trustee

Forcing the sale of land in NSW

Where land is owned by multiple people (whether as joint tenants or tenants in common), any one of the owners can approach the Supreme Court to seek an order for the appointment of a trustee for sale and for the property to be sold.

Ordinarily, the owners can come to agreement on the need for a sale and the basis on which it is to be conducted. For example, following some negotiations or a mediation, the co-owners may agree to:

  • sale by auction with an agreed reserve price;
  • sale by public treaty with an agreed price; or
  • sale by one owner to another, with agreement on how the price is determined (such as agreeing on a valuer or methodology).

When co-owners are in a dispute however as to whether a property should be sold, when and on what terms, the provisions of section 66G of the Conveyancing Act 1919 (NSW) can be utilized to force the sale of the property, even where the other owner (or owners) do not want to sell it.

Once appointed, the trustee has the legal power to sell the property on the best terms available and to engage real estate agents, valuers and lawyers/conveyancers as may be required. So as to help ensure that the property sells for fair market value and to avoid any breach of trust allegations from any of the owners for not obtaining the best price possible, it is sensible for a trustee to sell at public auction

A usual order made is that the unsuccessful party (usually the defendant/respondent) pays the plaintiff /applicant’s legal costs. The costs risk arising from litigation (which can be substantial in amount) is usually a key factor in out of court settlements being made.

Applications for the appointment of a statutory trustee for sale are generally only refused in special circumstances, such as where the is a prior agreement not to sell, around the terms of any sale or to sell only when certain conditions are met (which is why any co-ownership agreements ought to be in writing as verbal evidence can be less persuasive).

Usually, after a successful application is made and the property is sold, the proceeds of sale after payment of:

  • any encumbrances (such as mortgages and unregistered mortgages secured by caveats);
  • the costs of sale (real estate agent and auctioneer fees and marketing costs etc); and
  • the trustee’s costs

are held on trust by the appointed trustee and then distributed proportionally according to ownership.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to family disagreements in relation to land or estates or any business or commercial dispute, 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 needs.

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SMSF owns property. Member dies. Oh oh!

Do you, like many Australians, have a self managed superannuation fund (SMSF)?

If you want to own direct investments within your superannuation or have greater control of your superannuation portfolio, a SMSF can be a suitable alternative to retail superannuation funds.

SOME ADVANTAGES OF SMSFs

SMSFs have:

  • direct investment choice
  • access to wholesale managed funds
  • the benefit of being able to combine the superannuation balances of up to 4 people
  • the advantage of 15% taxation on investment earnings (as opposed to marginal or company tax rates) and potentially reduced capital gains tax
  • the ability to assist with estate planning and possibly for non-lapsing binding death benefit nominations

DIRECT PROPERTY

Often seen as a key advantage is the ability of an SMSF to invest in direct property, such as owning office or factory space from which a business operates from (assuming your SMSF’s Investment Strategy allows for direct property).

Where member balances are insufficient to buy a property outright, SMSFs can also borrow but only using a limited recourse borrowing arrangement (LRBA) using a bare trustee that holds the property on behalf of the SMSF for the duration of the loan and once the debt is paid, the legal ownership of the property passes to the SMSF.

Property values hopefully go up over the next 20 or so years and the members benefit from and can live happily off the benefits during retirement …

… well that’s the plan anyway. So, what happens if a member dies or gets really sick a few years into the plan? (hint – it can ruin everything, for the other members).

CONSEQUENCES OF DEATH OR TPD

On the death of a member, that member’s superannuation balance is to be paid out (to the member’s estate of their nominated beneficiary/ies) as soon as is practicable.

On the total and permanent disablement (TPD) of a member, the member may be able to exit from the SMSF and call for their member balance to be paid out.

… but if the SMSF’s cash is all tied up in the property and the property is still subject to the LRBA, where does the money come from to pay out the member balance?

The property may have to be sold to fund this! That is, unless there is a SMSF Member Death & TPD Exit Deed in place.

SMSF MEMBER DEATH & TPD EXIT DEED

A SMSF Member Death & TPD Exit Deed can help in reducing the financial effects arising from the unexpected death or TPD of a member by for example:

  • requiring the SMSF members to effect a life insurance policy over the lives of the other members and where there is a death and a payout under the policy, the policy owners contribute funds to the SMSF with the intention of paying out the deceased member’s superannuation balance (and using any remainder to reduce or pay out any debt on the property under the LRBA); and
  • requiring the SMSF members to either put in place appropriate TPD cover or to agree that on the occurrence of a TPD event of a member, that member may remain a passive investor in the SMSF but cannot immediately call for payment of their member balance, even if they would otherwise be entitled to under the superannuation legislation, but rather, if they want the payment, their member balance is to be paid out over several years (ie, from the SMSF’s cashflow).

Unless there are appropriate insurances in place or an agreement for members to only get paid out benefits over time in the event of a TPD event, then the likely outcome of the death or TPD of one member is the sale of the SMSF’s property.

This can be a particularly bad problem if the SMSF has only recently acquired the property and had therefore incurred all of the legal, financial planning and accounting costs as well as stamp duty, but had no time for the asset to generate income or appreciate in value. The death or TPD of the one member therefore affects up to 3 other members who may not even be related to the affected member!

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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SMSF owns property. Member dies. Oh oh!

Bringing on business partners?

For businesses that are growing and putting on other shareholders and directors, a Shareholders Agreement is a must have. If your business is not a company but it a partnership or a unit trust structure, the document would be a Partnership Deed or Unitholders Agreement.

Don’t leave some of the most important and fundamental issues for your business to chance. Consider a company with 2 or 3 shareholders – a typical small to medium sized business scenario…

COMMON PROBLEMS FOR SHAREHOLDERS

Issues that commonly that can affect shareholders include:

  • A shareholder sells their shares, leaving you with an unintended business partner;
  • A shareholder dies and you inherit an unintended business partner or you have to buy the shares from their estate for more than you ought to;
  • As a shareholder, you want out but cannot find a suitable purchaser but the other shareholders won’t buy you out;
  • The shareholders don’t have available funds to pay out an exiting shareholder;
  • The majority shareholder wishes to run the business one way, but is restricted by a minority shareholder;
  • You, as a minority shareholder, are being treated poorly by other shareholders who are running the business with little regard to your interests;
  • You wish to sell the company’s business as there is an excellent offer on the table, but another shareholder will not and is jeopardizing the sale;
  • You wish to receive dividends from the business, but others want to reinvest the profits.

The aim of a Shareholder Agreement is to bring some certainty to the business relationship so there is confidence in how the business will operate

TAILORED SOLUTIONS

A Shareholder Agreement tailors the rights and obligations of the shareholders to fit the particular purposes of the company, the nature of its business and the aims and wishes of its shareholders – to help avoid some of the potential problems identified above.

Some factors that should be considered in a Shareholders Agreement include:

  • The company’s activities/type of business – its purpose;
  • The roles and obligations of the shareholders;
  • Who are the directors and how the shareholders can change them;
  • Director remuneration;
  • Who will manage and control the business day to day, such as a managing director;
  • Meetings – how they are called, how they are run, counting of votes;
  • How decisions are made by shareholders or the board of directors;
  • What types of decisions require a simple majority, special resolution or a unanimous vote;
  • Payment of dividends;
  • Funding/borrowing;
  • Restrictions on the issue/transfer of shares and calculating the share price;
  • How shareholders can exit from the company and on what terms;
  • Funding of exits (including death) – buy/sell obligations and personal insurances;
  • Restraints on existing shareholders as to company customers etc;
  • Insurances to be taken out; and
  • How any disputes are to be resolved.

The aim of a Shareholders Agreement is to bring some certainty to the business relationship so that shareholders can have some confidence as to how the company will be run and, if there is a falling out, to provide a mechanism for that falling out to be dealt with, as painlessly as possible.

Ideally, the Shareholders Agreement would be in place from the outset whilst all parties are in agreement in relation to all issues however, they can be documented at any time (provided all parties agree).

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.

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

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Trusts – who is who in the zoo?

TYPES OF TRUSTS

There are many different types of trust including those created by wills (testamentary trusts) or by the operation of law, but for the purpose of this article, we are referring to the usual types of trust structures that accountants and lawyers prepare for their clients to operate businesses, own assets and the like, including:
  • unit trusts,
  • family/discretionary trusts,
  • hybrid trusts.

Trusts are often used to ensure that the person or entity with the legal ownership of assets is different to the persons or entities that enjoy the benefit of those assets.

WHAT IS A TRUST DEED?

The Trust Deed is a document that governs the terms of the Trust and sets out the rights and obligations of the Trustee, the Appointor and the Beneficiaries.

SETTLOR

The Settlor is often a person who has started the Trust (often an accountant or lawyer that obtained or drafted the Trust Deed at the request of a client) by paying a nominal amount such as $10 to the Trustee. This amount is known as the ‘settled sum’. The Trust Fund is then added to over time.

WHAT DOES THE TRUSTEE DO?

The Trustee of a Trust is responsible for administering the Trust and managing its assets for the benefit of the Beneficiaries. The Trust can only operate through its Trustee (one or more people or a company)

There are many duties that affect how Trustees can fulfill their role. Many of them are set out in the Trust Deed but there are also legislative provisions that apply, such as those set out in the Trustee Act.
Some of the duties include keeping accurate records, acting in a prudent manner as regards decisions, not mixing Trust assets with the Trustee’s own assets (which is why a often a company is set up to be the Trustee and do nothing but be the Trustee) and not using trust assets for the trustee’s own benefit. This is often one of the reasons a special purpose trustee company is used.

WHAT IS AN APPOINTOR?

The Appointor is the person with the power under the Trust Deed to remove a Trustee and appoint a new Trustee. They, therefore, ultimately control the trust.

Usually, changing the Trustee can be effected at any time by the Appointor executing a deed to remove and appoint a Trustee. Often the Trust Deed allows for the change to be effected by a person’s Will.

It is common for the Appointor of a discretionary family trust to be a parent or sibling and is often 2 people (or in the alternative, there is a Primary or First Appointor and a Second or Alternate Appointor that can act if something prevents the First Appointor from acting).

WHO ARE THE BENEFICIARIES?

In the types of Trusts we are talking about in this article, the Beneficiaries are those that are ultimately entitled to the benefit of the Trust. For Family/Discretionary Trusts, the Beneficiaries are not stated specifically but rather, for asset protection reasons, they are expressed as a class of potential beneficiaries that the Trustee can choose from (but is not obliged to – the protection arises as there is no specific share they are entitled to – it is in the Trustee’s discretion).

Often, the class of potential beneficiaries is very wide and includes children, grandchildren, grandparents, siblings and other trusts and companies which those people may have an interest in.

In the case of a Unit Trust, the Beneficiaries are the unitholders -the unitholders are entitled to a defined/fixed share of the Trust’s assets and income.

For asset protection and income splitting/tax minimisation reasons, often the units in a Unit Trust are owned by a Discretionary Trust.

FURTHER INFORMATION

Trust law is an extremely complex area and it is important to ensure that you understand your rights and responsibilities in relation to any Trust you are involved with or may have an interest in.

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

Trust & Superannuation Deed Amendments

Do you or any of your clients have a family/discretionary trust, unit trust or self-managed superannuation fund and want to change the deed?

Often the change is to remove and replace a trustee with a new one. In other situations, it may be changing a class of potential beneficiaries, dealing with the power of appointment, bringing forward the termination date or changing the trustee’s rights and/or obligations.

Care needs to be taken not to vest the trust or to cause a resettlement, which can give rise to unintended consequences, including:

  • CGT and
  • stamp duty.

There is no real “one size fits all” solution. Deeds can vary greatly as to the process and requirements.

McKillop Legal can assist in reviewing the relevant Deed/Rules and drafting an appropriate document to give effect to the required change.

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.