary.

47. Executors’ fees and commission (1)

Any of my executors or trustees who practises a profession (and I note that this clause does not apply to those of the trustees whose remuneration is provided for in the clause Powers of the trustee): (a) is entitled to be paid out of the fund all usual and reasonable professional fees for work done by that executor or trustee or her or his firm (as executor, trustee or both) on the same basis as if he or she were not one of my executors but employed to act on behalf of my executors; and (b) may in addition apply to the court for commission for her or his pains and trouble.

48. Unanimity (1)

Unless otherwise specified: (a) joint legal representatives, including my executors, must act unanimously; (b) joint guardians of a person must act unanimously; and (c) in any particular trust: (i) joint trustees must act unanimously; (ii) joint Appointors must act unanimously; and (iii) joint Protectors must act unanimously.

49. Interpretation (1)

Definitions (a) ‘children’: (i) means biological or adopted children; and (ii) includes a child; (b) ‘guardian’ includes guardians; (c) ‘Ineligible Officebearer’ means a person who meets the

(d) (e) (f)

(g) (h) (i) (j)

criteria of being an Ineligible Officebearer under the clause Automatic disqualification of an Ineligible Officebearer; ‘legal representatives’ includes legal personal representative; ‘my children’ means JACK PRINE, IAN PRINE, ANDREW PRINE, BRIAN PRINE and CHRIS PRINE; ‘my estate’ includes my residuary estate if it is appropriate in the context, for instance if legacies or devises have been given; ‘my wife’ means WINNIE PRINE; ‘parallel trusts’ means separate discretionary testamentary trusts set up for a particular primary beneficiary; ‘preservation age’ means the age of 45 years for JACK PRINE and the age of 25 years for all other beneficiaries; ‘spouse’ (and ‘spouses’ has a corresponding meaning) in relation to a person means: (i) the husband or wife of the person at any time; and [page 327]

(ii) the partner of a person, of the same sex or different sex (however described), with whom the person has been living at any time in a marriage-like relationship or domestic relationship; but (iii) does not include the former husband, wife or partner of a person where there has been a court order or binding financial agreement between the parties arising from the dissolution of the relationship; (k) ‘written notice’ means notification in writing, receipt of which has been acknowledged in writing by all the persons to whom the notice is to be given.

(2)

The headings to clauses in this document are for the assistance of the reader only, and do not form a substantive part of the document.

DATED The testator JOHN PRINE signed in the presence of both of us being present at the same time, and we attested his signature in the presence of him and of each other. Testator Witness 1: ……………… Witness 2: ……………… Full name: Full name: Occupation: Occupation: Address: Address:

[page 329]

11 FAMILY PROVISION STRATEGIES

Family Provision Introduction Family provision legislation Eligible applicants — family provision Relevant factors Notional Estate Strategies to Protect an Estate From a Family Provision Claim Introduction Strategy 1 — transferring assets Strategy 2 — changing the form of ownership — joint tenancy Strategy 3 — superannuation benefits — binding death benefit nominations Gift and Loan Back Strategies Strategy 4 — gift and loan back Producing cheques Repaying the loan What happens if the equity in the property increases? Division 7A of the Income Tax Assessment Act 1936 Sham transactions Documenting the transaction Promissory notes, overdrafts and set-off Transactions voidable on application of the trustee in bankruptcy Gift and loan back strategies and family provision in New South Wales Mutual and Contractual Wills Mutual wills Adequate Provision for Proper Maintenance and Support and other Sources of Wealth

[page 330]

FAMILY PROVISION Introduction 11.1 In all Australian jurisdictions, legislation confers on the court power to make a ‘family provision order’ out of the estate of the deceased person in favour of an ‘eligible person’ where the court is satisfied that ‘adequate provision for the proper maintenance, education or advancement in the life of the person’ has not been made either in the deceased’s will or on intestacy. In all jurisdictions except New South Wales, the court is limited to the deceased person’s estate as the source of provision, but in New South Wales the court is empowered to order that property not forming part of the estate be declared ‘notional estate’ and available to satisfy an order for provision. The implications of potential claims on an estate and the restrictions that family provision legislation may have on the testamentary wishes of the testator should be considered in every estate plan.

Family provision legislation 11.2 • • • • • •

The relevant legislation in each jurisdiction is: Family Provision Act 1969 (ACT); Succession Act 2006 (NSW); Family Provision Act 1970 (NT); Succession Act 1981 (Qld); Inheritance (Family Provision) Act 1972 (SA); Testator’s Family Maintenance Act 1912 (Tas);

• •

Administration and Probate Act 1958 (Vic); and Family Provision Act 1972 (WA).

This chapter is intended to provide background information for the strategies discussed in this chapter rather than a full discussion on family provision law.

Eligible applicants — family provision 11.3 The classes of eligible applicants for family provision differ from jurisdiction to jurisdiction. This chapter is intended to be illustrative, and only New South Wales and Victorian legislation will be referred to.

New South Wales 11.4 Under s 57 of the Succession Act 2006 (NSW), those eligible to make a family provision claim are: • •

a person who was the wife or husband of the deceased person at the time of the deceased person’s death; a person with whom the deceased person was living in a de facto relationship at the time of the deceased person’s death; [page 331]

• • •

•

a child (of any age) of the deceased person; a former wife or husband of the deceased person; a person who was, at any particular time, wholly or partly dependent on the deceased person, and who is a grandchild of the deceased person or was, at that particular time or at any other time, a member of the household of which the deceased person was a member; and a person with whom the deceased person was living in a

close personal relationship at the time of the deceased person’s death. The class of eligible persons under New South Wales legislation is broad and largely reflective of other jurisdictions.

Victoria 11.5 Interestingly, reforms to the Victorian Administration and Probate Act 1958 (Vic) have significantly limited those eligible to make a family provision claim, in particularly in relation to adult children. Under s 90, those eligible to make a family provision claim are: • •

•

•

•

a spouse or domestic partner of the deceased at the time of the deceased’s death; a child of the deceased, including a child adopted by the deceased who, at the time of the deceased’s death, was under the age of 18 years, a full-time student aged between 18 years and 25 years or has a disability; a stepchild of the deceased who, at the time of the deceased’s death, was under the age of 18 years, a full-time student aged between 18 years and 25 years or has a disability; a person who, for a substantial period during the life of the deceased, believed that the deceased was a parent of the person and was treated by the deceased as a natural child of the deceased who, at the time of the deceased’s death, was under the age of 18 years, a full-time student aged between 18 years and 25 years or has a disability; and a former spouse or former domestic partner of the deceased (subject to some restrictions).

Relevant factors 11.6

Where an eligible person has made a family provision

application, the court will determine whether adequate provision for the proper maintenance, education or advancement in life of the applicant has been made by the will of the deceased person, or by the operation of the intestacy rules in relation to the estate of the deceased person, or both.1 Each jurisdiction prescribes the factors that the court will consider in assessing a claim by an eligible applicant. It should be noted that these factors are not exhaustive. [page 332] By way of example, s 60 of the Succession Act 2006 (NSW) provides: (2)

The following matters may be considered by the Court: (a) any family or other relationship between the applicant and the deceased person, including the nature and duration of the relationship, (b) the nature and extent of any obligations or responsibilities owed by the deceased person to the applicant, to any other person in respect of whom an application has been made for a family provision order or to any beneficiary of the deceased person’s estate, (c) the nature and extent of the deceased person’s estate (including any property that is, or could be, designated as notional estate of the deceased person) and of any liabilities or charges to which the estate is subject, as in existence when the application is being considered, (d) the financial resources (including earning capacity) and financial needs, both present and future, of the applicant, of any other person in respect of whom an application has been made for a family provision order or of any beneficiary of the deceased person’s estate, (e) if the applicant is cohabiting with another person—the financial circumstances of the other person, (f) any physical, intellectual or mental disability of the applicant, any other person in respect of whom an application has been made for a family provision order or any beneficiary of the deceased person’s estate that is in existence when the application is being considered or that may reasonably be anticipated, (g) the age of the applicant when the application is being considered, (h) any contribution (whether financial or otherwise) by the applicant to the acquisition, conservation and improvement of the estate of the deceased person or to the welfare of the deceased person or the deceased person’s family, whether made before or after the deceased person’s death, for

which adequate consideration (not including any pension or other benefit) was not received, by the applicant, (i) any provision made for the applicant by the deceased person, either during the deceased person’s lifetime or made from the deceased person’s estate, (j) any evidence of the testamentary intentions of the deceased person, including evidence of statements made by the deceased person, (k) whether the applicant was being maintained, either wholly or partly, by the deceased person before the deceased person’s death and, if the Court considers it relevant, the extent to which and the basis on which the deceased person did so, (l) whether any other person is liable to support the applicant, (m) the character and conduct of the applicant before and after the date of the death of the deceased person, [page 333] (n) (o) (p)

the conduct of any other person before and after the date of the death of the deceased person, any relevant Aboriginal or Torres Strait Islander customary law, any other matter the Court considers relevant, including matters in existence at the time of the deceased person’s death or at the time the application is being considered.

Family provision in the context of a large estate is discussed in 11.23.

NOTIONAL ESTATE 11.7 In jurisdictions other than New South Wales, the court has no power to access non-estate assets to satisfy a family provision claim. This means that assets can be quarantined by moving them out of the estate, for instance by gift. This is a powerful tool in protecting assets from family provision claims. Section 63 and Pt 3.3 of the Succession Act 2006 (NSW) greatly widen the range of property available to the court to satisfy a family provision claim by introducing the concept of ‘notional estate’. Where there has been a ‘relevant property transaction’, s 80(1) permits the court to declare property to be ‘notional estate’ for the purpose of making a family provision order, and order that

provision be made out of that notional estate. It is not necessary that the property declared notional estate be property the subject of the ‘relevant property transaction’, nor is it necessary that the property to be declared notional estate ever belonged to the testator. ‘Relevant property transaction’ is defined in s 75(1): (1)

A person enters into a relevant property transaction if the person does, directly or indirectly, or does not do, any act that (immediately or at some later time) results in property being: (a) held by another person (whether or not as trustee), or (b) subject to a trust, and full valuable consideration is not given to the person for doing or not doing the act.

There are time limits. Section 80(2) empowers the court to make a notional estate order where a relevant property transaction is: •

•

a transaction that took effect within three years before the date of the death of the deceased person and was entered into with the intention, wholly or partly, of denying or limiting provision being made out of the estate of the deceased person for the maintenance, education or advancement in life of any person who is entitled to apply for a family provision order; a transaction that took effect within one year before the date of the death of the deceased person and was entered into when the deceased person had a moral obligation to make adequate provision, by will or otherwise, for the proper maintenance, education or advancement in life of any person who is entitled to apply for a family provision [page 334] order which was substantially greater than any moral obligation of the deceased person to enter into the transaction; or

•

a transaction that took effect or is to take effect on or after the deceased person’s death.

A ‘relevant property transaction’ can be an omission to do something as well as a positive act. For example, it was held in Kembrey v Cuskelly2 that the failure of a deceased person to nominate a specific beneficiary under a life insurance policy constituted a ‘relevant property transaction’. While New South Wales is currently the only jurisdiction with ‘notional estate’ provisions, other jurisdictions may follow. The National Committee for Uniform Succession Laws in its 2005 Report 110: Uniform Succession Laws: Family Provision, published by the New South Wales Law Reform Commission, recommended the general adoption of notional estate provisions.

STRATEGIES TO PROTECT AN ESTATE FROM A FAMILY PROVISION CLAIM Introduction 11.8 The fundamental goal of estate planning is to ensure that a testator’s assets pass to those that the testator intends to benefit, and the estate plan should immunise the testator’s wishes against a family provision attack by a disappointed eligible applicant. There are two main ways to reduce the risk or impact of a beneficiary challenge:3 • •

ensure adequate provision is made for beneficiaries entitled to contest the estate; or dissuade disappointed persons from seeking provision by reducing the overall value of the estate and removing the financial incentive to claim.

The effectiveness of the following strategies may be constrained by notional estate provisions in New South Wales.

Strategy 1 — transferring assets 11.9 A robust strategy is to deplete the estate. By divesting themselves of assets or the control of those assets before their death, a testator can greatly diminish the ultimate value of their estate and hence the assets available to satisfy a family provision claim. Depletion may also serve a wider purpose: the testator may in any case wish to pass control of assets to others during life. [page 335] The transfer of legal title in assets can invoke a range of considerations, including: • • • •

stamp duty liability; income tax liability (capital gains tax); social security laws (ie gifting provisions and the resulting impact on the age pension — see Chapter 4); or the unwinding of transactions under the bankruptcy ‘clawback’ rules.

Stamp duty can be payable as a result of the transfer of assets; however, there are many concessions and reliefs available depending on the relevant state legislation. Disposals can create capital gains tax (CGT) liability. Certain assets such as personal use assets and pre-CGT assets may be exempt. In other cases, concessions may shelter any resulting capital gains. The New South Wales notional estate provisions limit the effectiveness of depletion strategies where the transaction has occurred within three years of the testator’s death.

Strategy 2 — changing the form of ownership

— joint tenancy 11.10 Joint ownership can help deplete a testator’s future estate. Where an individual holds property as a ‘tenant in common’, each owner has a separate and definable ownership proportion (eg 50% person A and 50% person B). Each proportional interest can be transferred and will form part of an individual’s estate upon their death. However, where property is held by persons as ‘joint tenants’, all of the owners own the entire interest in the property and the ‘rule of survivorship’ applies. This means that the surviving joint tenants will immediately assume the ownership interest of any joint tenant who dies and the ownership interest does not pass to the estate of the deceased joint tenant. It follows that a testator who wants an asset to pass on death directly to another person without passing through the testator’s estate could ensure that he or she holds the asset as a joint tenant. Most jurisdictions have favourable stamp duty provisions which allow a change in ownership to a joint tenancy where the property in question is the principal place of residence of the owners (eg see s 72 of the Duties Act 1999 (ACT)). It should be noted that a change in ownership to a joint tenancy or a failure to sever the joint tenancy may be caught by the notional estate provisions in Pt 3.3 of the Succession Act 2006 (NSW).

Strategy 3 — superannuation benefits — binding death benefit nominations 11.11 Superannuation death benefits form an attractive asset from the point of view of a potential family provision applicant. The estate plan should [page 336]

therefore, as far as possible, prevent superannuation benefits from becoming part of the estate where there is a risk of a family provision claim. Superannuation death benefits do not automatically form part of a testator’s estate. However, they may do so if the superannuation fund trustee exercises its discretion to pay them into the estate, or if the deceased has made a valid binding death benefit nomination directing payment into the estate (see 1.4). The testator must understand what discretion the superannuation fund trustee has and curtail that discretion if necessary: see Chapter 6. So, if a person realises that a challenge to their future estate is likely, they may put in place a binding death benefit nomination requiring the trustee to pay their death benefits directly to their dependants — bypassing the estate. In New South Wales, where notional estate provisions apply, a binding death nomination may not stop the Supreme Court from finding that the signing (or failure to change) the binding nomination was a ‘relevant property transaction’ and declare the superannuation (or other property) to be notional estate available to satisfy a family provision claim. Cases dealing with the intersection of Pt 3.3 of the Succession Act 2006 (NSW) and the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) provisions relating to binding death benefit nominations are rare, but it is generally accepted that the signing of a superannuation death benefit form (or failure to do so) will in itself constitute a ‘relevant property transaction’.4 However, some commentary suggests an argument could be made that s 109 of the Commonwealth Constitution could cause the SIS Act provisions to prevail,5 but it seems that no attempt has been made so far to use this argument to prevent the signing or nonsigning of a death benefit nomination from being held to be a relevant property transaction.

GIFT AND LOAN BACK STRATEGIES

Strategy 4 — gift and loan back 11.12 In jurisdictions other than New South Wales, an effectively implemented gift and loan back strategy can give effective protection against a family provision claim. The transactions comprising gift and loan back arrangements are completed before the testator’s death, and inter vivos transactions can remove property from a person’s estate and so make the property unavailable for distribution after the person’s death. It may not be necessary for a testator to dispose of the legal title in assets in order to deplete their future estate. For example, a ‘gift and loan back’ strategy (sometimes referred to as a ‘secured debt strategy’) may be used. This strategy usually involves the owner of an asset making a gift of money equal to the value of their equity in that asset (such as real property or shares) to either a trust, a [page 337] ‘low-risk’ spouse or — in the context of minimising the impact of an estate challenge — the intended beneficiary. The trust, spouse or intended beneficiary then lends an amount of money equal to the value of the gift back to the testator and secures that loan with the relevant property. In the case of real property, the security usually takes the form of a mortgage. For personal property, the lender may take a security interest under the Personal Property Securities Register. This transaction has the effect of reducing the net value of a person’s estate without compelling the testator to give up title. The arrangement broadly achieves equivalent protection for the assets when compared with an absolute transfer. An advantage of a ‘gift and loan back’ arrangement over an absolute transfer of property is that no transfer duty or income tax consequences should arise given that there isn’t a disposal of title or beneficial ownership; however, mortgage or security interest

registration fees will be payable, along with mortgage duty in some jurisdictions. The disadvantages of a ‘gift and loan back’ arrangement are:6 •

•

the transaction is more complex than a simple transfer and will require the preparation of additional documents such as a deed of gift, loan agreement and security documents; and the arrangement only protects the net equity in the asset at the time of the gifting. It will not automatically protect any increases in the value of the property.

Example: Gift and loan back strategy7 Jane lives in the Australian Capital Territory. Jane owns 100% of an investment property with a current value of $2,500,000 and an existing mortgage of $1,000,000. Jane has a partner Bob and an adult child John that she wants to exclude from her estate. She is concerned that John will contest her estate when she dies. Jane may consider implementing a gift and loan back strategy in order to protect her assets. Step 1 — Gift Jane gifts an amount equal to the equity ($1,500,000) in her property to a trust. Step 2 — Loan The trustee of the trust subsequently lends an amount equal to the gift back to Jane and takes security over the property. The implementation of the gift and loan back strategy will protect her estate from a family provision claim by her son John by reducing the value of Jane’s estate.

Producing cheques 11.13 Evidence of the transactions should be available. Ideally, a physical cheque for the gifted amount should be drawn and given to the trustee to be

[page 338] banked. Likewise, a cheque should be drawn for the loaned amount and given to the owner of the asset. Where funds are not readily available, a bearer promissory note, overdraft facility or offset (discussed in detail below) can evidence the flow of funds.

Repaying the loan 11.14 To ensure that limitation of actions laws do not prevent enforcement of the loan, the loan agreement or the mortgage/security interest, the loan should be acknowledged periodically — at least annually. The time frame for bringing an action to recover a debt owing under a loan agreement secured by a mortgage is different for each jurisdiction. The limitation period for recovering a secured debt is currently 12 years in all states except South Australia and Victoria, where the limitation period is 15 years. The limitation period commences on the date the loan was last acknowledged whether by advance, partial payment or otherwise.

What happens if the equity in the property increases? 11.15 Where the equity in the property increases or the debt to an external financier is reduced the loan agreement should be ‘topped up’. This can be achieved, for example, by having the testator gift the amount of the increased value to the trust and repeating the process. Additional loan documentation may be required if the original loan agreement does not contemplate further advances.8

Division 7A of the Income Tax Assessment Act 1936 11.16 Income tax consequences can arise if a trust has an unpaid present entitlement owing to a private company beneficiary and makes a loan or payment to an individual who is a shareholder or an associate of a shareholder of that company. In these circumstances, Div 7A of the Income Tax Assessment Act 1936 (ITAA 1936) may have the effect that an unfranked dividend is deemed to have been paid to the shareholder or their associate. This is important if a gift and loan back arrangement is entered into with an existing trust.

Sham transactions 11.17 It is relevant to address whether the gift and loan back arrangement could be considered a ‘sham transaction’. In Sharrment Pty Ltd v Official Trustee in Bankruptcy9 (Sharrment), the Federal Court held that for a transaction to be considered a sham, the parties must intend that the acts or documents giving rise to the transaction ‘are not to [page 339] create the legal rights and obligations which they give the appearance of creating’.10 In other words, the court examines ‘whether the act or document was never intended to be operative according to its tenor at all but rather was meant to cloak another and different transaction’.11 A transaction is therefore a sham where the parties do not intend to give effect to the transaction.12 In Sharrment, the grantor effected a series of complex transactions designed to place certain assets out of the reach of his

creditors. The result was that the grantor owed a debt to the trustee of a family trust. It was held that the transactions did not constitute a sham arrangement and were intended to create a debt owed by the grantor rather than merely the appearance of a debt. This was despite the following: •

• •

• •

the transactions involved ‘a round robin of cheques’ rather than the physical transfer of funds, and not all of the parties had sufficient funds to meet the cheques; insofar as the transactions provided for loans to various entities, the loans were interest free and repayable at call; the grantor could control any call for repayment as he wished by issuing directions to the trustee of the family trust or by dismissing the trustee; the transactions were ‘circular in nature’ and ‘lack[ed] commercial purpose’; and there may have been an ‘ulterior purpose’ of the transactions, specifically to present a shield against the grantor’s creditors, which gave the transactions an ‘unpleasant aura’. Indeed, if such an ulterior purpose existed, it supported the validity of the transactions because only if the transactions were valid would the ulterior purpose be achieved.

Where a gift and loan back is implemented, the transactions are intended to be operative according to the documents that evidence them and to create the legal rights and obligations which they give the appearance of creating. By analogy with Sharrment, a gift and loan back arrangement should not be considered a sham merely because: •

• •

it is effected by a promissory note between the transferor and the trustee and does not involve the physical exchange of money; interest under the loan is payable at the discretion of the trustee and the principal is repayable at call; there is a degree of circularity in the transactions comprising

•

the gift and loan back and the transactions do not necessarily have a commercial justification; and the transferor could be said to have an ‘ulterior purpose’ of asset protection, rather than defeating the interests of a beneficiary in a family provision claim, in using the gift and loan back arrangement. [page 340]

Documenting the transaction 11.18 Sharrment supports the notion that a physical transfer of funds need not be necessary to document a transaction. This was subsequently confirmed in Atia v Nusbaum13 (Atia) where the court held that the legal effect of the documentation signed was exactly as the parties intended it to be and there was no mistake or sham involved. In Atia, a cosmetic surgeon entered into a gift and loan back style arrangement with his mother. When Dr Atia’s mother subsequently called in the debt, he argued that the loan and mortgage were not intended to be actually binding on him and were only documented to protect him against situations where he was sued professionally. In particular, Dr Atia argued that his mother was only calling in the debt secured by the mortgage because he had married his girlfriend against his mother’s express wishes. The court found that all aspects of the legal documentation, including a deed of gift, loan agreement and registered mortgage, had been validly signed.

Promissory notes, overdrafts and set-off

11.19 In some cases, there may be insufficient cash to carry out a gift and loan back transaction or it may be too burdensome to physically transfer funds. The transferor (testator) may consider payment by way of an overdraft facility, promissory note or by ‘setting off’ amounts owed to each other. An overdraft facility will provide the transferor with short-term funds to make payment to the transferee. Given that this amount is then loaned back to the transferor, the overdraft facility can be promptly repaid. This approach will usually require negotiation with a bank and interest expenses are likely to be payable for the short-term advance of funds. Another payment option may be a promissory note, which records a promise by one party to pay another. Given that a gift and loan back involves funds returning to the transferor, a single promissory note can be used to complete the transaction. For example, the transferor can issue the promissory note to the lender to satisfy payment of the gift. Under the loan back component of the strategy, the lender can pass the same promissory note to the issuer to satisfy the loaning of funds. Once the promissory note has returned to its issuer, the issuer may set off the amount owed to it by the lender against the amount that it owes the lender, and the note can be cancelled. A promissory note is often a convenient payment method which avoids the risks or impracticalities associated with physically transferring funds. The courts have traditionally regarded promissory notes as a money equivalent, and therefore they will be recognised as having the same effect as a physical transfer of money from one person to another.14 [page 341] The common law endorses the principle of set-off. In Re Harmony and Montague Tin & Copper Mining15 (commonly referred

to as ‘Spargo’s Case’), the court held that where there are mutual liabilities and mutual obligations, these can be set off against one another. That is, if A owes B and B owes A, a journal entry setting off these two amounts is sufficient ‘payment’. Sir George Mellish LJ stated: ‘if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards’.16 The Australian Taxation Office (ATO) has accepted this position in a superannuation context in SMSFD 2007/1.

Transactions voidable on application of the trustee in bankruptcy 11.20 Gift and loan back arrangements are not infallible. In the context of the Bankruptcy Act 1966, they can be unwound in circumstances where the testator or their estate is bankrupt (see Chapter 3). Relevantly, a transfer can be undone if it was made by a bankrupt: •

•

within five years before bankruptcy — and solvency cannot be proved otherwise by the bankrupt — to a related entity, and less than market value or no consideration was paid for the transfer;17 or at any time before bankruptcy — if the main purpose in making the transfer was to prevent the transferred property from becoming divisible, or to hinder or delay the process of making property available for division, among creditors.18

Critically, no time limit applies to the class of voidable transactions under s 121. The provisions specifically require that the main purpose in making the transfer must be to prevent the transferred property from becoming divisible, or to hinder or delay the process of making property available for division, among creditors.

The legislation infers that the main purpose of a transfer should be widely interpreted. In particular, a main purpose of defeating creditors can be established if at the time of the transfer the transferor was or was about to become insolvent. The onus will be on the transferor to disprove insolvency at the time of the transfer. In the context of s 122 of the Bankruptcy Act 1966, a statement of solvency at the time of the transaction given by an appropriately qualified professional will be helpful. Not only will this support the transferor’s financial ability, it will also help show that the transfer of equity cannot be seen to have the ‘main purpose’ of defeating creditors. In respect of s 121 and the notion of main purpose, other evidence will have to be to be adduced. [page 342] The leading ‘main purpose’ case under the Bankruptcy Act 1966 is Prentice (Trustees of the Property of Cummins (a bankrupt)) v Cummins19 (Cummins). In Cummins, the court confirmed that the Bankruptcy Act 1966 does not define the expression ‘main purpose’ and referred to the relevant dictionary definition of ‘main’ as being ‘chief, principal or leading’. The court stated that a transfer can be caught by the Bankruptcy Act 1966 even if the transferor had other purposes in mind in addition to the transferor’s ‘principal or leading’ purpose to defeat creditors, and it is for the bankruptcy trustee to prove that the transferor’s main purpose was to defeat creditors. This is likely to depend on the facts of the particular case. Mr Cummins was a barrister who had not lodged tax returns since 1955. When his failure to lodge was eventually identified by the ATO, he lodged returns for the 1992–1999 years. The assessment issued by the ATO was substantial, and Mr Cummins became bankrupt. The focus of the case was Mr Cummins’s transfer of his 50%

share in the family home to Mrs Cummins in August 1987 for less than market value and the transfer of 6,000 shares in a company in August 1987 for less than market value. The High Court found that for s 121 to apply: •

•

it must be probable, at the time of the transfer of property, that the property would have been available to creditors if it had not been transferred;20 and the relevant main purpose must have been to prevent the transferred property from becoming divisible, or to hinder or delay the process of making property available to creditors.21

The High Court confirmed that that the ATO was a creditor at the time of the 1987 transfers. Interestingly, the court’s view of the 1987 and earlier liabilities was not related to the 1992–1999 liabilities which were actually assessed and claimed by the ATO. The lack of any knowledge about an actual or likely claim would seem to be taken into account when establishing the main purpose. Therefore, if an individual does not have any reason to believe that a claim could be made, and has no existing issue with meeting payments to known creditors, then it would be difficult to demonstrate that a transfer could have been made for either of the purposes in s 121. The decision in Williams v Lloyd 22 (Williams) provides some hope that a sound existing financial position without any known or expected claims would prevent s 121 from applying. Dixon J stressed that the real intent to defeat or delay creditors must in fact exist from all the circumstances of a transaction. However, given that the High Court in Cummins stopped short of fully exploring the ‘future creditor’ issue, there is no definitive conclusion on this point as yet. [page 343] In Re Florance Ex parte: Andrew v Florance23 (Florance), an

alternative intention for a transfer was identified. In that case, the bankrupt executed options in favour of his non-bankrupt wife, which enabled her to purchase his interest in various properties. The options did not include an ability to increase the purchase price and were required to be exercised within a five-year period. The question in Florance was whether the grant of the options for nominal consideration were dispositions of property with the intent to defraud creditors. The bankrupt provided evidence to the court that he believed himself financially sound and solvent at the time of granting the options. Mrs Florance claimed that the option arrangement should be carried out so that the various properties could be retained and used for her retirement. This helped persuade the court that the options were not entered into with the intent to defraud creditors. While the bankrupt was successful in arguing that the transaction did not have the main purpose of defeating creditors, the case was ultimately lost on operation of s 120 given that the transactions occurred within the four-year period. The court provided further guidance on this issue by stating that if all that is known is that a professional person: • • • •

transfers the bulk of her or his assets to a family member or a family trust for no consideration; has no creditors at the time of the transfer (or retains assets sufficient to meet all liabilities known at that time); is not engaged, and does not propose to engage in any hazardous financial ventures; and intends to protect the transferred assets from any action brought by a client who might in the future sue for professional negligence,

then the transfer is not void against the trustee in bankruptcy under the Bankruptcy Act 1966. However, if a transferor makes a voluntary settlement of property leaving the transferor without sufficient assets to meet their debts, it can readily be inferred that the transferor’s main

purpose was to defeat creditors, since that is the necessary consequence of the transfer. Furthermore, a transferor’s main purpose may be to defeat creditors even if the transferor has no creditors or is able to satisfy all creditors at the date of the transfer. Given the rationale in the above cases, if the transferor has no creditors at the time of entering into a gift and loan back arrangement and does not propose to engage in any hazardous financial ventures, the interest in the property ought to be protected once the time limit that applies under the clawback has lapsed. If the transferor either has creditors at the time of entering into the gift and loan back arrangement or engages (or proposes to engage in) any hazardous financial ventures, they should be satisfied that there are sufficient assets remaining to meet all debts. [page 344] Unfortunately, there can be no iron-clad guarantees that the amounts gifted will be protected from future claims. However, given the lengthy time limits that apply to clawbacks, it is preferable to ‘start the clock running’ by implementing the gift and loan back documents at the first opportunity.

Gift and loan back strategies and family provision in New South Wales 11.21 Whereas a gift and loan back can deplete the estate, the strategy for avoiding a family provision order is problematic in New South Wales where notional estate provisions apply: see 11.7. So, a gift and loan back transaction will not protect against a family provision claim where the transaction took place within one year before the death of the testator (where the transaction

was made at a time when the testator had a moral obligation to provide for the applicant), or within three years if the transaction was made with the intention of denying or limiting family provision. Time may therefore be of the essence. Section 75 covers both acts and omissions. It can be argued that the only omission that could be said to have ‘occurred’ where a gift and loan back strategy has been implemented is the failure of the deceased to pay back the loan. The authors are not aware of any cases in which a gift and loan back strategy has been tested in a family provision context involving notional estate.

MUTUAL AND CONTRACTUAL WILLS Mutual wills 11.22 A contract to make mutual wills is an agreement or promise by which the parties (usually a couple) or one of them bind themselves to make a will or wills in particular terms and declare that the will or wills will be either irrevocable, revocable with the consent of the other party or revocable on notice to the other party. If a party breaches the agreement by transferring property or making gifts inter vivos, or seeks to defeat the agreement by varying the will in conflict with the agreement, equity will intervene and provide a remedy, which may include a constructive trust. The doctrine of mutual wills is discussed in Hussey v Bauer:24 The characteristics of mutual wills and the means of proving their existence have been the subject of consideration in many courts. It is possible to draw from those authorities the following principles: (a)

Mutual wills arise when two persons agree to make wills in particular terms and agree that those wills are irrevocable and that they will remain unaltered25;

[page 345] (b) (c)

(d)

Substantially similar, even identical, wills are not mutual wills unless there is an agreement that they not be revoked26; The mere making of wills simultaneously and the similarity of their terms are not enough taken by themselves to establish the necessary agreement27; A will is, as a matter of probate law, revocable. But the revocation of a mutual will ordinarily results in the imposition of particular obligations – that is, the survivor becomes a constructive trustee.

On the other hand, contractual wills involve an agreement between a testator and an intended beneficiary. This means that a liability can be created against the estate which is only discharged when the promised asset is transmitted to the intended beneficiary. It is important to consider the impact of family provision legislation in two circumstances: •

•

the claimant under a mutual wills agreement could use family provision legislation as an alternative source of rights against the testator’s estate; and the rights of a beneficiary under a mutual wills agreement may be threatened by the competing claims of third parties with rights under the family provision legislation.

In Schaefer v Schuhmann28 (Schaefer), the New South Wales court held that property, the subject of a valid testamentary agreement, does not form part of the testator’s estate for the purpose of such legislation. In that case, the testator — a widower with seven children — made a codicil to his will in which he gave his house and contents to his housekeeper. After that date, the housekeeper was not paid for her services. A majority of the Privy Council held that she had acted on the basis that she would receive the house and contents on his death. On the testator’s death, his children made a family provision claim. The majority held that the house and contents were the subject of a contract and therefore the court did not have jurisdiction to make an order affecting the house. It was held that an obligation to bequeath property was analogous

with a debt against the estate. The personal representative was therefore bound to perform the testator’s promise and the property affected by the promise could not form part of the testator’s estate for the purposes of a family provision claim. As a result of the Schaefer decision, Queensland enacted an antiavoidance provision in s 41(12) of the Succession Act 1981. The provision has limited scope: it applies only to a donatio mortis causa, that is, the legislation provides that property that constitutes a gift in contemplation of death will be treated as part of the testator’s estate for the purposes of the family provision legislation. [page 346] Notional estate legislation in New South Wales operates to capture a much wider range of transactions. In Barns v Barns29 (Barns), the majority of the High Court30 held that property that is the subject of a mutual will (or other contract to make a will) is susceptible to a family provision application.31 While certain comments of the majority, at first glance, might lend support to a general public policy ground for restricting the ability of a grantor to enter into an inter vivos transaction to avoid family provision requirements (including by way of a gift and loan back arrangement),32 Barns did not provide a clear principle. Gleeson CJ, with whom Kirby J agreed, expressly noted that transfers made and obligations incurred by a grantor prior to her or his death are effective in diminishing the property that may be the subject of a family provision application.33 If documented correctly, an intended beneficiary may be able to secure the promise of the testator with a mortgage or security agreement.

ADEQUATE PROVISION FOR PROPER MAINTENANCE AND SUPPORT AND OTHER SOURCES OF WEALTH 11.23 When entering into a gift and loan back arrangement or a mutual or contractual will, it is also important to consider the ability of eligible applicants to make a family provision application. While the applicant would be asserting an entitlement to protected assets, in jurisdictions other than New South Wales, their claim may be a difficult one to succeed. Family provision orders can be very substantial. The disgruntled beneficiary in Darveniza v Darveniza & Drakos as Executors of the Estate of Bojan Darveniza34 (Darveniza) worked for the deceased for many years for minimal financial reward. The deceased promised the beneficiary that he would be rewarded in the future. Between 1979 and 1981, the beneficiary’s ‘remuneration’ was the use of the deceased’s petrol account at a service station and access to a tool shed where he slept. The estate in Darveniza was very large — at the time of trial it was at least $27 million, with up to $400 million held by associated entities. An award of family provision was made. The applicant was already well off — he had a net wealth at trial of approximately $2.5 million and the ability to generate around $700,000 per annum from his assets. Historically in Queensland, applicants of similar means have seen their applications [page 347] summarily dismissed (Higgins v Higgins,35 Dawson v Joyner36) or have had an insignificant sum awarded to them (Lamond v Public Trustee of Queensland)37.

In essence, the case was an excellent opportunity for the court to test the principle of ‘proper’38 provision in the context of ‘wellto-do’ beneficiaries. The case focused predominantly on promises made to the beneficiary during the deceased’s lifetime. These representations impacted upon the beneficiary’s ability to complete his secondary education and to obtain employment as a pilot. The court accepted that the beneficiary had contributed significantly to the estate assets. The court ordered that a lump sum of $3 million be paid to the applicant, thus setting a record for the highest sum awarded by a Queensland court to a family provision applicant. In an attempt to access the vast wealth held by the associated entities, the disgruntled beneficiary presented a claim in equity and a claim under the Trade Practices Act 1974 (Cth). Both of these claims were unsuccessful. Outside the scope of the two failed proceedings, the only consideration given to the associated entities was in establishing that the deceased had based his failure to provide for the beneficiary on the inaccurate assumption that the beneficiary would receive distributions from those entities. It does not, however, appear that the award to the beneficiary under s 41 of the Succession Act 1981 (Qld) was impacted by the wealth held in the associated entities. Therefore, in this regard, Darveniza can be viewed as confirming the effectiveness of gift and loan back arrangements, at least in jurisdictions without notional estate.

1. 2. 3.

4. 5.

Section 59 of the Succession Act 2006 (NSW). [2008] NSWSC 262. C Birtles and R Neal, Hutley’s Australian Wills Precedents, 8th ed, LexisNexis Butterworths, Sydney, 2014. Chapter 14 discusses the available methods of avoiding family provision. Kembrey v Cuskelly [2008] NSWSC 262. JK De Groot (ed), The Laws of Australia, Thompson Reuters, [36.2.730]; B O’Sullivan,

6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38.

Estate and Business Succession Planning 2011–12, The Tax Institute of Australia, 2012, [12-125]. McCullough Robertson, What is a Gift and Loan Back? Brisbane. Ibid. Ibid. (1988) 82 ALR 530. (1988) 82 ALR 530 at 536. (1988) 82 ALR 530 at 539. (1988) 82 ALR 530 at 537–538. [2011] QSC 044. See Ceborah SNC v SIP (Industrial Products) Ltd [1976] 1 Lloyd’s Rep 271 at 276, 278; Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713 at 732. (1873) LR 8 Ch App 407. (1873) LR 8 Ch App 407. Section 120 of the Bankruptcy Act 1966 (Cth). Section 121 of the Bankruptcy Act 1966 (Cth). [2006] HCA 6. Section 121(1)(a) of the Bankruptcy Act 1966 (Cth). Section 121(1)(b) of the Bankruptcy Act 1966 (Cth). (1934) 50 CLR 341. [1983] FCA 357. [2011] QCA 91 at [29]. Re Goodchild [1997] 3 All ER 63. Gray v Perpetual Trustee Co Ltd (1928) 40 CLR 558. Bigg v Queensland Trustees Ltd [1990] 2 Qd R 11. [1972] AC 572. (2003) 214 CLR 169. Gleeson CJ, Gummow, Kirby and Hayne JJ (Callinan J dissenting). The relevant legislation in Barns was the Inheritance (Family Provision) Act 1972 (SA). (2003) 214 CLR 169 at [34] per Gleeson CJ. (2003) 214 CLR 169 at [7], [19]. [2014] QSC 37. [2005] QSC 110 (where the applicant was an adult son with assets valued at $2.1 million). [2011] QSC 385 (where the applicant was an adult son with assets valued at $800,000). [2009] QSC 247 (where the sum awarded was only $30,000 more than that provided to the applicant in the will). Section 41 of the Succession Act 1981 (Qld).

[page 349]

12 BLENDED FAMILY STRATEGIES

Introduction The blended family dilemma The Blended Family Spectrum Strategy 1 — capital protected trusts Application of the provisions in Schedule 3 Property of the trust Beneficiaries of the trust The purposes of the trust The Appointor The Protector The trustee Powers of the trustee Investment of the fund Ending of the trust Strategy 2 — right of residence Strategy 3 — blended families — partial gifts to children Strategy 4 — full gift to spouse

INTRODUCTION The blended family dilemma 12.1

The nuclear family structure involving two parents and

two-and-a-half children is becoming less common. With a growing divorce rate it is unsurprising to see more and more blended families; that is, a family where one or both of the ‘parents’ have children from previous relationships and in some circumstances they may also have children together. The blended family poses a difficult challenge for a testator both emotionally and from an estate planning perspective. The testator will want to ensure that their current spouse and the children from that relationship are [page 350] adequately provided for, and at the same time the testator will want to ensure adequate provision for the children from the previous relationship. Where assets are limited, it is difficult to balance these needs, and in any case the testator’s expressed testamentary wishes are at risk of being overthrown by a successful family provision claim.1

THE BLENDED FAMILY SPECTRUM 12.2 The dilemma faced by clients in the above circumstances can be illustrated by the blended family spectrum. On one end of the spectrum are strategies giving certainty for the testator that their spouse will be adequately provided for, combined with certainty that their children will also inherit (whether initially or at some later stage). Such strategies are often highly restrictive for the surviving spouse. On the other end of the spectrum is flexibility and freedom for the surviving spouse, but a lack of certainty that the testator’s children will benefit. As the blended family spectrum shows, each strategy that the testator chooses becomes a trade-off between certainty and the level of restrictions they place on their spouse.

This chapter will consider four strategies along the spectrum, with Strategy 1 being at the end of the spectrum that is most restrictive to the surviving spouse and Strategy 4 being the least restrictive to the surviving spouse. The authors note that such strategies should be used cautiously. As pointed out in Hutley’s, long-term provisions in wills should generally be avoided unless there are good reasons for including them and the testator is fully aware of their implications.2 The reason for this is that with the passage of time such provisions usually become burdensome on both beneficiaries and trustee and are liable to become overly complex and inflexible to the needs and circumstances of beneficiaries in the future.3 Nevertheless, an overview of such strategies is given in this chapter.

Strategy 1 — capital protected trusts 12.3 At the extreme end of the blended family spectrum is the capital protected trust. This strategy by its nature is the most restrictive on the surviving spouse, but does provide maximum certainty that the testator’s children will eventually inherit. This strategy involves leaving all or part of the estate into a specifically drafted capital protected trust, where the income is to be provided for the benefit of the surviving spouse, but the capital is preserved for the eventual benefit of the children. [page 351] The main benefit of a capital protected trust is that it ensures that the capital of the trust will be preserved for the eventual benefit of the testator’s children, although it may take some time before they actually have access to those funds. The disadvantages of a capital protected trust are:

•

• • •

•

It is likely to be subject to a family provision claim if the court takes the view that despite the capital protected trust or as a result of the trust itself, inadequate provision was made for the spouse. The surviving spouse may in the future need access to the capital if the income from the trust is inadequate). Consideration will need to be given to the control points and in particular who should be the Appointors and trustees. A capital protected trust may lack the tax effectiveness of a discretionary testamentary trust in the sense that it may force income to be taxed in the hands of the spouse. Even where the surviving spouse is the trustee or a co-trustee with the children, he or she will inevitably face a level of interference from the residual capital beneficiaries who will be eager to receive their inheritance.

For the above reasons, a capital protected trust is not appropriate in all circumstances and as such the will drafter should ensure that the testator is fully aware of its implications. 12.4 A precedent for a capital protected trust is included below. If there is no Schedule 2 trust for a disabled beneficiary, Schedule 3 should be renumbered and amended accordingly to become Schedule 2. The Gift provisions through testamentary trusts clause should also be amended in a similar manner to where a Schedule 2 trust is used. SCHEDULE 3: CAPITAL PROTECTED TRUST

Application of the provisions in Schedule 3 12.5 This clause refers to the General powers of my executors and trustees clause. 1.

Application of the provisions in Schedule 3

In Schedule 3, ‘the trust’ means each trust governed by Schedule 3. The provisions in Schedule 3 do not apply to any trustee other than a Schedule 3 trustee. The provisions in Schedule 3 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

(1) (2) (3)

Property of the trust 12.6

This clause defines the property of each trust. [page 352]

2. (1)

The property of the trust The property of the trust (the fund) includes: (a) the initial sum paid by my executors from the initial property fund; (b) property which my executors transfer to the trustee as trustee; (c) property added or accumulated to the fund from time to time; and (d) the proceeds of any loan taken out by the trustee on behalf of the trust.

Beneficiaries of the trust 12.7 This clause sets out the beneficiaries of the trust. A distinction is made between income and capital beneficiaries in order to give effect to the primary purposes of the trust. The income beneficiaries include a wide class of beneficiaries in order to allow the trustee, with the consent of the Protector, to

distribute to any one or more of the income beneficiaries. The capital beneficiaries are, however, restricted to the testator’s lineal descendants. 3. (1) (2)

Beneficiaries of the trust The beneficiaries of the trust are the primary beneficiary, the income beneficiaries and the capital beneficiaries. To the extent that the inclusion of any trust or person as a beneficiary under the trust would cause the will or trust to be invalid for any reason whatsoever, that trust or person is not a beneficiary of the trust.

Income beneficiaries (3)

The income beneficiaries of the trust are the following persons, whether alive at my death or coming into existence thereafter: (a) the primary beneficiary; (b) the issue of the primary beneficiary; (c) the issue of a grandparent of the primary beneficiary; (d) my children; (e) the issue of my children; (f) a spouse and the issue of any of the persons specified in the preceding paragraphs; (g) subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; (h) a charity or charitable entity; and (i) an entity recognised as a deductible gift recipient entity under Australian taxation law.

Capital beneficiaries (4)

The capital beneficiaries of the trust are the following persons,

whether alive at my death or coming into existence thereafter: (a) my children; [page 353] (b) (c)

(d) (e)

the issue of my children; subject to subclause (2), a trust, company or other entity in which a person mentioned in the preceding paragraphs has an interest, whether absolute, direct, indirect, present, contingent or expectant, or is a director or shareholder; a charity or charitable entity; and an entity recognised as a deductible gift recipient entity under Australian taxation law.

The purposes of the trust 12.8 This clause contains the purpose of the trust. The primary purpose of the trust is to provide an income stream to the primary beneficiary. Where the Protector has provided consent, the trustee may use the trust funds for the secondary purposes. 4.

The purposes of the trust

Primary purposes of the trust (1)

The primary purpose of the trust is to directly or indirectly provide for the ongoing care and maintenance of [NAME] for [her or his] lifetime and to give to the trustee the widest possible discretion in carrying out this purpose.

Secondary purposes of the trust (2)

Where the Protector has given consent, other purposes for

which the trustee holds the fund on trust are directly or indirectly to provide for or promote the maintenance, education (including travel to broaden the mind), advancement or benefit of a capital beneficiary or beneficiaries; and to give to the trustee the widest possible discretion in using the powers of the trustee in carrying out those purposes. Trustee has absolute discretion (3)

The purposes of the trust as stated in this clause are to be read in their general meaning. Subject to the requirement that the trustee pay the net income of the trust to the primary beneficiary, I emphasise that there is no obligation on the trustee ever to provide a benefit of any kind, to or for any other beneficiary.

The Appointor 12.9 The default Appointor (or Appointors) of the trust are the executor or executors. Variations may be made to this clause using the variations in Chapter 9 to appoint a named Appointor. The primary beneficiary is specifically excluded as an Appointor in order to ensure that they do not gain control of the trust. If the intention was that the primary beneficiary should become Appointor and control the trust, the testator should simply [page 354] have given the primary beneficiary outright control through a Schedule 1 discretionary testamentary trust in the first place. 5.

The Appointor

Powers of the Appointor (1)

The Appointor has the power to: (a) appoint one or more trustees; (b) appoint herself or himself trustee or sole trustee; (c) remove one or more of the trustees; and (d) resign as Appointor.

Eligibility and appointment of the Appointor (2) (3) (4) (5)

(6)

Subject to subclause (3), my executors are the first Appointors. [NAME] is not eligible to be an Appointor. If an Appointor, not being a sole Appointor, ceases to be an Appointor, the remaining Appointor is the Appointor. If there is no Appointor: (a) those of my executors are or become Appointors; or (b) if I have no executor who is willing and able to be an Appointor, the court may appoint an Appointor. A person who is Appointor under this clause is not an Appointor under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Appointor (7)

An Appointor (including joint Appointors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Appointor or Appointors, to act with or instead of the Appointor; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the Appointor is restricted from passing her or his powers as Appointor.

The Protector 12.10 As with the Model Testamentary Trust precedent, the Protector has the power to consent to certain actions by the trustee. In the context of a Schedule 3 (capital protected) trust, the Protector has the power to consent to the trustee making distributions of income to any of the income beneficiaries, distributions of capital to the capital beneficiaries, or to the ending of the trust. If for example, the surviving spouse of the testator no longer needed access to the funds, they could agree to the ending of the trust. [page 355] 6. (1) (2)

The Protector The Protector has the power to consent to certain actions by the trustee. The powers of the Protector to consent to the actions of the trustee are set out in subclause (5) of the clause Powers of the trustee.

Eligibility and appointment of the Protector (3) (4)

(5)

Subject to subclause (4), the primary beneficiary is the first Protector. If the primary beneficiary lacks or loses capacity, that person is disqualified from being a Protector, and the guardian or legal representative of the primary beneficiary is the Protector, but only until such time as the primary beneficiary is no longer subject to guardianship, at which time the primary beneficiary is Protector. If there is no Protector: (a) my executors are the Protector; or (b) if I have no executor who is willing and able to be a

(6)

Protector, application may be made to the court for a Protector to be appointed. A person who is Protector is not a Protector under any other Schedule unless he or she is appointed under that Schedule.

Succession of the office of Protector (7)

(8)

A Protector (including Joint Protectors) may, by unregistered deed or will, subject to any restrictions which apply to them: (a) appoint another person or persons as Protector or Protectors, to act with or instead of the Protector; and (b) attach restrictions to the appointment and, without limiting the range of permissible restrictions, specify that: (i) the appointment is revocable or irrevocable; or (ii) the appointed Protector is restricted from appointing a Protector. A Protector may resign.

The trustee 12.11 7. Trustee of the trust: definition and appointment (1) (2)

The trustee is the person who controls the trust pursuant to this Schedule. The trustee or trustees may be or include a professional trustee or one or more of my executors.

Appointment of the trustee (3) (4)

The trustee or trustees are those persons appointed by the Appointor. If the Appointor does not appoint an eligible person, my executors must nominate a trustee or trustees.

[page 356]

Powers of the trustee 12.12 This clause contains the powers of the trustee. Importantly, the trustee is required to distribute income of the trust to the primary beneficiary unless the Protector consents otherwise. This ensures that the interests of the surviving spouse are protected from a trustee who refuses to make distributions and instead accumulates the income. 8. (1)

(2)

Powers of the trustee The provisions in this clause which require the Protector’s consent for an action by the trustee do not apply if the sole Protector is the sole trustee or if all the Protectors are trustees. The resolutions of the trustee may be written or oral.

Unrestricted powers of the trustee (3)

The trustee may in her or his absolute discretion retain all or part of the capital of the fund, for any period permitted by law.

Restricted powers of the trustee (4) (5)

Subject to paragraph (5)(a), the trustee must distribute net income of the trust to the primary beneficiary. If the trustee has obtained the written consent of the Protector, the trustee may: (a) make distributions of all or part of the income of the fund to any one or more of the income beneficiaries; (b) make distributions of all or part of the capital of the fund to one or more of the capital beneficiaries; (c) retain all or part of the capital or accumulate all or part of the income of the fund, for any period permitted by

(d)

(e)

(f)

(g) (h) (i)

(j)

law; refrain temporarily or permanently from distributing or providing income, capital or other benefits from or relating to the fund, to any one or more of the primary beneficiary or potential beneficiaries; alter the provisions of the trust, but not so as to alter any of the capital beneficiaries of the trust or the clause Ending of the trust and vesting of the balance; bind by deed the future operations of the trust (including future distributions of income of the trust fund); carry on any trade or business; alter or revoke by deed a previous deed binding the future operations of the trust; exercise the powers in paragraphs (e), (f), (g), (i), (j), (k), (l), (m), (n), (q) and (r) of the clause General powers of my executors and trustees; if he or she practises a profession, or her or his firm performs services in a professional capacity, he or she may charge for those services at reasonable rates arrived at by agreement with the Protector, and may pay or recover those charges from the fund; [page 357]

(k) (l) (m)

(n)

make loans to beneficiaries on whatever terms the trustee thinks appropriate; make superannuation contributions on behalf of a beneficiary; where the trustee has exercised the power in the clause Streaming of income and capital to treat a capital receipt as income, distribute that income which was originally received as a capital receipt; appoint one or more separate trustees over any part of

(o)

the trust property noting that the new trustee or trustees will be bound by the terms of the trust in relation to the holding of that property; and end the trust.

How the trustee obtains written consent of the Protector (6)

(7)

Where the Protector’s written consent is required for an action by the trustee: (a) the trustee must give the Protector written notice of intention to do the action, and if there is more than one Protector, the notice must be given to each of them; (b) the Protector may give written consent to or veto the proposed action; (c) the trustee may, with the Protector’s written approval, take the proposed action; and (d) if the trustee has given the Protector written notice of a proposed action and the Protector has had at least 14 days to veto the action but has not done so, the trustee may take the action, in accordance with the terms of the written notice. The Protector may by written notice to the trustee, withdraw written consent already given, but a withdrawal of written consent has no effect on actions or commitments the trustee has already taken or made following the initial consent.

Investment of the fund 12.13 9. (1)

This clause contains the trustee’s powers of investment.

Investment of the fund Subject to subclauses (2) and (3), the trustee may invest the fund in any form of investment, and vary an investment at any time.

(2)

(3)

Subject to the subclause (3), the trustee is under no duty to comply with any provisions of s 14A(2) or s 14C(1) of the Trustee Act 1925 (NSW) (or any equivalent provision or legal requirement in the laws of the jurisdiction of the trust). The Protector may in their absolute discretion provide notice to the trustee that they must act in accordance with the provisions specified in the preceding subclause.

Ending of the trust 12.14 This clause contains the terms on which the trust will end and the balance will vest. Importantly, the trust ends when the primary beneficiary [page 358] dies. The trustee may end the trust at an earlier time if the Protector consents. 10. Ending of the trust and vesting of the balance (1)

(2)

The trust ends on the first to occur of any of the following: (a) when the trust ends by operation of law; (b) when the trustee acting under the powers given in this will ends the trust; or (c) when the primary beneficiary dies. When the trust ends: (a) If the trust ends because the primary beneficiary dies, the balance of the trust becomes part of my estate and is distributed as if the primary beneficiary died before me. (b) If the trust ends for any other reason, the balance of the trust fund vests in the capital beneficiaries specified by the trustee acting under the powers given in this will.

End of Schedule 3

Strategy 2 — right of residence 12.15 Moving along the blended family spectrum, the next strategy that may be considered is granting a right of residence in the testator’s principal place of residence to their spouse and passing residual interests to their children. Where the principal place of residence is held as joint tenants, the testator would need to sever the joint tenancy so that each of them will hold the property as tenants in common. Most jurisdictions impose nominal duty for severing a joint tenancy where it is the principal place of residence and the interest holders are spouses (see, for example, Div 4 of the Duties Act 1997 (NSW)). A right of residence can be structured in numerous ways. The two most common ways are to pass the property into a specific trust with a right of residence granted to the surviving spouse or give the property to the children or to the trustees of their discretionary testamentary trusts with a right of residence to the spouse. An example of the former is outlined below in 12.19. Assuming that no trust has been included for a disabled beneficiary, the following clauses would be included at the start of the will and a new Schedule 2 included. This precedent is a modified version of Form 26.05 in Hutley’s. 12.16 The right of residence precedent is included below. It consists of two parts. The first part contains a clause that should be inserted before the Gift provisions through testamentary trusts clause. This clause directs the executors to hold the principal place of residence on trust in accordance with Schedule 4. The second part contains the Schedule provisions relating to the residence (described as Schedule 4 for the purposes of differentiating it from the other schedules discussed in this text).

[page 359] 12.17 Residence for life with right of occupation (3)

If my spouse [NAME] survives me, then but not otherwise my executors hold my principal place of residence on trust in accordance with Schedule 4.

12.18 It is crucial that a definition of ‘principal place of residence’ is included in the Definitions clause of the will. An example is included below, though the will drafter may wish to specifically describe the property: ‘principal place of residence’ means any property that I own and live in at the time of my death;

12.19 The Schedule containing the residence for life provisions is outlined below. SCHEDULE 4: RESIDENCE FOR LIFE PROVISIONS Application of Schedule 4 (1) (2) (3)

This Schedule 4 and the terms of this Schedule shall only apply where [NAME] survives me. The provisions in Schedule 4 do not apply to any trustee other than a Schedule 4 trustee. The provisions in Schedule 4 prevail over any inconsistent provisions in the clause General powers of my executors and trustees.

Purpose of Schedule 4 (1)

It is my express wish that my executors use their powers under this will to ensure that [NAME] is provided with comfortable and appropriate accommodation out of the property which I

(2)

have set aside for that purpose. It is my wish that my executors: (a) use their powers to ensure that [NAME] is provided with comfortable and appropriate accommodation out of the property which I have set aside for that purpose; and (b) as far as is practical, consult with [NAME] and so far as is consistent with the general purpose of the trust, give effect to her or his wishes.

Residence for life (1)

Subject to the succeeding provisions of this Schedule 4 my executors must hold my principal place of residence on trust to allow [NAME] to live there for as long as he or she wishes, without paying rent, so long as he or she: (a) pays the rates, taxes and other outgoings in respect of the residence; (b) pays the premiums on any insurance policies taken out by my executors on the residence; (c) keeps it in repair to a reasonable standard and to the reasonable satisfaction of my executors; and (d) if relevant, pays all payments required by the provisions of a mortgage subsisting on the residence. [page 360]

(2)

(3)

In addition, [NAME] has the power to instruct my executors to sell the residence and to use the proceeds of that sale to purchase a replacement property, and if this occurs then that replacement property is to be held subject to the same terms as the residence under this Schedule as if the replacement property were my own principal residence at the time of my death. If in the reasonable opinion of my executors [NAME] has ceased to reside permanently in the residence, or to comply

(4)

with the conditions of the right of residence under this Schedule, my executors may give her or him notice in writing: (a) specifying that he or she has ceased to reside permanently in the residence or specifying the nature of the breach; (b) requesting that he or she rectify the breach specified; and (c) setting out their powers under this will. In addition to the powers given to them in this Schedule, my executors may exercise the powers given to them by law and by the rest of this will.

Ending of the right of residence (1)

(2)

The right of residence ends when [NAME]: (a) dies; (b) no longer resides permanently in the property; or (c) is in breach of the terms of the right of residence. When the right of residence ends, the property and/or the proceeds from the sale of the property as the case may be shall be distributed as part of the residue of my estate in accordance with the clause Gift provisions through testamentary trusts. End of Schedule 4

Strategy 3 — blended families — partial gifts to children 12.20 A blended family produces an enhanced risk of a family provision claim. A testator using Strategy 3 minimises that risk by making a specific gift or giving a percentage of the estate to their children (usually through a discretionary testamentary trust), and leaving the residue to the surviving spouse. The estate may be too small to make the gift to children without substantially reducing the benefits to the spouse. Life insurance

can play a crucial role in increasing the size of the estate: see Chapter 5 and the example in 5.18. The gift provisions through testamentary trust clause of the Model Testamentary Trust would usually be modified as follows: (1)

Subject to subclause (2), my executors must divide the proceeds of my life insurance policy [DETAILS OF POLICY] into equal shares and give those shares respectively to the trustee or trustees of the trusts created for each of my children [NAME1] and [NAME2] who survive me. [page 361]

(2)

(3) (4)

If a child of mine does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. My executors must give the residue of my estate to the trustee or trustees of the trust for my wife [WIFE] who survives me. Subject to the preceding trusts: (a) subject to paragraph (b), my executors must divide the residue of my estate into equal shares and give those shares respectively to the trustee or trustees of the trusts created for each of my children [NAME1] and [NAME2] who survive me; and (b) if a child of mine does not survive me (‘my predeceased beneficiary’), leaving children who survive me, my executors must divide the share which they would have given to the trustee or trustees of the trust for my predeceased beneficiary into as many equal shares as there are children of my predeceased beneficiary and

(5)

give those shares respectively to the trustee or trustees of the trusts for each of those children who survive me. Where in this clause I have given gifts and allocations of shares of my estate to the trustee or trustees of a trust for a person, my executors must deal with those gifts and allocations in accordance with the clause Primary beneficiary may request special distribution and Schedule 1.

Strategy 4 — full gift to spouse 12.21 This is the simplest of the blended family strategies and provides maximum freedom and flexibility to the surviving spouse. The testator leaves 100% of their estate to their spouse, and the spouse’s will benefits all the children, including the testator’s children from the previous relationship — the spouse’s step-children. The arrangement is not contractual — there is no mutual will arrangement. The testator is acting in the faith that the spouse will not change their will in the future so as to cut out the testator’s children from the previous relationship. This strategy requires complete trust in each other. It is risky, particularly if there is a possibility that the surviving spouse might remarry. However, the benefits are significant. Unlike the previous strategies, this option imposes no restriction on the survivor and is therefore flexible enough to cater to the future financial needs of the surviving spouse. The strategy is also tax effective because superannuation can pass to the surviving spouse as a tax-effective pension and free of any potential death benefit taxes: see Chapter 6. The Model Testamentary Trust precedent in Chapter 8 is suitable for this strategy.

1.

Strategies to reduce the risks of a family provision claim are discussed in Chapter 11.

2. 3.

C Birtles and R Neal, Hutley’s Australian Wills Precedents (Hutley’s), 8th ed, LexisNexis Butterworths, Sydney, 2014, para 26.1. C Birtles and R Neal, Hutley’s Australian Wills Precedents, 8th ed, LexisNexis Butterworths, Sydney, 2014, para 26.1.

INDEX References are to paragraph numbers

A Apple iTunes library digital asset, as .… 1.5 Appointor .… 7.21 asset protection by .… 3.3 bankruptcy of .… 3.17 capital protected trust precedent .… 12.9 interaction with other offices .… 7.30 example .… 7.31 Model Testamentary Trust .… 8.21 appointor is named person .… 9.30, 9.52 disqualified .… 9.31 disabled beneficiary, for .… 9.51–9.53 substitute appointor is named person .… 9.32, 9.53 power allocation between offices .… 7.30 pre-drafting consideration .… 1.21 Asset protection appointor, by .… 3.3 background .… 3.2 bankruptcy see Bankruptcy and asset protection beneficiaries protected from themselves .… 3.4 control withheld permanently .… 3.5

death before reaching preservation age .… 3.6 beneficiaries protected from third parties .… 3.7 mandatory or optional testamentary trusts .… 3.8 benefit aims and .… 7.10 family law see Family law and asset protection flexibility and .… 7.10 limits .… 3.9 overview .… 3.1, 3.2, 3.29 protector, by .… 3.3 stronger level option .… 7.29 Assets digital .… 1.5 estate and non-estate, distinguished .… 1.3, 6.3 superannuation as non-estate asset .… 1.4 Automatic disqualification clauses bankruptcy .… 3.24 family law basic clause .… 3.51 strong provision .… 3.52

B Bamford see Federal Commissioner of Taxation v Bamford Bankruptcy appointor .… 3.17 asset protection see Bankruptcy and asset protection automatic disqualification clauses .… 3.24 beneficiary .… 3.14 trust-controlling .… 3.18 cases .… 3.19–3.22

deceased estate creditor-defeating transfers .… 3.28 insolvent debtor’s estate .… 3.25 market value, transfers for under .… 3.27 trustee in bankruptcy voiding transactions .… 3.26 gift and loan back .… 11.20 overview .… 3.10 trustee .… 3.15 Bankruptcy and asset protection appointor’s bankruptcy .… 3.17 automatic disqualification clauses .… 3.24 bankrupt trustee .… 3.15 beneficiary’s bankruptcy .… 3.14 trust-controlling beneficiary .… 3.18 cases .… 3.19–3.22 divisible property .… 3.13 interest in trust, treatment for bankruptcy .… 3.16 overview .… 3.11, 3.23, 3.29 property available to trustee in bankruptcy .… 3.12 trustee’s bankruptcy .… 3.15 Bare trusts .… 1.13 Beneficiaries bankruptcy .… 3.14 trust-controlling beneficiary .… 3.18 cases .… 3.19–3.22 benefits and benefit qualification .… 7.8 capital protected trust precedent .… 12.7 characteristics .… 7.6 disabled see Disabled beneficiaries

flexibility see Flexibility identity re Schedules .… 7.16 minors .… 1.20 optional discretionary trusts for able adults .… 7.11 potential .… 7.20 preservation age .… 1.20, 3.4, 7.26 death before reaching .… 3.6 primary .… 7.19 Model Testamentary Trust clauses identification .… 8.11 special distribution request .… 8.14 protection see Asset protection taxation where beneficiary not legally disabled .… 2.3 trust income taxed as beneficiary’s income .… 2.5, 2.18 trust rules and identity of .… 7.16 Blended families .… 12.1 spectrum .… 12.2 capital protected trust .… 12.3 precedent see Capital protected trust precedent children, partial gifts to .… 12.20 residence right .… 12.15 precedent .… 12.16–12.19 spouse, full gift to .… 12.21 Body disposal, model clause .… 9.7 burial .… 9.8 cremation .… 9.9

C Capital gains tax (CGT)

testamentary trusts .… 2.10 CGT discount .… 2.13 CGT rollover and tax-advantaged entities .… 2.11 tax effectiveness .… 2.18 Capital protected trust precedent .… 12.4 appointor .… 12.9 beneficiaries .… 12.7 ending trust .… 12.14 fund investment .… 12.13 protector .… 12.10 purposes of trust .… 12.8 Sch 3 provisions application .… 12.5 trust property .… 12.6 trustee definition and appointment .… 12.11 powers .… 12.12 Children see also Minors guardianship model clause .… 9.10 legal guardian, testator’s choice .… 1.19 partial gifts to .… 12.20

D Deceased estates bankruptcy creditor-defeating transfers .… 3.28 insolvent debtor’s estate .… 3.25 market value, transfers below .… 3.27 trustee in bankruptcy voiding transactions .… 3.26 estate and non-estate assets .… 1.3, 6.3

digital assets .… 1.5 superannuation .… 1.4 overview .… 1.8 testamentary trusts, distinction .… 1.7 Disabled beneficiaries control permanently withheld from .… 3.5 Model Testamentary Trust see Model Testamentary Trust Schedule 2 preservation age .… 1.20, 3.4, 7.26 death before reaching .… 3.6 special disability trusts see Special disability trusts Distributions tax effectiveness distributions to adults and minors .… 2.16 distributions to minors .… 2.15 Drafting testamentary trusts considerations before .… 1.17 appointor .… 1.21 children’s legal guardian, choice .… 1.19 executor choice .… 1.18 preservation age for certain beneficiaries .… 1.20 protector, choice .… 1.22 flexibility see Flexibility Model Testamentary Trust see Model Testamentary Trust overview .… 7.1

E Ease of use .… 7.3 modularity of precedents .… 7.14

‘matched’ elements .… 7.15 Estate planning estate and non-estate assets .… 1.3, 6.3 digital assets .… 1.5 superannuation .… 1.4 insurance see Insurance life insurance, strategies including .… 5.16 overview .… 1.1 what constitutes .… 1.2 Examples see Precedent application examples Executor .… 7.18 appointment model clause .… 8.9 conflicts of interest model clause .… 8.30 death benefit related powers, model clause .… 8.31 interaction with other offices .… 7.30 example .… 7.31 Model Testamentary Trust schedule clauses conflicts of interest .… 8.30 death benefit related powers .… 8.31 powers generally .… 8.32 power allocation between offices .… 7.30 powers, model clause .… 8.32 death benefit related .… 8.31 testamentary trust, choice for .… 1.18

F Facebook .… 1.5 Families, blended see Blended families Family Court

cases where trusts looked through .… 3.37–3.46 implications .… 3.47 drafting and administration issues .… 3.48 family law and automatic disqualification clauses .… 3.51, 3.52 separate trusts for each child .… 3.50 solicitor’s asset protection advice .… 3.49 ‘trust busting’ powers .… 3.31 family trust as financial resource or expectancy .… 3.33 ownership of third party’s property, alteration .… 3.35 setting aside transactions .… 3.34 trust assets treated as parties’ property .… 3.32 trust treated as sham .… 3.36 Family law and asset protection automatic disqualification clauses basic clause .… 3.51 strong provision .… 3.52 Family Court see Family Court property settlements, limits of asset protection .… 3.30 solicitor’s asset protection advice .… 3.49 Family provision .… 11.1 blended families see Blended families contractual wills .… 11.22 eligible applicants .… 11.3, 11.23 New South Wales .… 11.4 Victoria .… 11.5 example .… 11.23 factors relevant to claim .… 11.6 gift and loan back see Gift and loan back legislation .… 11.2

mutual wills .… 11.22 notional estate .… 11.7 gift and loan back .… 11.21 protection from claim .… 11.8 asset transfer .… 11.9 gift and loan back see Gift and loan back joint tenancy .… 11.10 ownership form change .… 11.10 superannuation benefits .… 11.11 binding death benefit nomination .… 11.11 ‘relevant property transaction’ .… 11.7 superannuation and .… 6.19, 6.20 protection from family provision claim .… 11.11 binding death benefit nomination .… 11.11 Family trust election to be, for tax purposes .… 2.9 parties’ financial resource or mere expectancy .… 3.33 Features of testamentary trusts appointor .… 7.21 asset protection .… 7.29 beneficiaries potential .… 7.20 preservation age .… 7.26 primary .… 7.19 executor .… 7.18 ineligible officebearer .… 7.27 temporary or permanent .… 7.28 precedent’s key offices/concepts .… 7.17 protector .… 7.22

trustee appointment .… 7.25 controlling .… 7.24 function and powers .… 7.23 removal .… 7.25 Federal Commissioner of Taxation v Bamford .… 2.19 Commonwealth Government reactions .… 2.28 High Court decisions .… 2.23, 2.26 consequences .… 2.24, 2.27 income of trust .… 2.20 ambiguity of meaning .… 2.20 capital gain as .… 2.20, 2.21 Commissioner’s argument .… 2.21 High Court decision .… 2.23 consequences .… 2.24 taxpayer’s argument .… 2.22 ‘that share’, meaning .… 2.25 High Court decision .… 2.26 consequences .… 2.27 Fixed trusts .… 1.13 Flexibility .… 7.3 aspects .… 7.4 asset protection and benefit aims .… 7.10 beneficiaries benefits and benefit qualification .… 7.8 characteristics .… 7.6 individual, for .… 7.11 drafting .… 7.5

family types .… 7.7 relationships to testator .… 7.7 shares, uncertainty about .… 7.9

G Gift and loan back .… 11.12 bankrupt transferor .… 11.20 cheque production .… 11.13 effectiveness example .… 11.23 equity increase consequences .… 11.15 ITAA 1936 Div 7A .… 11.16 loan repayment .… 11.14 New South Wales .… 11.21 overdrafts .… 11.19 promissory notes .… 11.19 set-off .… 11.19 sham transactions .… 11.17 transaction documented .… 11.18 voidability for bankruptcy .… 11.20 Gifts (Model Testamentary Trust clauses) absolute gifts .… 8.10 variations .… 9.12, 9.13 absolute gifts given in ‘gift provisions’ clause .… 9.26 default gift taking effect .… 8.15 gift provisions through testamentary trusts .… 8.13 variations .… 9.14 children with representation .… 9.17 general beneficiaries .… 9.18 property or money .… 9.15

siblings of testator .… 9.19–9.24 testator’s children only .… 9.16 gifts held on trust under schedules .… 9.25 absolute gifts given in ‘gift provisions’ clause .… 9.26

I Income of trust .… 2.18 ambiguity of meaning .… 2.20 beneficiary’s income, taxed as .… 2.5, 2.18 capital gain as .… 2.20–2.22 case see Federal Commissioner of Taxation v Bamford High Court decision on meaning .… 2.23, 2.24 net, meaning .… 2.25 Income tax see also Taxation of testamentary trusts testamentary trusts .… 2.6 tax effectiveness .… 2.14–2.16 Income Tax Assessment Act 1936 (Cth) (ITAA 1936) Div 7A .… 11.16 overview .… 2.2 s 97 .… 2.3 interpretation case see Federal Commissioner of Taxation v Bamford s 98 .… 2.4 s 99 .… 2.5 trust stripping and s 100A .… 2.8 Insurance affordability .… 5.11 background .… 5.2 beneficiary nomination .… 5.12

business interests .… 5.15 cover determination expenses method .… 5.4 replacement method .… 5.3 family provision .… 5.13 life insurance estate planning strategies including .… 5.16 term life insurance .… 5.6 overview .… 5.1, 5.2 policy ownership .… 5.14 types .… 5.5 income protection .… 5.9 key person .… 5.10 term life .… 5.6 total and permanent disability .… 5.7 trauma .… 5.8

L Legal personal representative role .… 1.9 trustee, distinguished .… 1.9

M Mandatory or optional testamentary trusts beneficiaries protected from third parties .… 3.8 mandatory .… 1.15 mandatory versus optional .… 1.14 optional .… 1.16 Minors see also Children

distributions to .… 2.15 adults and minors .… 2.16 preservation age, where beneficiaries .… 1.20 Model Testamentary Trust application examples see Precedent application examples clauses see Model Testamentary Trust clauses disabled beneficiary see Model Testamentary Trust Schedule 2 ease of use see Ease of use example document .… 8.37, 8.38 explanatory document .… 8.36 flexibility see Flexibility overview .… 7.2, 8.1 purpose .… 7.2, 7.3 structure .… 7.32 see also Model Testamentary Trust clauses; Model Testamentary Trust schedules disabled beneficiary, trust for .… 7.35 discretionary provisions .… 7.34 general provisions .… 7.36 standard first clauses .… 7.33 variations clauses see Model Testamentary Trust clauses disabled beneficiary see Model Testamentary Trust Schedule 2 Model Testamentary Trust clauses .… 7.33, 8.2 advice recommendation .… 8.5 creation of trusts .… 8.12 disclaimer .… 8.8 example document .… 8.37, 8.38 executor appointment .… 8.9

variations .… 9.2–9.6 explanatory document .… 8.36 gifts see Gifts (Model Testamentary Trust clauses) primary beneficiary identification .… 8.11 special distribution request .… 8.14 revocation clause .… 8.4 schedules .… 8.16 see also Model Testamentary Trust schedules standard first clauses .… 7.33 survivorship clauses survivorship presumption .… 8.6 30 day survivorship requirement exclusion .… 8.7 testimonium .… 8.3 variations .… 9.1 benefit equalisation .… 9.11 children’s guardianship .… 9.10 disposal of body .… 9.7 executors .… 9.2–9.6 gifts see Gifts (Model Testamentary Trust clauses) Model Testamentary Trust General Provisions Schedule .… 7.36 application .… 8.28 attestation .… 8.35 executors conflicts of interest .… 8.30 death benefit related powers .… 8.31 powers generally .… 8.32 interpretation .… 8.34 streaming of income and capital .… 8.29 trustees

conflicts of interest .… 8.30 powers generally .… 8.32 unanimity .… 8.33 Model Testamentary Trust Schedule 1 .… 7.34 application .… 8.17 appointor .… 8.21 named person .… 9.30 disqualified .… 9.31 substitute is named person .… 9.32 beneficiaries .… 8.19 residence right .… 9.42 ending trust .… 8.27 variations .… 9.41 fund investment .… 8.26 legislation cited in clause .… 9.40 ineligible officebearer, automatic disqualification .… 8.24 variations .… 9.38 protector .… 8.22 named person .… 9.33 disqualified .… 9.34 provisions .… 8.18 purposes .… 8.20 trustee definition and appointment .… 8.23 variations .… 9.35–9.37 powers .… 8.25 variations .… 9.39 vesting balance .… 8.27 variations .… 9.41

Model Testamentary Trust Schedule 2 .… 7.35, 9.27 beneficiary with children inappropriate for trust .… 9.46 characteristics .… 9.43, 9.44 children prevented from inheriting .… 9.45 ending .… 9.62 explanation, clause-by-clause .… 9.64 expression of wishes .… 9.63 fund investment .… 9.61 provisions application .… 9.47 appointor .… 9.51–9.53 beneficiaries .… 9.49 protector .… 9.54–9.56 trust property .… 9.48 trust purposes .… 9.50, 9.63 special disability trust provision .… 9.28 creation option .… 9.29 trustee definition and appointment .… 9.57–9.59 powers .… 9.60 use .… 9.43, 9.44 Model Testamentary Trust schedules disabled beneficiaries see Model Testamentary Trust Schedule 2 discretionary provisions see Model Testamentary Trust Schedule 1 example document .… 8.37, 8.38 explanatory document .… 8.36, 9.1 general provisions see Model Testamentary Trust General

Provisions Schedule

O Officebearer ineligible .… 7.27 automatic disqualification model clause .… 8.24 variations .… 9.38 temporary or permanent .… 7.28 Offices interaction between .… 7.30 example .… 7.31 power allocation .… 7.30 Optional testamentary trusts see Mandatory or optional testamentary trusts

P Precedent application examples see Precedent application examples capital protected trust see Capital protected trust precedent ease of use .… 7.3 flexibility see Flexibility key offices/concepts .… 7.17 model trust see Model Testamentary Trust modularity .… 7.14 ‘matched’ elements .… 7.15 residence see Right of residence precedent Precedent application examples .… 10.1 husband gives personal item to brother regardless of wife’s survival .… 10.5 hypothetical facts .… 10.14

testator’s instructions .… 10.15 will .… 10.16 husband making specific gifts with residue to wife .… 10.3 hypothetical facts .… 10.7 testator’s instructions .… 10.8 will .… 10.10 will plan .… 10.9 husband making specific gifts with residue to wife but wife fails to survive him .… 10.4 hypothetical facts .… 10.11 testator’s instructions .… 10.12 will .… 10.13 husband with second marriage and children from first .… 10.6 hypothetical facts .… 10.17 testator’s instructions .… 10.18 will .… 10.19 outlines .… 10.2–10.6 Preservation age .… 1.20, 3.4, 7.26 death before reaching .… 3.6 Protector .… 7.22 asset protection by .… 3.3 capital protected trust precedent .… 12.10 choice of, when drafting .… 1.22 interaction with other offices .… 7.30 example .… 7.31 Model Testamentary Trust .… 8.22 disabled beneficiary, for .… 9.54–9.56 protector is named person .… 9.33, 9.55 disqualified .… 9.34

power allocation between offices .… 7.30

R Right of residence precedent .… 12.16 residence for life .… 12.18 provisions .… 12.19

S Self-managed superannuation funds (SMSFs) binding death benefit nominations for non-SMSFs .… 6.24 superannuation wills and .… 6.25 trustee succession .… 6.26 cases .… 6.27, 6.28 lessons .… 6.29 Simple wills overview .… 1.6 taxation example .… 1.6 SMSFs see Self-managed superannuation funds (SMSFs) Social security assets and income test .… 4.2 trusts .… 4.5 disclaiming interests deprivation .… 4.3 taxation implications .… 4.4 eligibility .… 4.2 overview .… 4.1 special disability trusts see Special disability trusts trust income .… 4.5 Special disability trusts benefits .… 4.7

creation .… 4.8 model clause .… 9.28 creation option .… 9.29 overview .… 4.6 reform .… 4.9 wills, incorporation into .… 4.10 Superannuation binding death benefit nominations accumulation fund .… 6.6 non-SMSFs .… 6.24 death benefit taxes lump sum paid on death .… 6.12 payment to deceased estate .… 6.13 minimisation strategies withdrawal and re-contribution .… 6.14 Withdrawal of benefits before death .… 6.15 deceased estate .… 6.2 estate assets .… 6.3 family provision claims .… 6.19, 6.20 fund types .… 6.4 accumulation fund .… 6.4, 6.6 death benefit nominations .… 6.6 defined benefit schemes .… 6.4, 6.5 non-estate assets .… 1.4, 6.3 overview .… 6.1, 6.2 payment of benefits .… 6.10 income stream .… 6.11 succession planning .… 6.23 binding death benefit nominations for non-SMSFs .… 6.24 superannuation wills and SMSFs .… 6.25

trustee succession and SMSFs .… 6.26 cases .… 6.27, 6.28 lessons .… 6.29 super dependant .… 6.7, 6.8 tax dependent .… 6.7, 6.9 taxation see death benefit taxes above trusts superannuation proceeds trust .… 6.16, 6.18 superannuation proceeds will trust .… 6.16, 6.17 will drafting considerations .… 6.21, 6.22 Survivorship Model Testamentary Trust clauses survivorship presumption .… 8.6 30 day survivorship requirement exclusion .… 8.7

T Taxation disclaiming interests, implications .… 4.4 simple wills, example .… 1.6 superannuation death benefit taxes lump sum paid on death .… 6.12 payment to deceased estate .… 6.13 minimisation strategies withdrawal and re-contribution .… 6.14 withdrawal of benefits before death .… 6.15 Taxation of testamentary trusts anti-avoidance provisions .… 2.7 trust stripping and ITAA 1936 s 100A .… 2.8 trust stripping arrangements example .… 2.8

Bamford see Federal Commissioner of Taxation v Bamford beneficiary not legally disabled .… 2.3 CGT .… 2.10 CGT rollover and tax-advantaged entities .… 2.11 discount .… 2.13 tax effectiveness .… 2.18 family trust election .… 2.9 Federal Commissioner of Taxation v Bamford see Federal Commissioner of Taxation v Bamford income of trust .… 2.18 ambiguity of meaning .… 2.20 beneficiary’s income, assessed as .… 2.5, 2.18 capital gain as .… 2.20–2.22 case see Federal Commissioner of Taxation v Bamford High Court decision on meaning .… 2.23, 2.24 net, meaning .… 2.25 income tax .… 2.6 effectiveness .… 2.14–2.16 ITAA 1936 .… 2.2 s 97 .… 2.3 interpretation case see Federal Commissioner of Taxation v Bamford s 98 .… 2.4 s 99 .… 2.5 trust stripping and s 100A .… 2.8 introduction .… 2.1 overview .… 2.2 residence .… 2.12 tax effectiveness

CGT .… 2.17 income tax .… 2.14–2.16 trust income taxed as individual’s income .… 2.5, 2.18 trust streaming powers, statutory .… 2.29 trustee liability .… 2.4 Testamentary trusts application examples see Precedent application examples asset protection see Asset protection creation .… 7.12 parallel trusts .… 7.13 deceased estates, distinction .… 1.7 drafting see Drafting testamentary trusts elements .… 1.10 features see Features of testamentary trusts mandatory or optional see Mandatory or optional testamentary trusts parallel trusts .… 7.13 reasons for use .… 1.11, 1.12 taxation see Taxation of testamentary trusts when to be used .… 1.12 Testator family types and relationships to .… 7.7 shares, uncertainty about .… 7.9 Trust streaming statutory powers .… 2.29 Trustees appointment .… 7.25 capital protected trust precedent .… 12.11 Model Testamentary Trust schedule clause .… 8.23

disabled beneficiaries .… 9.57–9.59 variations .… 9.35–9.37 bankruptcy of .… 3.15 capital protected trust precedent .… 12.11, 12.12 conflicts of interest model clause .… 8.30 controlling .… 7.24 definition model clause .… 8.23 capital protected trust precedent .… 12.11 variations .… 9.35–9.37 disabled beneficiaries .… 9.57–9.59 function .… 7.23 interaction with other offices .… 7.30 example .… 7.31 legal personal representative, distinguished .… 1.9 Model Testamentary Trust schedule clauses conflicts of interest .… 8.30 definition and appointment .… 8.23 disabled beneficiaries .… 9.57–9.59 variations .… 9.35–9.37 powers .… 8.25, 8.32 disabled beneficiaries .… 9.60 variations .… 9.39 overview .… 1.9 power allocation between offices .… 7.30 powers .… 7.23 capital protected trust precedent .… 12.12 Model Testamentary Trust schedule clause .… 8.25, 8.32 disabled beneficiaries .… 9.60 variations .… 9.39

removal .… 7.25 role .… 1.9 succession and SMSFs .… 6.26 cases .… 6.27, 6.28 lessons .… 6.29 taxation liability .… 2.4 trustee in bankruptcy voiding transactions .… 3.26 Trusts appointor see Appointor bare .… 1.13 family see Family trusts fixed .… 1.13 social security .… 4.5 special disability see Special disability trusts streaming .… 2.29 testamentary see Testamentary trusts

W Wills contractual .… 11.22 disposal of body model clauses .… 9.7–9.9 example .… 8.38 see also Precedent application examples mutual .… 11.22 simple .… 1.6 taxation example .… 1.6 special disability trusts incorporated into .… 4.10 superannuation and drafting considerations .… 6.21, 6.22