There are a few lessons to be learnt from high-profile family disputes, including that of Gina Rinehart, according to lawyer Bernie O’Sullivan.
In 2012 there have been several high-profile disputes involving family trusts, including the dispute between Gina Rinehart and her children over the Margaret Hope Hancock Trust and a dispute relating to a family trust controlled by the Lew family.
Every financial planner and accountant should take the opportunity over the Christmas break to reflect on the important lessons and opportunities that arise from these disputes.
Many of your clients have family trusts with considerable assets. It is vital they understand the legal and investment consequences of their incapacity and death and the risks of relationship breakdowns. If you don’t talk to your client regarding this, someone else will – probably a competitor of yours.
You should also reflect on your obligations under the Future of Financial Advice (FOFA) legislation to guide your clients regarding all estate planning issues.
What is a trust?
So, what is a family trust and what are some of the pitfalls?
‘Family trust’ is the generic term given to a discretionary trust created during a person’s lifetime. The features of a typical family trust include:
- The beneficiaries of the trust are a broad group including the primary beneficiary, their spouse, children and other lineal descendants;
- The primary beneficiary is a controller of the trust by virtue of their role as trustee and appointer – the latter meaning they can replace the trustee at any time;
- No beneficiary has a fixed entitlement to income or capital, so the controller has ultimate power; and
- The trust ends on the ‘vesting date’ which is usually 80 years from when the trust was established (but, as with the Hancock Trust, a shorter period can apply).
Lessons from the law
Key lessons from recent cases involving family trusts are:
- Trustees should not seek to control the way in which beneficiaries behave. A classic example is the Western Australian case where two uncles controlled a trust where the main beneficiaries were their nieces. The uncles made it clear to the nieces that they expected them to live their lives a certain way – otherwise they would not receive future distributions. The Court removed the uncles from their controlling positions.
- Beware the Family Court. Although beneficiaries only have a ‘discretionary interest’, in some cases the Family Court will treat the interest as ‘property’, resulting in trust assets being allocated to a former spouse. Strategies dealing with this significant risk must be implemented wherever possible.
- Primary beneficiaries do not own the trust assets. It is not uncommon for a primary beneficiary to mistakenly regard the assets in the family trust as their own. Two problems arise from this: First, the trustee will breach the significant duties and obligations owed to the trust and beneficiaries, leaving the trustee open to be sued. Second, many Primary Beneficiaries try to dispose of the family trust assets via their Will when in fact they cannot (because the family trust assets do not form part of their estate!).
- Amending the deed can amount to a resettlement. Some deed amendments change the nature of the family trust so much that the Commissioner of Taxation will regard the trust to have been wound up and a new trust established. In such an event the trust is said to have been ‘resettled’ and a capital gains tax (CGT) event to have occurred, giving rise to a potentially significant CGT liability.
- Compliance: Some trusts have, shall we say, compliance issues. A judge will not hesitate in referring such issues to the relevant regulator (eg, the Commissioner of Taxation). Other compliance issues may relate to the legality of past resolutions or distributions. It is not uncommon for an aggrieved beneficiary to use compliance issues as leverage in their request for a greater share of the trust fund.
- Be careful with promises. Many family trusts operate family businesses that employ family members. Take care with promises such as “One day, all this will be yours!” as they can give equitable and legal rights to the promisee. A recent Victorian case went all the way to the Supreme Court of Appeal because of a dispute between a father and a daughter over alleged representations regarding control of the trust upon the father’s death. The father successfully defended the claim, but the cost to all parties (in dollar and emotional/family terms) must have been enormous.
- Understand loan accounts. Many family trusts make ‘distributions’ to beneficiaries that are not physically paid but recorded by journal entry as a distribution and then as a loan back to the family trust from the beneficiary. It is imperative that these distributions/loans be understood because at some stage the beneficiary just might knock on the trustee’s door and ask that the loans be repaid! Sometimes the beneficiary’s spouse will be delighted to discover that these loans exist and form part of the property pool of the marriage that can be divided by the Family Court. The loans must also be understood from an estate planning perspective.
Experience also tells us that many disputes are driven by personal issues. It is imperative that you work in conjunction with a lawyer who has the skills to deal with these nuances as well as the tax, trust and corporations law aspects.
Family trusts were first regularly established in the 1970s and 1980s. The time for transfer of control of many of these trusts is now rapidly approaching. As an adviser you must seize this opportunity in 2013 to demonstrate to clients that you really are their trusted adviser.
Bernie O’Sullivan is the founder of Bernie O’Sullivan Lawyers.
