Asset Protection

What is a lien?

A lien is the right of a person or business to hold or retain possession of an item as security for performance of an obligation owed by another, such as the payment of monies owed.

Liens only apply to physically transferable items of personal property and effectively act as an informal or unregistered form of security for payment.

Liens only arise if the item was given to the lien holder with the express or implied authority of the owner (such as the owner or driver of a vehicle) and generally won’t arise over stolen property.

A lien does not arise simply by simply performing work.  There must be a basis for a lien to arise such as a contractual right, a piece of legislation or operation of the law.

There are 4 types of liens, each of which we discuss briefly below:

  1. statutory;
  2. contractual;
  3. common law (or possessory); and
  4. equitable.

In all but the latter of the categories, maintaining actual possession of the property in question is crucial as the rights afforded to the lien holder are only applicable while the lien holder is in possession of such property.

Statutory liens

Statutory liens arise through the operation of specific pieces of legislation such as those in Part 5 of the Sale of Goods Act 1923 (NSW), the Storer’s Liens Act 1935 (NSW) etc.

The relevant Acts describe the terms of the liens created by those statutes.

Contractual liens

If the terms of agreement, terms and conditions of trade or similar document that governs the rights and obligations of the parties to a contract provide for a lien, then such a lien is a ‘contractual lien’.

The operation of the lien is the same however – there must be money or some obligation owed and an item of the other party held pending payment or performance of that obligation.

Common law liens

At common law, liens can either be ‘particular’ or ‘general’ (also known as ‘specific’) and arise by implication of law.

A ‘specific lien’ secures obligations that are incurred in respect of the particular goods that are held.  A common example of a specific lien is the ‘mechanic’s lien’ – the right to hold your car until you have paid for the work performed or a repairer’s lien for payment in respect of improvement work done on a chattel.

A ‘general lien’ however is more favourable, although far less common and more difficult to establish. A general lien allows a person to retain possession of any goods held (but not sell or otherwise deal with that property) until all sums payable by the owner of the goods are satisfied, not just the amount payable in respect of work performed on the specific goods held hostage.

General liens must be established by strict proof of custom or usage such as a ‘solicitors’ lien’ or an ‘accountant’s lien’ which allows a solicitor or accountant to assert a lien over and thus retain a client’s documents (or the fruits of a court action) until payment of all debts owed by the client. It is effectively an implied term of the relevant contract.

Equitable liens

Equitable liens are created on a case by case basis by the law of equity as determined by the Courts. Judges may declare such liens so as to uphold or preserve fairness or justice to a situation having regard to the parties’ dealings and conduct.

An example is where a party spends money improving the item for another where there was either express or implied agreement that the performing party should have an interest in the enhanced property. The party who performed the work and is owed the debt may then acquire an equitable interest in the property proportionate to the value of the enhancement.

Unlike the other types of liens, ‘equitable liens’ do not require actual possession of the article in question. Such liens can be voided by the express or implied agreement of the parties.

Consideration often needs to be given to the value of the lien compared to the substantial time and monetary cost of seeking judicial intervention.

How does a lien end?

Any right to assert a lien (other than an equitable lien) expires upon performance of the outstanding obligation (such as payment) or upon release if the item over which the lien is maintained as without possession, there is no lien.

How does the PPSA affect a lien?

Statutory liens and common law liens can be exempted from the operation of the Personal Properties Securities Act 2009 (Cth) (PPSA).

In some circumstanced, the party asserting the lien can have priority over any security interests registered on the Personal Property Securities Register (PPSR) held by other creditors of owner of the item if:

  • the materials/services were provided in the ordinary course of business by the person asserting the lien;
  • no other Act prevents the lien from having priority; and
  • the holder of the lien did not have knowledge of any security agreement under the PPSR relating to those goods (that prohibited the creation of the lien).

Security interests registered on the PPSR under the PPSA will usually defeat any contractual lien.

FURTHER INFORMATION

For more information, please contact McKillop Legal on (02) 9521 2455 or email help@mckilloplegal.com.au to discuss your needs.

This information is general only and is not a substitute for proper legal advice.

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Does marriage, separation or divorce affect my Will?

This blogpost is limited to New South Wales as the laws in each State and Territory differ in relation to these matters.

Marriage

If you get married after you sign a Will, the Will is revoked unless it is specifically stated to have been made in contemplation of that particular marriage taking place.

Marriage will not affect a gift to the person who is your spouse at your date of death or their appointment as your executor.

Entering into a defacto relationship does not have the same impact on a Will as a marriage, but this can give rise to other rights as regards the property of the relationship whilst the parties are alive (and claims in relation to the division of the estate on their deaths).

Divorce

Subject to the contrary intention being expressed in a Will, if you divorce after you make your Will, it only revokes or cancels any gift to a former spouse and their appointment as executor.

It will not however cancel their appointment as trustee of property left on trust for beneficiaries that include children of both you and your former spouse.

Separation

If you don’t update your Will after you separate, your spouse may inherit any property you left to them and they can still be the executor of your estate if named as such in theWill.

The take away

If any time your circumstances change (such as a birth or death in the family, a marriage, separation or divorce or a material change in finances for the better or the worse) you should consider whether your estate planning documents require any updates. It may be that no change is necessary, but it at least should be considered.

FURTHER INFORMATION

For further information in relation to Wills and estate planning, contact McKillop Legal on (02) 9521 2455 or email help@mckilloplegal.com.au 

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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COVID-19: McKillop Legal remains open for business

McKillop Legal remains open for business and is fully operational despite the significant and unprecedented challenges facing our families, the Australian economy and our way of life as a result of the Coronavirus/COVID-19 pandemic.

We remain open for business and available to provide advice either by telephone, email or other services (and, if necessary, in person, abiding by the Government’s social distancing guidelines).

Our staff all have the ability to work remotely from home or in other places using our secure technology infrastructure and systems.

If you or your business has any legal issue it requires assistance with, whether relating to your rights or responsibilities relating to business, shutdowns or employment in relation to the pandemic or in relation to other matters, please call or email us and we will be in touch promptly.

Take care.

Can you just put a caveat on someone’s house?

If you are owed a substantial sum of money by someone, whether because you have loaned them funds or if you have a bill that hasn’t been paid, you would generally like to secure those funds. This way, if the borrower or debtor ends up being a bankrupt or insolvent, you may be in a better position as a secured creditor to those that are unsecured and hopefully you can get paid.

So how does security work? Security is effectively giving notice to the world that you have a claim on that person’s estate or assets so that subsequent people or businesses dealing with the same person are aware that you are to be paid in property, ie before them.

Security can be given in several ways, including:

  • handing over physical possession of certain assets;
  • the granting of  a Security Interest over assets registered on the Personal Property Securities Register (or “PPSR”); or
  • perhaps granting a Mortgage over real property owned by the person owing the money.

The registration of securities grants priority in order of registration, so it is important not to delay in registering any securities granted.

Ordinarily, you would have put in place a Loan Agreement or had Terms of Trade in place to govern your business relationship so that you have the express written consent to do such things to secure the debt, but if these documents are not in place before the financial obligation arises, people often take the step of lodging a caveat on title to property owned by the debtor.

A Caveat registered on title to a property has the effect (subject to the specific wording of the caveat of course) of preventing the owner or registered proprietor of that land from dealing with that land without the consent of the person who lodged the Caveat (the “caveator”). Dealings that can be prevented include lodging other Mortgages, lodging Transfers and the like.

Can you just put a caveat on someone’s house? If only things were that simple!

Many people have taken the step of lodging a Caveat on title to a debtor’s property only to have been unsuccessful in protecting their debt. Why? Well, in order to lodge a caveat (or even a Mortgage or PPSR Security Interest for that matter), you need to have the relevant asset “charged” in your favour with payment of the relevant debt. Creating a “charge” over an asset creates an interest in that asset that allows you to lodge a Caveat to notify and protect that interest.

A Caveat is not a document that gives you priority over previously registered interests, but it does give you some control over the asset such that you can prevent refinancing or a sale of an asset unless satisfactory arrangements for you to be paid have been made as part of that process  Properly drafted documents in relation to the lending of funds or business agreements where credit is extended should include things such as Mortgages, General Security Deeds or other things that create an interest in the asset sufficient to lodge a Mortgage, on title (to land), a Security Interest (on the PPSR in relation to assets etc) or at a minimum a Caveat over land.

Without such an interest being created, the caveator runs the risk that the owner can’t sell or refinance and suffers financially, then pursues the caveator for damages flowing from the caveator’s wrongful act, putting the caveator in an even worse position than they were before!

These things should not be done without proper advice, so take the time to review your current situation and documents now before a problem arises and have the documents updated to best protect you or your business.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to debt recovery, loan agreements, estate planning, any business-related matter or if you have a Caveat lodged on your property without your consent, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your legal concerns or objectives.

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Power of appointment

You may have a family trust or a discretionary trust that your accountant prepared for you.

Perhaps you are the trustee or that trust, or one of several trustees such as your spouse or partner or perhaps you are a director of a company that is the trustee.

There are a number of terms used in trust deeds that are not commonly understood, such as the “settlor”,vesting date” or the “excluded class”.

One of the things that is often:

  • not properly considered at the time of establishing the trust; and /or
  • overlooked at the time estate planning documents are being drafted

is the “power of appointment”.

The power of appointment is a power granted to the “appointor” named in the trust deed to decide who should be the trustee of the trust.

This power of appointment is the most important power in a trust deed as it generally affords the appointor the power to remove and replace the trustee as the appointor thinks fit (subject of course to any provisions of the trust deed).

Often the trust deed will provide for how that power is to be transferred, such as on the death of the appointor, and allows the appointor to give that power in their Will.

If you have a trust deed and you either:

  • don’t know who holds the power of appointment;
  • want to amend the trust deed to change who holds that power of appointment or
  • want to ensure that the power is appropriately transferred on your death

then speak to your lawyer about this without delay.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to trusts, estate planning, business succession or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

Contract to Make Mutual Wills

A Contract to make Mutual Wills is an agreement between 2 parties (usually a husband and wife, but can be a same sex couple or a de facto couple) to make Wills in an agreed form.

Usually, they provide that the parties may not act such that those Wills don’t get given effect to, such as:

  • revoking or destroying the Will;
  • making a new Will; or
  • disposing of assets so that they do not pass to the agreed beneficiaries

without the consent of the other party (or the executors/administrators of their estate  if they have died).

Often they are put in place when the parties have had a prior marriage or marriages and there are children of the prior relationship/s and the current relationship.

The benefit of such contracts (or deeds as they often are) is that the parties can take some comfort in providing for the other during their lifetimes (for example by gifting their entire estates to each other in their Wills), but with the overall distribution of their combined estates (on the death of the last of them) passing as agreed in the Wills made pursuant to the document.

Where a party breaches the agreement (such as by changing their Will), that party (or their estate) may be sued by the other party (or their executors/administrators if they have died) for breach of contract.

Whilst mutual Wills can be an effective estate planning tool, they are not for everyone and they can cause unintended complications due to their inflexibility, particularly around subsequent marriages, children and unexpected events following the death of a party.

As with most things, there are also other options or alternatives to consider to get a similar result, including creating life interests in real estate or establishing trusts.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to estate planning, business succession or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your estate planning needs.

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The difference between joint tenants and tenants in common

You own property with another person and you are in the process of making a Will.

Of course, you want your interest in the property to go to your intended beneficiaries.

Your solicitor asks you if you own the property as “joint tenants” or as “tenants in common“. You stop and think…

Until now, you had no idea that there was any difference between joint tenants and tenants in common and had probably never considered it.

The concepts are the same for any asset, but are more commonly used in relation to land. So what is the difference?

What is tenants in common?

The simplest way to think about owning real estate (or real property) as tenants in common is that each owner has a legal interest in the land in a defined or specific share or proportion.

For example, the phrase “as tenants in common in equal shares” means that each owner has an equal interest in the land (so in the case of 2 owners, they each hold a 50% interest and in the case of 3 owners, they each hold a 1/3 interest).

Where property is owned as tenants in common but in unequal shares, the proportion of ownership is specifically stated (such as “John Smith as to 1/4 share and Bob Brown as to 3/4 share as tenants in common”).

With tenants in common, each owner (subject of course to any Co-Ownership Agreement or encumbrance such as a Mortgage or Caveat) may freely transfer or dispose of their share of the property, including in their Will when they die.

On their death, their interest in the property will be included in the inventory of property annexed to the grant of Probate or if they don’t have a Will, annexed to the grant of Letters of Administration.

What does joint tenancy mean?

Joint tenants however each own the whole of the relevant asset. The concept is that the co-owners’ ownership of the asset overlaps such that on the death of one joint tenant, the remaining joint tenant/s will continue to hold the whole of the asset. This is known as the “right of survivorship“.

A deceased joint tenant’s interest in the property does not form part of their estate and is not available for distribution to the beneficiaries of that person’s Will. Often this is overlooked by those drafting Wills.

The same principles apply to bank accounts held jointly.

It is for this reason that most married couples (or those in longer term relationships) hold their property or at least their principal place of residence as joint tenants. There are however, sometimes good reasons for holding property differently as part of an overall Estate Plan. Blended families for example often necessitate this right of survivorship not being given effect to so as to more fairly distribute their estate on their death.

Other situations where a joint tenancy may be appropriate for those not in a relationship like marriage is a Lease by parties to a Partnership – the death of one partner would then not necessarily affect the continuation of the Lease.

Severing a joint tenancy

If you hold property as joint tenants with another person it is possible to sever the joint tenancy – which then converts it to a tenancy in common in equal shares.

This can be done unilaterally by lodging the appropriate documentation at NSW Land Registry Services (formerly NSW Land & Property Information and the Land Titles Office) and is often done by lawyers when parties to a marriage or de facto relationship no longer wish for the other party to own the entire property on their death, such as when they separate or get divorced.

Mixed tenancies

It is also possible to have a combination of both a “joint tenancy” and a “tenancy in common“, such as where a property is owned by 2 families. For example,  a husband and wife may own one half of the land but they own it jointly as between them (so that if one passes away, the other continues to own it) and the brother of the husband owns the other half absolutely.

The title to the property would show “John Smith and Mary Smith as joint tenants as to 50% and David Smith as to 50% as tenants in common”.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to estate planning, changing the tenancy of a property or documenting a co-habitation or property use agreement, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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What is a Granny Flat Right?

WHAT IS A GRANNY FLAT RIGHT?

You can have a granny flat interest in any kind of dwelling, not just those typically referred to as a “granny flat” (a separate, self-contained building or living area attached to a home or property). It must be a private residence and your principal home.

You cannot however, have a granny flat interest in a property in which you have legal ownership (or your partner or a company or trust that you control).

A “granny flat right” or a “granny flat interest” is where you pay for the right to live in a specific home for life.

Granny flat interests are usually family arrangements providing company and support for older people, but they don’t have to be for social security purposes. They are created when you exchange assets, money or both for a right to live in someone else’s property for life. For example, you could:

  • transfer ownership of your home but keep a lifelong right to live there or in another private property; or
  • transfer assets, including money, in return for a lifelong right to live in a home.

The granny flat right only lasts for your lifetime. It’s not part of your estate when you die, so you can’t give it in your will as part of your estate plan.

DOCUMENTATION

A granny flat right does not have to be in writing however, given that amounts that can be paid for a granny flat right can be significant and they are usually funded by significant events like the sale of a family home, it can be a very good idea to get a lawyer to draw up a legal document so you have proof of what you and the owner have agreed to in relation to the granny flat arrangement.

A Granny Flat Right Agreement can include many things in addition to the amount paid, such as what happens if the property is sold, whether the right can be transferred to another property or what you may get back if you give up your granny flat right, as well as what regular contributions for rent, maintenance or outgoings (insurance, rates, phone etc) may have been agreed.

GIFTING RULES & THE REASONABLENESS TEST

In Centrelink/Department of Human Services terms, a “deprived asset”, also known as “gifting”, is where you give away an asset without getting something of at least equal value in return.

The value of a granny flat right is the amount paid, or the value of the assets transferred, in return for a life interest or life estate in a property.

Centrelink may apply the “reasonableness test” in determining the amount that should be paid for a granny flat right. This test is based on a formula based on a conversation factor relating to your age next birthday and the couple age pension rate.

If the amount paid is equal to or below the value determined by the reasonableness test, then there is no deprivation. However, if the amount you paid for the granny flat right is more than the cost or value of the granny flat right, the excess amount paid is considered to be a “deprived asset”.

This could affect the amount of pension you are paid.

Depending on the value of the granny flat right, you may be considered as a home owner for Centrelink (assets test) assessment purposes, even though you don’t own the home you have the granny flat right in.

WANT MORE INFORMATION?

Speak to us about how we can assist you to draft a Granny Flat Right Agreement to document your arrangements regarding the use and occupation of part of your home. We will liaise with your financial planner to cover off the financial and social security aspects as there may be other things you can do like contribute proceeds of sale to super.

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to documenting co-habitation and property use agreements and estate planning matters generally, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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Downsizer superannuation contributions

*The contents of this article are general in nature – as always, you should seek financial planning advice before doing anything to alter your financial position.*

From 1 July 2018, the Australian Government will allow “downsizer contributions” into superannuation as part of a package of reforms aimed at reducing pressure on housing affordability in Australia.

This measure applies where the exchange of contracts for the sale of your home (which must be your principal place of residence) occurs on or after 1 July 2018.

If you are 65 or older, and you meet the eligibility requirements, you may be able to choose to make a “downsizer contribution” from the proceeds of selling your home into your superannuation account for an amount of potentially up to $300,000.

Importantly, your downsizer contribution is not a non-concessional contribution and will not count towards your contributions cap, nor do the normal contributions rules apply, such as the “works test”.

Downsizer contributions are not tax deductible and will be taken into account for determining your eligibility for the age pension.

If you do not meet the “downsizer contribution” requirements, then the contribution will be assessed under the normal contributions caps (and penalties may apply).

If considering a downsizer contribution, you should also look to ensure that your estate plan is appropriate and if not, put appropriate arrangements in place.

From 1 July 2018, the Australian Government will allow “downsizer superannuation contributions

ELIGIBILITY

You will generally be eligible to make a downsizer contribution to super if you can answer “yes” to all of the following:

  • you are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit),
  • the amount you are contributing is from the proceeds of selling your home where the contract of sale was exchanged on or after 1 July 2018,
  • your home was owned by you (or your spouse) for at least 10 years prior to the sale,
  • your home is in Australia (and is not a caravan, houseboat or other mobile home),
  • the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT, rather than a pre-CGT (acquired before 20 September 1985) asset,
  • you have provided your super fund with the downsizer contribution form, either before or at the time of making your downsizer contribution,
  • you make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually the date of settlement, and
  • you have not previously made a downsizer contribution to your super from the sale of another home.

HOW MUCH CAN YOU MAKE AS A DOWNSIZER CONTRIBUTION?

If you are eligible to make a downsizer contribution, there is a maximum amount of $300,000 that can be made.

The contribution amount can’t be greater than the total proceeds of the sale of your home.

It only applies to the sale of your main residence, and you can only use it for the sale of one home. You can’t access it again for the sale of a second home, but there is also no requirement to purchase another home.

TIMING

You must make your downsizer contribution within 90 days of receiving the proceeds of sale. This is usually at the date of settlement.

You may make multiple “downsizer contributions” from the proceeds of a single sale however:

  • they must be made within 90 days of the date you receive the sale proceeds (usually the settlement date of the sale), and
  • the total of all your contributions must not exceed $300,000 (or the total proceeds of the sale less any other downsizer contributions that have been made by your spouse).

If circumstances outside your control prevent payment within that time, you can seek an extension of time.

HOW TO MAKE A DOWNSIZER CONTRIBUTION

Before you decide to make a downsizer contribution, you should:

  • obtain financial planning advice in relation to the relevant requirements and any effect on your social security benefits or other entitlements (there may be other things to consider with any surplus sale proceeds such as acquiring a “granny flat right” and updating your estate planning documents),
  • check the eligibility requirements for making a downsizer contribution,
  • contact your super fund to check that it will accept downsizer contributions, and
  • complete a downsizer contribution form for each downsizer contribution and provide this to your super fund when making – or prior to making – each contribution

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to estate planning, business succession, superannuation or SMSFs, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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Setting up a new business

Before starting a new business, the first thing that you need to consider is the structure of the entity to operate the business.

There are numerous options to choose from, such as:

  • sole trader;
  • partnership;
  • company; and
  • unit trust.

This is when it can pay to get good accounting/taxation, financial planning and legal advice as there are advantages and disadvantages associated with each type.

WHICH STRUCTURE IS THE BEST?

There is no right or wrong answer to this necessarily, although some are preferred more than others.

To determine the most appropriate structure, you need to consider what is most important for you and your family and things such as what assets/business you already have interests in, whether you intend to be in business with others or you’ll go it alone, how you intend to run the business and whether it is a long term plan or whether you intend to quickly build and sell it.

Each option has different qualities, including:

  • simplicity vs complexity,
  • asset protection vs personal liability,
  • income going to one individual vs ability to minimise tax through income splitting,
  • taxation issues on sale such as CGT exemptions; and
  • business succession planning issues.

OTHER THINGS TO CONSIDER

Once the structure has been determined, and depending on the structure to be adopted, other things that need to be covered off include:

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to starting or buying a business, drafting business documents or any other commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au.