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Estate Planning, Asset Protection & StructuringBDO PPN WEBINAR UPDATE

CHRIS BALALOVSKIPARTNER, BUSINESS SERVICES

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BDO PPN Webinar Update - Estate Planning, Asset Protection & Structuring - 12 May 2020

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ASSET PROTECTION

What is asset protection?• Using sophisticated and legally permissible techniques• Purpose is to maintain ownership of assets

Why is it important?Inadequate asset protection can result in:• An increase in the level of assets exposed to liability• Increased costs in attempting to rectify poor planning• Assets passing to an at-risk beneficiary, where they can be seized


ASSET PROTECTION - RISKS

Some of the typical risks to assets include:• Divorce and personal relationship break-downs• Business relationship break-downs• Bankruptcy and insolvency• Negligence claims• Civil litigation


ASSET PROTECTION

Who is it for?• Professionals and advisers• Entrepreneurs and business owners• Company executives and officers, trustees• The wealthy• Those engaged in “at risk” activities, eg. property development• Landlords• Litigation targets, ie. those in the public eye or who are otherwise perceived to

be wealthy


“GIFT AND LOANBACK” STRATEGY

Scenario:• An unencumbered asset is owned by an “at risk” party, and the transfer of its

ownership is considered undesirable

How it works:• Borrowing undertaken by the “at risk” party• Gift made to related party• Related party loans money back to the “at risk” party• A charge is taken as security for the loan• Presence of a charge creates protection• Periodic refreshment should occur


TRUSTS AND BANKRUPTCY

• Fixed vs discretionary (entitlements/interests) • Beneficiary’s interest in property

o In a discretionary trust, beneficiary has no proprietary interest in the trust property, even if they are a bankrupt, settlor, trustee and/or appointor/guardian of the trust

o A creditor can have no greater rights in trust property than their debtor has in it

• Creditor has no direct access to assets of the trust• Needs to be documented or substantiated – otherwise there is risk of the

arrangement being deemed a sham


POSSIBLE CHALLENGES TO ASSET PROTECTION

Family Law “look-through” principles• Kennon v Spry

Appointment of receivers – ability to retrieve property held by a third-party • Richstar case (also known as ASIC v Carey (No. 6)), but see Lewis v Condon

(2013) NSWCA204


SUPERANNUATION – ARE BENEFICIARIES AND CONTRIBUTIONS PROTECTED?Superannuation – accumulation phase• Ever since RBLs were abolished, protection is theoretically unlimited• General principle since Cook v Benson• Caution: contributions which are considered to be “out of character”

Superannuation – income streams• Relevance of Base Income Threshold Amount• Starts from $59,031* (no dependants) up to $80,283 (over four dependants)*Indexed on 20 September each year


INTERGENERATIONAL WEALTH TRANSFERS

Key asset protection aspects to consider• Understanding who will inherit, and which beneficiaries are “at risk” in their

own right• Transfer of offices, eg. trustee, appointor, director, etc• Types of potential creditors and predators• Tax outcomes• Managing capacity • Social security considerations• Family provision claims


WHAT CAN GO WRONG?

Poorly drafted clauses can lead to:• Trust has no substitute trustees/appointors when original trustees/appointors die/become

disabled etc. = no trust = vesting of trust = possible CGT and stamp duty implications• Substitute trustee/appointor who is unwanted, eg. former spouse• Mechanism for appointing substitute trustees/appointors is flawed, eg. reference to Wills that

are silent on the point, or which refer to non-existent people

Case in point: Rinehart• Trust was to vest on the date on which the youngest child attained the age of 25 years, or later

if agreed by all parties• Deed failed to outline trust succession upon extension of deed• Caused significant familial conflict, and legal costs estimated at $9m (up to $3m for Bianca,

$6m for Gina)


HOW TO PREVENT DISPUTES

Trust deed• Have a mechanism that avoids arbitration, courts, etc, eg. a cascading appointment clause. A

complexity arises in determining how many generations should cascade• Review and update trust deeds regularly to ensure appointors/trustees are capable of acting in

good faith and with the best interests of the beneficiaries in mind• Appointor may include an independent person or company

Characteristics of well-drafted clauses• Dispute resolution mechanism


TESTAMENTARY TRUSTS

What are testamentary trusts?• Incorporated in Wills• Spread assets and income between beneficiaries• Trustee usually vested with wide discretion• Minors aren’t subject to punitive tax

What are the benefits of testamentary trusts?• Flexibility• Asset protection• Tax advantages• Preservation of social security benefits


TESTAMENTARY TRUSTS


How a testamentary trust is useful

John (70) Lisa (69)

Karen (40) Jim (40)

Max (16) Jane (18)

Mary (30)

Beth (3)

TESTAMENTARY TRUSTS – CASE STUDY


Using a testamentary trust to keep assets in the family

Testamentary TrustTrusteeKaren

Max Jane

Trustee

Karen

• Flexibility of distributions• Tax savings, especially for minor children

CHALLENGES TO WILLS

• Increasing number of family provision claims in Australia • Driven by the “pull” of the greater sophistication of the public, as well the

“push” of lawyers’ advertising• It’s presenting as a cultural shock for an older generation and many ethno-

cultural groups that believed testamentary wishes were “sacrosanct”• Although the majority of claims are made by one or more of the children of the

deceased, an increasing number of applications are being made by de facto partners of persons who are already married or in other relationships


A RECAP OF THE GENERAL LAW

• A family provision claim is an application for an order for (additional) provision to be made out of an estate for a person’s maintenance, education and/or advancement in life under the Succession Act 2006 (NSW) (or similar Act in other jurisdictions)

• The Act makes various persons eligible to make an application, eg. spouse (current or former), de facto spouse, child (of any age), dependent grandchild, or person in a close personal relationship

• The application must generally be brought within 6 months from the date of the grant of probate or administration, with the possibility of extension granted by the court


THE IMPORTANCE OF COMMUNICATION AND DOCUMENTATION• You should advise clients that there is always the potential for substitute

dispositions to be made by a court• You should discuss the possibility of obtaining waivers of rights to commence a

family provision claim• Clients should include an explanation of their reasons in their Will or in some

extraneous document• Where appropriate, there should be a managed family conference, where

reasons for the provisions made to beneficiaries can be explained• Clients should maintain contemporary records relating to any lifetime gifts or

other benefits they provide to possible claimants


CASE STUDY ONE

Background• In excess of $10b wealth tied-up in shareholdings in a single business formed and

operated by a patriarch for 60 years• No formal mechanism for passing-on ownership and control of the business or other

family wealth

Succession plan• Ownership and control passed to 2 daughters via 2 separate testamentary trusts• Strict controls on the ability of the 2 daughters to make business decisions and to

dispose of their interests for 2 years from the date of death or disability of the patriarch


CASE STUDY TWO

Background• Wealth tied-up in shareholdings in a single business formed and operated by a

patriarch• Patriarch’s primary aim: transfer ultimate control to two children, but remain

unchallenged and with power/influence over the business until death/disability/resignation

Succession plan• Control only transferred upon evidence of necessary skills• Provision for control to go to a trusted individual, should the children lack these

necessary skills at time of patriarch’s death/disability/resignation


CASE STUDY THREE

Background• Husband and wife with wealth in cash and numerous properties• Clients’ primary aim: transfer ultimate control to children upon death/disability/resignation,

limit non-lineal descendant entitlements, possibility of distributing more inheritance to one child

Succession plan• Appointment of independent executors of trusts, to ensure all amounts are distributed in

accordance with Wills• Deed of disclaimer to be signed by the children, waiving their entitlement to challenge the

Wills• Establishment of Mutual Wills for husband and wife, meaning that their Wills cannot be

changed once one of them dies


QUESTIONS?


Chris BalalovskiPartner, Business ServicesPhone: +61 2 8264 6697Email: [email protected]

mailto:[email protected]

DISCLAIMER

This presentation has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The presentation cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in Australia to discuss these matters in the context of your particular circumstances. BDO Australia Ltd and each BDO member firm in Australia, their partners and/or directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this presentation or for any decision based on it.

BDO refers to one or more of the independent member firms of BDO International Ltd, a UK company limited by guarantee. Each BDO member firm in Australia is a separate legal entity and has no liability for another entity’s acts and omissions. Liability limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees.

BDO is the brand name for the BDO network and for each of the BDO member firms.

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