The following is a sample extract from The Complete Guide to SMSFs and Planning for Loss of Capacity and Death.

Transcription

1 The following is a sample extract from The Complete Guide to SMSFs and Planning for Loss of Capacity and Death. DBA Lawyers has updated The Complete Guide to include the recent decision of Wooster v Morris [2013] VSC 594. Demonstrating that the identity of who is holding the purse strings upon death or loss of capacity is what really matters, it is considered to be the most important decision ever regarding SMSF succession planning and identifies the need for complete and thorough SMSF succession planning to ensure sensible outcomes. To order the full page version visit The following sample is provided for illustrative purposes only and should not be relied upon. DBA Lawyers may alter the exact contents of The Complete Guide to SMSFs and Planning for Loss of Capacity and Death at any time and without notice. DBA 1

2 Level 1, 290 Coventry Street (PO Box 2085) South Melbourne Vic 3205 Ph: (03) Fax: (03) DBA Lawyers Pty Ltd ACN The complete guide to SMSFs and planning for loss of capacity and death

3 TABLE OF CONTENTS 1. COPYRIGHT NOTICE Attention: «office_suburb» office of «Firm_name_if_applicable» Terms of purchase Copyright infringement reward for you Thank you for your understanding INTRODUCTION Goal 1 ease of use Goal 2 comprehensiveness Goal 3 practical Goal 4 technical accuracy What does it mean to lose capacity? CRITICAL RECENT CASE: WOOSTER V MORRIS Disclaimer Introduction Facts Question for the Court Lessons for practitioners THE 11 KEY STEPS STEP 1 IDENTIFYING THE GOVERNING RULES Introduction to governing rules and their importance Identify all deeds (not just current deed) Correct execution Also identify change of trustee documentation Solutions for a lost deed STEP 2 STRONGLY CONSIDER A SOLE PURPOSE CORPORATE TRUSTEE Introduction The advantages of a corporate trustee The advantages of a sole purpose corporate trustee The disadvantages of corporate trustees The one exception no longer applies STEP 3 SHAREHOLDING OF A CORPORATE TRUSTEE Introduction Importance of structure of shareholding Majority of shares are typically needed to appoint/remove directors No requirements as to who must own shares Importance of successor directors Importance of constitutions allowing attorneys to exercise shareholder rights STEP 4 ENDURING POWERS OF ATTORNEY Introduction Key concepts Relevant legislation Dispelling a common misunderstanding Enduring powers of attorney compared to other powers of attorney The ability to use limited enduring powers of attorney Alternate directors...43

4 8.8 Number of attorneys Where an attorney is already a director or trustee How attorneys are appointed as directors or trustees Where there is no enduring power of attorney Secretaries Conclusion STEP 5 RUNNING SMSF UPON INCAPACITY Introduction Introductory concepts Appointing and removing trustees Removing and appointing directors Tying it all together Successor trustees and successor directors STEP 6 MAKING A WILL Introduction Who should be the executor Hotchpot clause Death benefits should be kept separate Gifts to children of deceased spouses Where a member dies without a will STEP 7 RUNNING AN SMSF UPON DEATH Relevant law Individual trustees Corporate trustees STEP 8 WISHES FOR SMSF S WEALTH UPON DEATH Introduction How death benefits can be paid To whom death benefits can be paid Impact of borrowings Discretion Lump sum to LPR Lump sum to a dependant Pension to a dependant No pension to an estate Non-commutable pension and upon spouse s death capital to biological children STEP 9 TAX PAYABLE Introduction Level 1 basic tax considerations Level 1 receiving pension upon death Level 1 anti-detriment Level 1 deductions for future liability to pay benefits Level 1 refreshing the cost base Level 1 carrying forward capital losses Level 1 introduction of new members Level 1 GST Level 1 tying it all together Level 2 basic tax consideration Level 2 maximising tax free component withdrawal and recontribution Level 2 maximising tax free component pension planning Level 2 what constitutes financial dependency? Level 2 grandchildren and private school fees...133

5 13.16 Level 2 pensions to grandchildren Level 2 withdrawal before death Level 2 terminal medical conditions Level 2 the importance of acting promptly Level 2 insurance Level 2 testamentary trusts and minor beneficiaries Level 2 superannuation proceeds trust Level 2 stamp duty Miscellaneous issue reserves STEP 10 LOCKING IN WISHES Introduction Discretion Auto-reversionary pensions Binding death benefit nominations Hard-wired deeds Death benefit rules and SMSF wills Mutual wills agreement Using borrowings Removing money from the SMSF system STEP 11 INSTRUCT LAWYER Introduction What constitutes legal work DETAILED CASE STUDIES Introduction Disabled child SMSF with significant real estate farm GLOSSARY AND DICTIONARY Glossary Dictionary DISCLAIMER...173

6 1 Copyright notice 1. Copyright notice 1.1 Attention: «office_suburb» office of «Firm_name_if_applicable» Please respect copyright. This publication took many hundreds of hours to write. This publication has been purchased by the «office_suburb» office of «Firm_name_if_applicable» and must remain at that office only. 1.2 Terms of purchase The «office_suburb» office of «Firm_name_if_applicable» has not purchased the copyright in this publication. Rather, it has purchased: the physical paper on which this publication is printed; and a non-revocable licence for members of the «office_suburb» office of «Firm_name_if_applicable» to read this publication. Member means employees, directors and partners in respect of the «office_suburb» office of «Firm_name_if_applicable». No one else is included as a member (eg, contractors or subcontractors are not members). This publication must not be photocopied, scanned or reproduced in any other way whatsoever. This publication (including unauthorised copies) must not be given, mailed, couriered, ed or otherwise provided to anyone who is not a member of the «office_suburb» office of «Firm_name_if_applicable». This means it must not be provided to: clients of «Firm_name_if_applicable»; other offices of «Firm_name_if_applicable»; relatives of members; contractors or subcontractors of the «office_suburb» office of «Firm_name_if_applicable»; and anyone else who is not a member of the «office_suburb» office of «Firm_name_if_applicable». 1.3 Copyright infringement reward for you If you are reading this and you are not a member of the «office_suburb» office of «Firm_name_if_applicable» copyright has been infringed. Please contact DBA Lawyers if this is the case. We will not pursue you. However, we will vigorously defend our intellectual property against whoever provided you with your copy. If necessary, we will commence legal proceedings against that party. We will provide you with half of the net proceeds from any resulting settlement or successful action. 1.4 Thank you for your understanding The authors of this publication have been the victims of copyright infringement before. It is very distressing. Given the proliferation of computers, scanners, , photocopiers and the internet, authors are more exposed to copyright infringement than ever before. We trust you understand our position, especially given the vast amount of time and effort this publication took to write.

7 2 Introduction 2. Introduction This publication sets itself four goals: Goal 1 ease of use; Goal 2 to be the most comprehensive guide ever written regarding planning for SMSFs upon the loss of capacity or death of a member (ie, SMSF succession planning); Goal 3 to be the most practical guide ever written for SMSF succession planning; and Goal 4 to be the most technically accurate and detailed guide ever written for SMSF succession planning. Naturally, feedback is always welcome as to how well this publication achieves these goals. 2.1 Goal 1 ease of use This publication is designed for several users: the busy adviser who wants to do what is best for their SMSF clients; the sceptical adviser who does not accept a statement merely because someone confidently asserts it; and switched on SMSF members who want to understand what to do in the lead up to loss of capacity and death. Accordingly, this publication is broken into three main parts. The first part is chapter 4. This chapter runs you through the 11 steps that must be taken to properly plan for SMSF succession. Chapter 4 also provides suggestions and guidance. This chapter aims to be quite short and punchy. The second part is comprised of chapters 5 to 15. Each of these 11 chapters corresponds to one of the 11 steps. Accordingly, those who want to know more about a particular step can then read the appropriate chapter (or skip chapters if irrelevant). Finally, chapter 16 provides several detailed worked case studies of common SMSF succession planning scenarios. This structure is designed to be very structured and have a very logical sequence. Accordingly, rather than being a hotchpot of different concepts, rules and ideas, this publication has been designed to provide method to the madness. 2.2 Goal 2 comprehensiveness SMSFs have become a huge part of people s wealth creation strategies. As they were recently described in a Supreme Court case relating to an SMSF dispute upon death, they are now a feature of the financial fabric of this country (Ioppolo v Conti [2013] WASC 389 [1]). Recent figures suggest that ( Self-managed super fund statistical report - September 2013 in ATO website < There are 516,925 SMSFs.

8 2 Introduction The average net value of assets in each SMSF is $1,006, Accordingly, SMSFs are very important to many people. Furthermore, they appear to still be growing, with no obvious sign that their growth will slow down. Consider the following graphs showing the growth in both the number and value of SMSFs: Graph 2.2.1: Growth in total number of SMSFs Total number of SMSFs 600, , , , , , Graph 2.2.2: Growth in value of each SMSF Average value of an SMSF $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $

9 2 Introduction But SMSFs involve many areas of law and principles, from income tax law, to specific prudential legislation, to trusts and equity, and much more. This publication aims to cover all the important rules for succession planning. This publication aims to be the most comprehensive collection ever of information on SMSFs and planning for loss of capacity and death. 2.3 Goal 3 practical At the end of the day, advisers need to know what to do. They need to know the answers to many questions, such as: Who should be the holder of the enduring power of attorney (and any alternate attorney)? (See subchapter 8.2(b).) Who should be the executor of the will? (See subchapter 10.2.) Who should be the secretary of the corporate trustee? (See subchapter 5.3.) Is a BDBN really the best option? (See subchapter 14.4(f).) What actually is a death benefit rule? (See subchapter 14.6(b).) This publication answers all of these questions and many more. 2.4 Goal 4 technical accuracy This publication aims to be completely technically accurate. We welcome feedback as to any points that you might disagree with or any conflicting advice that you might have received. As much as practicable, we have punctuated this publication with references supporting all assertions. Where there are two conflicting views, we acknowledge both and then select our preferred view and the reasons for it. (See, for example, subchapter 14.4(b).) 2.5 What does it mean to lose capacity? (a) Introduction In the context of SMSFs and succession planning, capacity is an essential consideration. As an introductory point, we consider what it means to lose capacity. Capacity is the ability to make legally recognised decisions. Should an individual lose their capacity to make decisions, the decisions will be invalid and not enforceable. It is therefore pertinent to consider the definition of capacity and the relevant legal tests. Courts do not apply a unified test in all situations when ascertaining whether an individual has the capacity to make a decision. In Gibbons v Wright (1954) 91 CLR 423, 438 the High Court said: [T]he mental capacity required by law in respect of any instrument is relative to the particular transaction which is being effected by means of the instrument, and may be described as the capacity to understand the nature of the transaction when it is explained. Therefore, it is not accurate to refer to an individual s incapacity without first specifying the context and type of capacity.

10 2 Introduction (b) Wills In the context of wills, capacity refers to the will maker (ie, testator or testatrix) and their ability to make a valid will. Cockburn CJ stated the seminal test in Banks v Goodfellow (1870) LR 5 QB 549, 565: It is essential to the exercise of such a power that a testator shall understand the nature of the act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect; and, with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind has been sound, would not have been made. It was recently stated that mental capacity is demonstrated if a will maker is of sound mind, memory and understanding (Tasmanian Perpetual Trustees Ltd v Rourke [2012] TASSC 44 [2]). In effect, what is required of will makers (in addition to being of sound mind) is that they: understand the nature and effect of a will; know the nature and extent of their property; comprehend and appreciate the claims to which they ought to give effect; and are not affected by delusions that influence the disposal of their assets at the time they are making their will. This was recently applied in Tasmanian Perpetual Trustees Ltd v Rourke [2012] TASSC 44. In this case, the plaintiff and executor of a will applied to propound the will. This was denied on the basis that the will maker (Mrs Betty Artherton) was not of sound mind, memory and understanding. After suffering several strokes in 1991/92, the will maker s mental capacity declined rapidly. This was evidenced by a lack of memory, paranoid delusions of her daughter stealing her car, and diagnosis by health professionals of dementia and a rapidly declining memory. The will maker made numerous changes to her will, the last of which (signed in 1995) deprived her daughter of any beneficial interest. While it was accepted that Mrs Artherton knew exactly what she was doing when this will was signed, it was found that when she did so she lacked testamentary capacity, as she was influenced by a paranoid delusion that the defendant had stolen the proceeds of the sale of her car. Evidence plays a very important role when ascertaining whether there is a lack of capacity (Tasmanian Perpetual Trustees Ltd v Rourke [2012] TASSC 44 [60]): In cases where the evidence raises a doubt about the testator s testamentary capacity, it is necessary that there be a vigilant examination of the whole of the evidence. The relevant standard of proof is the balance of probabilities (Worth v Clasohm (1952) 86 CLR 439, 453), which requires the conscience of the court to be satisfied that the document is not, on balance, the true will of the will maker. Although this evidential burden was clearly met in the Rourke decision mentioned above, it may not always be so clear. Even the decision in this case was nuanced, as despite being aware of what she was doing when she made a new will, the will maker was nonetheless found to lack testamentary capacity. At first glance, this may seem contradictory. However, this simply demonstrates that the court s approach will vary significantly based on the circumstances of the case, and the symptoms of the health disorder (if any) suffered by the will maker. Individuals with dementia may have the capacity to make simple wills but not complex ones; there is no absolute rule (Nick O Neill and Carmelle Peisah, Capacity and the Law, (2011), 1.2). Additionally, those with mental illness may be able to make wills

11 2 Introduction during lucid periods (Perpetual Trustee Co v Fairlie-Cunninghame (1993) 32 NSWLR 377). A finding of soundness of mind is highly dependent upon the facts of the case. Example 1 At the age of 70, Jack decides to prepare his will. In it, he stipulates that his daughter is to receive the title to his home and his son all of his personal chattels. At the time, Jack was suffering from dementia. Upon his death, his son challenges the will on the basis that Jack lacked the capacity to make this decision. The court finds that Jack was capable of making the decision and his will for the following reasons: the will was extremely straight forward; the decision was made during a period of lucidity (it is a medically recognised fact that dementia sufferers experience periods where they are entirely aware of their decisions and are completely sound of mind); and Jack s soundness of mind while signing the will was confirmed by his witnesses, one of whom was a psychologist. Although the outcome in the above example accorded with Jack s wishes, it is clear that it is better to prepare for succession well in advance. This will reduce the likelihood of the will maker s capacity to make a will being questioned upon its execution, and will minimise any uncertainty. (c) Enduring Power of Attorney An enduring power of attorney is a form of agency whereby an adult (the donor ) appoints another as their agent. The agent is entitled to make decisions of a financial nature that the maker of the power of attorney has a legal right to do themselves. In Queensland, Tasmania, Victoria and the Australian Capital Territory, the test for the capacity to make an enduring power of attorney is found in legislation (Powers of Attorney Act 2006 (ACT) s 18, Instruments Act 1958 (Vic) s 118, Powers of Attorney Act 2000 (Tas) ss 30(2)(a) and 30(3) and Powers of Attorney Act 1998 (Qld) sch 1 s 1). Although there are small differences, the legislation for these states generally has the same requirements, and the donor must understand: that they can state, specify or limit the powers to be given; when the power of attorney is exercisable; that once the power of attorney begins, the attorney will have the power to make almost all financial decisions that the donor personally can make, and will have full control over the functions given to them; that they may revoke the enduring power of attorney at any time they are capable of doing so; that the power of attorney continues if they become impaired; and that at any time they are not capable of revoking the enduring power of attorney, they are unable to effectively oversee its use by the attorney. Case law has further explored the capacity requirements for an individual seeking to make an enduring power of attorney. In Ranclaud v Cabban [1988] NSW Conv R , 57, 548 Young J said the following: When considering whether a person is capable of giving that sort of power one would have to be sure not only that she understood that she was authorising someone to look after her affairs but also what sort of things the attorney could do without further reference to her.

12 2 Introduction Forrest J in Ghosn v Principle Focus Pty Ltd [2008] VSC 574 [76] further developed the test put forward by Young J, and stated that the following matters also need to be considered: 1. the nature and extent of the assets to be managed (at least in a broad sense); 2. the decisions likely to be made on the donor s behalf; and 3. the ability of the attorney to carry out the tasks involved. The law continues to develop with respect to capacity. However, it is clear that, in general, an understanding of their powers and by implication soundness of mind is required in addition to any statutory requirements where applicable. Again, thorough preparation ahead of time is the best way to ensure that these decisions are legally enforceable. (d) SMSFs There is scant case law expressly considering loss of capacity in the context of an SMSF. However, as a rough rule of thumb, the principles already articulated in this subchapter 2.5 could be applied. That is, if a member/trustee/director no longer has capacity to make a will or an enduring power of attorney, it is very likely that he or she is no longer able to make valid decisions regarding their SMSF.