Top 5 most read hints this week

One of the most unique features about our document building process is that each page has hints written personally by Dr Brett Davies and designed to assist the building process.

Here are the top 5 most clicked hints:

1. From the Family Discretionary Trust – What is the difference between an Appointor and a Trustee?

Question: What is the difference between the Trustee and the Appointor?

The Appointor is god. The Appointor bosses the Trustee around. The Trustee looks like it is in control, as it has the assets in its name. However, the Trustee takes it marching orders from the Appointor. The Appointor can sack the Trustee on a whim, for no reason at all.

This is a perfect example of ‘ownership’ vs ‘control’. Under the messy and complex Australian taxation system, it is generally better to ‘control’ assets, rather than ‘own’ them. The Trustee ‘owns’ the assets in trust for the beneficiaries. But it is the Appointor that ‘controls’ those assets.

When it comes to Estate Planning and working out who ‘gets’ the Family Trust after you die, it is always a question of who will be the Appointor when the current Appointor dies. Clients will often, instead, want to talk about who will own the shares in the Trustee company. The Estate Planning lawyer will often point out that the Trustee is an irrelevancy and it makes little difference who the shareholders and directors are of the puppet corporate Trustee are. If the Appointor does not like the Trustee, shareholders or members of the corporate Trustee then it sacks the Trustee. A new Trustee (either human or another company, in this example) is then made the Trustee, who is more to the Appointor’s liking.

If I were you, I would make myself the Appointor. You can be both the Appointor and the Trustee. But, for asset protection it would be better to have someone else the Trustee. The Trustee can be attacked if something goes wrong with the trust assets. If the Family Trust goes insolvent, then the Trustee may well go down with the sinking ship.

2. From the Family Discretionary Trust – Default Beneficiaries – What are they good for?

The nature of the Family Trust is that the Appointor will tell the Trustee who to distribute the income to each year.

This is fantastic to reduce taxable income on the trust income.

For example, one year your daughter may be on maternity leave. Because she is on a low income, you can distribute some of the trust income to her. She never actually sees the money. This is called an ‘unpaid present entitlement’ (‘UPE’). She forgives the UPE at the end of the year. Also when she stays in your home or gets a birthday present her UPE is reduced by the cost of providing the accommodation or gift.

When the children turn 18 they can ask for their UPE – so make sure it is reduced to zero every year. Your accountant can help you with this.

If however, you forget to distribute the income – which is a very silly and reckless thing to do – they the income goes to your Default Beneficiaries equally.

Also at the end of 80 years, which is the life of most trusts, if the Appointor forgets to tell the Trustee who gets the capital then the Default Beneficiaries get the capital equally.

3. From the BDBN – Many binding nominations need updating after the Munro case

Mr Munro, a lawyer, loved his two daughters from his first marriage. As in Cinderella, his second wife didn’t feel that love. His Will gave $350 000 to his second wife and the remainder of his huge estate to his two beautiful daughters. Mr Munro assumed that his Self Managed Super Fund (SMSF) would be included as part of his Will, as per his Superannuation Binding Death Benefit Nomination.

Imagine you are getting your affairs in order. To remove the trustee of your SMSF’s discretion, you sign a Binding Nomination. This forces your Super into your Will, releasing the second wife from temptation. To draft the Binding Nomination, you use the wording provided by the accountant and financial planner: “to trustee of deceased estate”.

This all sounds quite reasonable, doesn’t it? Unfortunately, the Binding Nomination had a minor, but fatal, drafting error. The cumulative knowledge of Mr Munro, his accountant and his financial adviser failed to realise that Binding Nominations must only nominate:

  • the member’s “dependants”, or
  • the member’s “legal personal representative”.

Sadly, neither phrase was used. Even though his intention was clear, the court, in Munro v Munro [2015] QSC 61, took the view that the Binding Nomination was faulty and therefore not binding. This unfortunately gave his second wife, as trustee of the SMSF, the discretion to pay all the Super benefits directly to herself, and she did.

To compound Mr Munro’s mistake, there was no backup plan. Good sense requires that his daughters have joint control of Mr Munro’s SMSF after he dies. At Legal Consolidated, we create an Intergenerational Corporate Trustee Structure. This allows Cinderella to share control of the Super Fund with the stepmother.

Bitter from their loss, the daughters are free to turn to the accountant and financial adviser for the faulty Binding Nomination.

The Deed of Variation, you are building, updates your Deed so as to allow binding nominations – that never expire – and bind the Trustees of the your SMSF after you die.

4. From the BDBN – Why update my SMSF Deed when it was drafted by experienced professionals in 1988?

It doesn’t matter if your Deed was drafted in 1988 (when I first started drafting super fund deeds) or today, the SMSF Laws are constantly changing and as such, you need to ensure that your SMSF Deed is consistently reviewed to ensure compliance and efficiency.

If your Deed hasn’t been updated for some time, talk with your accountant and financial planner.

5. From the Self Managed Super Fund deed – Requirements to set up your SMSF

The Australian federal government provides generous tax concessions that come from operating a ‘compliant’ self managed superannuation fund (SMSF). But you must be compliant. To be compliant:

  1. Your fund must have a maximum of 4 members. You can have 1, 2, 3 or 4 members.
  2. Each member must be a trustee. Each trustee must be a member. (Unless you have a company as trustee. Or unless there are minors as members.)
  3. Instead of having all the members, as trustees, you can have a company. This is called a corporate trustee. Each member must be a director of the company. Only members can be directors.
  4. You can not have someone you employ as a member with you. This is unless that employee is related to you.
  5. The trustee is a volunteer – a trustee can never draw a salary or fees for performing the job of trustee.

All members and trustees should be Australian residents, otherwise you face complexity.

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