One year on from the biggest year in estate planning in a generation: where are the changes**?

This time last year, our article argued that 2018 had seen more changes in key estate planning areas in that calendar year than each of the previous 30 years combined.

In particular, potentially important shifts in approaches across the following areas were explored:

1      trust vesting;

2      trust splitting;

3      testamentary trusts and excepted trust income; and

4      capital gains tax (CGT) rollovers on relationship breakdown.

Twelve months on, this article explores the status of each of the above areas.

Final Trust Vesting Ruling

In August 2018, the Australian Tax Office (ATO) issued its ruling in relation to trust vesting with TR 2017/D10 finalised as TR 2018/6.

The ATO also published details of its administrative approach.

As flagged in last year’s article however, there are a range of important trust vesting questions that remain unanswered.

Set out below are 2 of the key questions identified, a summary of what the position appears to be, and acknowledging there has been no further substantive statement from the ATO in relation to any of these issues.

In what situations will a power of variation be deemed to be too narrow to allow an extension of a vesting date?

Generally the decision in Jenkins v Ellett is a useful point of reference here, given that it explains a number of principles concerning variations including:

1      if an attempt is made to made to amend fundamental provisions (such as appointor powers or indeed the amendment power itself), there must be a specific ability to do so under the trust instrument;

2      conversely, ancillary provisions – of which it is argued the vesting date will generally be categorised as – should be able to be amended so long as there is a robust power of amendment in the trust deed;

3      this said, the trust deed may expressly prohibit certain amendments, thereby effectively “hard wiring” those clauses – again the vesting date may be such a provision, depending on the terms of the trust deed; and

4      furthermore, the exercise of a power of amendment must comply with any restrictions on the exercise of power, for example the need to obtain prior consent from a principal or appointor. The case of Re Cavill Hotels P/L is also often quoted in this regard.

Can a trustee resolve to amend the jurisdiction of a trust to South Australia, and thus have any vesting date essentially abolished?

The answer to the question here is potentially an entire article in itself.

South Australia has a unique approach (in Australia) in relation to perpetuity periods, having essentially abolished the rule against perpetuities (which is generally 80 years) and allowing trusts to potentially last indefinitely.

Broadly, it appears to be accepted that the settlor of a new trust should be able to nominate a trust’s governing law and jurisdiction as South Australia, to avoid the rule against perpetuities, even where the trust may otherwise be more closely connected with another jurisdiction.

In Augustus v Permanent Trustee Co (Canberra) Ltd, the Court held that a provision in a trust deed purporting to establish the trust under the laws of New South Wales was effective in validating a disposition that would otherwise have been void under ACT law.

In particular, the Court held that it was open to the settlor to specify the governing jurisdiction of the trust.

Applying by extension the logic set out above in relation to the ability to amend a trust deed to extend a vesting date, with a wide power of variation, it should also therefore be possible to change the jurisdiction under which a trust is administered.

Trust splitting

In July 2018, the ATO released its views on trust splitting in TD 2018/D3.

There are a range of concerns with TD 2018/D3 for all trust advisers, that have only been partially addressed by the final ruling released in December 2019 as TD2019/14.

Critically, TD 2018/D3 assumed a single factual matrix which is very specific, and it lists a number of line items that may, or may not, be a part of a trust splitting arrangement.

Many trust splitting arrangements involve a change of trustee in relation to specific assets and few (or indeed none) of the other features listed in TD 2018/D3 (for instance, no changes to the appointors, right of indemnity or range of beneficiaries).

Given the extended delays in finalising TD 2018/D3, there must be a legitimate question as to its correctness in relation to the one example included in the draft.

More positively TD2019/14, does now include a second example which suggests how the ATO believes a form of trust split may be able to be implemented, without causing a resettlement.

Certainly, proceeding with a trust splitting that corresponds exactly with the (one) example in TD 2018/D3 would seem unnecessarily risky. However, an arrangement along the lines of the additional example included in TD2019/14 would now seem permissible.

2018 Federal Budget attack on excepted trust income

In October 2019, the draft legislation implementing the 2018 Budget announcement was finally released for consultation.

A post from View at the time of the legislation release explains the key issues further.

As usual, please contact me if you can not otherwise access easily.

Family law CGT rollovers

Thankfully, 2019 has not seen any substantive iterations in this particular space.

This said, it is timely to revisit another aspect in the family law area that is increasingly being used as an estate planning tool, namely FAs.

FAs can be used as an estate planning tool in a number of ways, and in particular in:

1. later life relationships (ie where couples have children from previous relationships); and
2. situations where parents effectively mandate that in order for their children to benefit under an estate plan, each child must first enter into an FA with their spouse.

The High Court in a leading recent case listed the following six factors (noting that they are however not exclusive) relevant in assessing whether there has been undue influence in the context of FAs:

1. Whether the agreement was offered on a basis that it was not subject to negotiation.
2. The emotional circumstances in which the agreement was entered, including any explicit or implicit threat to end a marriage or to end an engagement.
3. Whether there was any time for careful reflection.
4. The nature of the parties’ relationship.
5. The relative financial positions of the parties. 
6. The independent advice that was received and whether there was time to reflect on that advice.

Conclusion

In modern estate planning, significant complexities from the interaction between the legislation relating to tax, trusts, bankruptcy, family law and superannuation have been omnipresent. 

The estate planning space has largely been exempt from radical simultaneous rule overhauls. 2018 was arguably an outlier to this position, at least in recent years.

2019 has shown however that many of the most critical aspects of the 2018 changes remain in a state of flux. 

As we head into 2020, with the post baby boomer intergenerational wealth transfer wave gathering pace, the inertia during 2019 in a number of key areas is disappointing.

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Parts of this article are based on material that originally appeared in the Weekly Tax Bulletin and state-based seminars presented for The Taxation Institute.

** for the trainspotters, the title here is an obvious riff from the David Bowie song ‘Changes’.

View here: https://www.youtube.com/watch?v=IJSv6JXKS_I