Blended Families - Does my business need a will

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> ESTATE PLANNING > SELF MANAGED SUPER FUNDS > BUSINESS STRUCTURES > TAXATION > COMMERCIAL > FAMILY LAW


Blended Famil ies: Does my business need a wi l l?

Steven Grant LLM, LLB, F FIN, CTA


First recorded unprepared heir

The Prodigal Son

Acknowledgement - ©2014 The Williams Group All Rights Reserved.



Blended distrust


Fixes


“I have been writing estate plans and trusts for many years and have learned that I cannot write an estate plan that ‘fixes’

your kids . . .”– Nancy Henderson, Attorney at Law STEP LA, May 2009


• Mark re-marries Amelia who has two children from a pervious marriage David (21) and Brian (19).

• Amy and Mark directors.• David works in the business.• Amy is a stay-at-home mum.

Sarah & Mark + Amelia

David Brian

Mark

Steel Pty Ltd

AmeliaSarah

50%

50%

FrankAmy


Mark Dies

Mark’s will gifts his shares to Amelia.

Steel Pty Ltd

AmeliaSarah

50%

50%


The Issue

Neither Sarah nor Amelia have 50+%. Amy only continuing director

Steel Pty Ltd

AmeliaSarah

50%

50%

Amy - director


The Issue

• Amy increases her salary because she is now sole director

• Suspends dividend payments

• Sarah and Amelia need income

• Sarah and Amelia cannot agree on a replacement director or who will run the business

•David only person who can operate business – will resign unless dividend to Amelia continues


Common Issue

Tyres Pty Ltd

JohnAdmin and Marketing

BobOperations

50%

50%

• Both directors• Both work in the business


Bob Dies

Tyres Pty Ltd

JohnSole DirectorBob’s wife

50%

50%

• John refuses to offer Bob’s wife a job or allow her to be a director• John promotes his son to Operations Manager


Solution – business will

Plan made before death


Fexuto Pty Ltd v Bosnjak

Facts

• Bob and his brothers were shareholders in a holding company that operated Westbus Group (the largest private bus company in Australia).

• Bob held 28% of the shares and his brothers held the remainder.

• Bob was increasingly alienated from the decision-making.

(2001) NSWCA 97


Held

• Bob did not have a right to veto decisions of the company

• The majority shareholders actions as a total were held oppressive, therefore Bob was entitled to require the majority to buy his shareholding at value.


Shamsallah Holdings

Owen J in Shamsallah Holdings v CBD Refrigeration and Air Conditioning Services [2011] WASC 8, held that the directors actions in paying themselves excessive remuneration while restricting the payment of dividends (which had been paid for a number of years prior) was oppressive conduct.

“If the salaries are unjustifiable then it can be seen as an element of unfairness and ripping off the company and shareholders.” [30]


Hancock v RinehartFamily

Lang

Gina Rinehart Frank RinehartGreg Milton(Hayward)

Bianca John Hope Ginia

Daughter

Hancock v Rinehart [2015] NSWSC 646

Hope

First husband Second husband


• Lang Hancock was the trustee of the Hope Margaret Hancock Trust (“the Trust”).

• Cl. 5 – Income was to be used for ‘the education, advancement and benefit of the children of Mrs. Rinehart’.

• Cl.6 - The trust was to vest on the date on which the youngest of Mrs. Rinehart’s surviving children attained the age of 25.

• Mrs. Rinehart became trustee of the trust on the death of Lang Hancock in March 1992.

• The trust is estimated to be worth $5 billion.

Background


Facts

• Mrs. Reinhart amended the Trust to limit the beneficiaries to her ‘immediate bloodline’.

• Three days before the trust was set to vest Mrs. Rinehart wrongly informed the beneficiaries that if the property was to vest they would need to pay CGT of $142 million, a value that would bankrupt them.

• Mrs. Reinhart amended cl. 6 extending the vesting day until 2068 pressuring the beneficiaries to agree so they would avoid CGT tax and bankruptcy.


Plaintiff’s Claim

• The Trust be reinstated to the original terms.

• Sought an order removing Mrs. Rinehart as the trustee.

• That the Court appoint Bianca as trustee.


• Given the risk of matrimonial litigation in the event of a marriage breakdown, the first amendment was consistent with avoiding any risk of triggering a change of control and did not indicate any ulterior purpose - held binding [103].

• The Court gave weight to Mrs. Rinehart’s desire to keep the trust monies in the family, and considered the variation appropriate in the circumstances.

HeldNarrowing beneficiaries


Held

• Was not determined because Gina vested the Trust on 30 April 2012

Extend vesting date


Held

The court has the power to appoint a new trustee upon application to the court “whenever it is expedient to do so.” The court is to consider amongst other things:

• The wishes of the testator, express or implied.• The trustee should not have a view of promoting the interests of

beneficiaries in opposition to the wishes of the testator.• Whether the appointment would promote of impede the execution of the

trust.• Welfare of the beneficiaries.

New Trustee


Held

Mrs. Reinhart argued that a licensed trustee company be appointed, while the plaintiff’s submitted Bianca be appointed.

The proposed trustee companies did not provide adequate assurance of independence from the ability to resist the influence of Mrs Rinehart and there was potential for Mrs Reinhart to acquire influence.

On the facts of this case, the trust instrument was interpreted as a desire to keep the trust in the family. Bianca as a trustee was desired by at least two of the beneficiaries.

Bianca was appointed

New Trustee


Hitchcock v. Pratt

• Deceased died in 2009, resided in Victoria

• Survived by wife, the executrix

• Hitchcock had a relationship with the deceased and had an ex nuptial

child, Paula

• Hitchcock and Paula bought a Family Provision claim under the

Succession Act 2006 (NSW)

• Sought notional estate order

Facts:


Facts

• Deceased owned no real estate in New South Wales

• Four properties in New South Wales owned by companies controlled by

a Trust where:

• Deceased, his wife and Hitchcock were not beneficiaries

• Deceased was a director of the company that owned the property


Wife’s Application

• Executrix applied for summary dismissal of proceeding:

• No relevant property transaction – s75(1)

• Not a beneficiary – s 83(1)

• Exceeded constitutional power, could not apply to property outside of NSW


Decision

• Brereton J summarily dismissed the proceedings

• Being a director under s76(2)(a) was not enough because fiduciary duties

owed to shareholders and deceased not a shareholder therefore no relevant

property transaction within s75(1)

• In respect of control of the Trust – as deceased or applicant not a

beneficiary, therefore s83(1) could not be satisfied

• (Above as no doubt the result of some careful estate planning advice)


Jurisdiction

• Act could only have jurisdiction

• non NSW resident if movable property in NSW

• No jurisdiction to non NSW immovable property if person was a non resident

• Hitchcock & Anor. v. Pratt [2010] NSWSC 1508


Pratt No 2

• This time claim in Contract

• Deceased made promises

• Leave escort industry in 2003

• Become non exclusive mistress

• In exchange

• $500,000 per annum

• Accommodation

• Trust fund for children


Defences

• Certainty

• Intention to create legal relations and social and domestic arrangement

• Could deceased enforce bargain, i.e. Claimant not return to escort

business

• Contract void public policy


Other Issues

• Estoppel

• Accord and satisfaction and earlier release


Judgment

• Uncertain

• Void public policy

• Estoppel failed, no detriment

• Also had been accord and satisfaction

Ashton v. Pratt (No 2) [2012] NSWSC3


• Plan for every contingency

• Loss of control

• Cost – duty, tax and maintenance

• Will it work

Planning


No Plan

• Failing to plan for the death/incapacity of the business owner will often give rise to litigation, more-so in blended families.


Tools For Business SuccessionPlan will include:

1. Shareholder/Unitholder/Governance Agreements

2. Family Law

3. Trust

4. EPA and Guardianship

5. Super

6. Causes


1. Governance Agreements

• Agreement

• Constitution

• Pre-emption

• “Beirat” or Family Agreement


Beirats/Family Agreements

• Popular in Germany

• 90% of SME have a Beirat on death of Principal

• Australian equivalent combination of an advisory board and family constitution

• Becoming more popular here


Typical Beirat• Board

• “advisory board” become “the board”

• Lock in Period

• Board cannot be altered for 2 years from death

• Shares, business or control of same cannot be sold for 2 years from death

• Board to consider in the 2 years whether a family member has ability to run business


Document

• Agreement between family members

• Integrates with the constitution or trust deed


Advisory “Board”

• Accountant, lawyer, banker, industry expert, independents

• Capacity is not that of a formal director, do not make decisions

• Deep knowledge of structure, finance and operations

• Not to govern until death


Why Two Years?

• During uncertain period to provide some stability

• Emotional time for family

• Independent review of business

• Independent review of family, possibility of succession of control. If not ready the business for sale

• Convert active assets to passive income stream for family


Why?

• Second, third, plus generational businesses

• Large bedding company

• Started by grandfather

• Seeded to two sons of five children

• One son four children, the other five

• Nine cousins


Bedding Example

• Family constitution

• MD appointed on ability (currently a family member)

• Each family member has a ‘right to a job’ but based on qualification and ability

• Independent board, family board disbanded

• Moving to a corporate model and ultimately public offering


Hotel

• Pub is an icon, income good but limited

• Father started, passed away

• Mum still alive, in her 90s in a home

• Six children, four have predeceased their mother

• Predeceased children left dependant spouses and children

• Two children operate the hotel• On mum’s death, who will control and what of dependant spouses and

grandchildren


Naive Children

• Father ran two children’s life

• Father died, left the children in control

• Children not qualified, no experience, unaware of litigation, unaware of

value of estate

• No succession of control

• Uncertainty and raw emotion from death generate bad blood


Naive Children

• Advisory Board

• Board could have assessed children, been aware of the business and

litigation

• Board resolve litigation, sell business and divide and put in place passive

income stream for children in independent hands


2. Family Law

• Financial Agreements• Stephen Burke from Certus Law will cover in Session 4.

• ‘Intact’ Stanford type applications – Polik v. Polik

• Adjournment

• Spousal maintenance

• Interim orders

• Injunctions


Polik v. Polik [2012] FamCA 335

• Application by husband in an ‘intact’ marriage

• Devout Catholics

• Had a troubled marriage

• Husband the steward of a large family business, run for benefit of

parents, siblings, their children

• Husband wanted a BFA wife declined

• Sought s79 adjustment


‘To Save the Marriage’

• Seeking orders to ‘save the marriage’

• Might be a way to force business succession

• s78 declaration or s79 adjustment


Polik Scenario

• Parties to second marriage happy and intact• Husband 20 years older than wife• Husband retiring from business, wanted his wealth to pass to adult

daughter from the first marriage• Business value of in excess of $50 million • Wife wanted to take sole control and expand, wanted that to pass to her

children • Complicated corporate structure


Polik Scenario

• Restructure to achieve husband’s and wife’s goals had significant:• Duty• Income tax• CGT

• If s79 order made then:• Certainty• No duty (conflict between s90 of the Family Law Act and some State Duty

Acts – for example Qld s420(1) Duties Act 2001)• No CGT


3. Trusts

• Contingency• Dwyer v. Ross (1992) 34 FCR 463• Richstar v. Carey [2006] FCA 814

• Control• Inter vivos

• Sub trusts, trust splitting

• New trusts

• Amending trusts or settling new trusts to overcome notional estate –

Hitchcock v. Pratt [2010] NSWSC 1508

• Leave to Matthew Burgess – Session 10.


Montevento Holdings(2012) HCA 48

Facts: • The trust deed stated “if and so long as any individual appointer is a

beneficiary that individual shall not be eligible to be appointed as a trustee.”

Beneficiaries

Discretionary Trust

Beneficiary appointed his company as trustee of the discretionary trust.


Appointor:

Dad Mum One son

Held:

• an individual is distinct from a company even when that individual is the sole shareholder and director.

• the appointment was valid.

Montevento Holdings


Mercanti v Mercanti [2015] WASC 297

Facts – The case concerned the validity of deeds of variation for two discretionary trusts. The existing appointer Michael was replaced with his son Tyrone.

The MMF trust amendment power allowed the trustee to “vary all or any of the trusts terms and conditions” –

Held - The variation was valid. The FW trust amendment power only allowed the trustee to “vary all or any of the trusts” –

Held - The word ‘trusts’ did not extend to the appointment clause and the variation was invalid.

Mercanti v. Mercanti


Father planning80cancer

79Mum (starting to lose it)

Ran business with sister’s

husband

Uncertainty Hippie Disabled

Many grandchildren


Father Succession

Appointor

Company

Family Trust

(pre CGT)Business $20 million +

100%Shares

1970s deed

(father)

Significant issue with the Trust Deed


Plan

Mum

Super

DisabledDaughter

Company

Family Trust

1 2 3 1 2 1 2 1 2

AppointorDaughter

AppointorDaughter

AppointorDaughter

AppointorSon


Family Agreement

• Executed by all entities and controllers

• Father’s estate nominal

• 3/9ths of business income plus 1/4 of all other income to son

• 2/9ths plus 1/4 to daughters

• Father and son to manage, then son day to day

• Decision-making, disputes and exit all dealt with in an Agreement


Good Trustee• diligent

• unbiased

• sensitive

• wise investor

• forecast the future

• psychologist

• family mediator

• value fees

• knows family well


Good Trustee

However if found

• Relatively simple discretionary trust will provide:

• flexibility

• protection

• will not be alter ego

• will not be property

• good tax outcome

• relatively cheap to administer

• wise counsel


Even With a Good Trustee

NB

• It will be a loss of control to the spouse or children

• Need to be checks and balances

• A Trust is my preferred succession structure


4. EPA and Guardianship

• Individuals

• Companies

• Power of attorney

• Trustees

• Delegation

• Leave to Robert Monahan – Session 6 this afternoon


5. Super

• Important

• Covered by Angela Cornford-Scott in Session 5 and Scott Hay-Bartlem

in Session 7.


6. Causes

Anticipate:

• unconscionable conduct and proprietary estoppel

• constructive trusts and joint endeavour claim

• statutory will application


Nolan v. Nolan [2014] QSC 218

• Tony oldest of six children

• Family operation

• Donna sought adjustment in respect of Brian’s and Majella’s property

Brian Majella

Tony Donna


Donna

• Brought claim in

• estoppel

• joint endeavour

• Estoppel failed, promise not certain.

• Joint endeavour succeeded

• Trust declaration made


GAU v. GAV [2014] QCA 308

• Statutory will application

• Conflict with FLA?

• Trust declaration made

• Daughter-in-law and son separated

Dad Mum

SonDaughter-in-law

Married 17 years


Issue

• Existing asset pool was $1 - $1.2M

• Father applied to alter mum’s will to establish

testamentary trust for son and grandchildrenMum

Son

$6M assets to son


• Difficult to anticipate all claims against what might be bought if there is a

conflict between family members


• None of us choose our parents but functioning adults can choose

whether or not they have children

• ‘The price the deceased paid for passing his assets tax free to his

nominated beneficiaries was acceptance of the statutory duty’ to make

adequate provision for all his claimants

(Mead v. Lemon [2015] WASC 7)

Don’t Plan


Mead v. LemonMichael WrightDOD 2012 74 yrs

First WifeDivorced

Daughter – 2nd defendant1971Daughter – 3rd defendant1973

Son - deceased

Second WifeDivorced

Third WifeDivorced

No children

No children

Elizabeth Mead

Fourth Wife - MaryMarried 1997 No children

ApplicantOlivia Mead1995


Mead v. LemonApplicantOlivia Mead1995

Defendant 1ExecutorLemon

Defendant 2Daughter

Defendant 3Daughter

(residuary beneficiary)


• $800 million to $1 billion

• Executor distributed all of estate bar $45M

• (His Honour not happy – no court approval sought)

Size of the Estate


• 19 years old

• left $3M in a trust

• ‘a real prospect it will never vest’

Ms Mead


Claim by Ms Mead

• A ‘cozy’ house worth $2.5 million,• ‘Fashion accessories’ worth $298,400,• A diamond-encrusted bass guitar worth $250,000,• A $1.53 million crystal-covered grand piano,• An Audi A4 and a Toyota Tarago van for when she has children,• A $100,000 wedding,• $40,000 a year for holidays,• $150 a week for wine,• $20,000 each year to keep a dog, a rabbit, a ferret and a Mexican

walking fish,• Five pairs of shoes valued at $5,000 every year and 20 pairs valued at

$300 every year for the rest of her life.


Claim

• totalled $25 million

• reduced by His Honour during the hearing to $12 million

• His Honour then awarded $25 million

• beware executors who do not respect the process and court


Executor

• had distributed bulk of the estate

• not applied to the court for a direction in this regard *

• appointed a new trustee to ‘Ms Mead’s Trust’ without consultation with her

• other admissions, undertaking and payments highlighted the uncertainty surrounding the Trust

*s96 Trusts Act 1973 (Qld), s92 Trustees Act 1962 (WA)


The Succession Plan Design Matrix

The business and asset

structures and tax

considerations

Management interests of family and non-family


holding interest

Your personal and family goals and objectives


succession plan

Acknowledgement - ©2015 Peter Bobbin.


Questions

Blended Families - Does my business need a will

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