Bowen Buchbinder Vilensky

Informed action avoids the pitfalls of investment options

by
The Australian, August 2011

ONE of the most encouraging investment trends in Australia is the increasing willingness of large numbers of people to take responsibility for their future lifestyles. The huge growth in self-managed super funds is part of this, as is the era of mechanisms such as the advance health directive or living will. 



ONE of the most encouraging investment trends in Australia is the increasing willingness of large numbers of people to take responsibility for their future lifestyles. The huge growth in self-managed super funds is part of this, as is the era of mechanisms such as the advance health directive or living will. 

But along with these options come responsibilities, of which a worrying number of people are unaware. Being money savvy is one thing, but investors also need to be legally literate if they are to avoid having their best-laid plans unexpectedly unravel. There are three areas where investors are wise to take informed action. 

Assets held in SMSFs: Most people ask an accountant or lawyer to set up their SMSF. While there is a generic standard for SMSF trust deeds, they are not one-size-fits-all documents and can vary greatly. 

One of the most widespread misconceptions about SMSFs is that the assets held within them are subject to a person's will. In fact, the two are separate. The shares, property, bonds and any other assets in a SMSF are left to whoever is nominated in the trust deed of the SMSF. This person is typically a trustee who has some discretion over who they can nominate to receive the assets. 

An example of how things can go wrong is in a blended family situation where a man may leave everything in his will to his second wife and, according to the trust deed, leave everything in his SMSF to his children from a previous relationship. If the trustee of the SMSF is his second wife, without a binding nomination she may decide to direct the assets to his estate, of which she is the sole beneficiary. A binding nomination can prevent this happening, but few investors for whom this is relevant are aware of its importance. 

Assets held in discretionary trusts: Such trusts typically are created for tax planning and asset protection purposes so that assets are not owned by an individual but by a trustee for the benefit of beneficiaries, even though the trustee may effectively control the trust. 

It is a widespread fallacy that these trusts can protect the assets of a person in the event of divorce. 

In reality, parties cannot show up at the Family Court and effectively say "I have nothing" when there are assets held in trust. Part 106B of the Family Law Act makes it clear that assets transferred to a trust to defeat a claim can be clawed back to be considered as part of an overall settlement. And the High Court of Australia has ruled conclusively that a family trust can be easily penetrated and its assets divided in event of divorce. 

Interestingly, assets held in trust are far less open to challenge once the person who controlled them has died because they do not form part of a person's estate. Not only is it because the matter is no longer under the jurisdiction of the Family Court but the Supreme Court (which does not have nearly the same sweeping power to penetrate discretionary trusts) but that the assets are simply not owned by the dead person but by the trustee. 

For this reason, it is would be wise for the estranged partners of elderly or infirm controllers of trusts to take action while their partners are still alive because gaining access to trust assets will be significantly more difficult or even impossible after they die. 

Enduring power of attorney: They have become almost as commonplace as wills, the misunderstanding here is that they cover a wide scope of activity. 

But they deal only with financial decisions, typically giving one spouse authority over bank accounts and investments in the event the other is incapacitated by illness or accident or the creeping incapacity of old age. 

For lifestyle decisions, as opposed to financial decisions, an enduring guardian under an enduring power of guardianship must be appointed to make decisions on your behalf. You may leave open or restrict the decision-making authority of an enduring guardian on many matters from deciding where you live and who with to taking legal decisions on how you live your life. 

In addition, medical treatment decisions, commonly known as a living will, are dealt with by an advance health directive. Here you spell out the circumstances in which you would wish to receive or reject treatment, such as assisted ventilation, resuscitation after a heart attack and similar life-and-death issues. The choices you spell out are not open to legal challenge, thereby providing you with control of the circumstances in which you remain alive. 

Investment structures and medical advances provide us with dramatically improved choice compared with previous generations. But a degree of legal literacy is critical for us to benefit fully from these opportunities. 

Morgan Solomon is a director of Perth-based law firm Bowen Buchbinder Vilensky.

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