Unwinding the Estate Plan: Wrapping up Complex Administration and Avoiding Potential Pitfalls

Introduction

This article considers some of the logistics of finalising the administration of a complex estate.1

Because of the breadth of the subject matter, this article is a ‘grab bag’ of ideas to assist advisors working in the area of succession when providing estate administration advice to executors and administrators (collectively referred to in this article as Legal Personal Representatives (LPRs)).2

LPR Obligations

As a deceased person’s final representative on earth, an LPR has the responsibility to finalise the deceased persons affairs. In addition to arranging the deceased’s funeral and carrying out the deceased’s wishes as outlined in the Will – including dealing with any Will construction issues – an LPR must identify, manage and protect all of the assets of the estate until they are distributed to the beneficiaries, settle all the liabilities of the estate, and keep full and accurate administration records.

LPRs are in a fiduciary relationship with estate beneficiaries, described judicially as:

…. relationships of trust and confidence … the fiduciary undertakes …to act for … another person in the exercise of a power or discretion which will affect the interests of that other…3

Advisors and LPRS

Decisions made by fiduciaries can be investigated by the Court. If that occurs, it is likely that the LPR will seek to pass liability onto any advisor associated with the administration of the estate. Advisors therefore need to be proactive in the advice that they provide to LPR’s and ensure that all relevant matters associated with the administration of the estate are attended to.

Estate Administration Aphorisms4

In assessing an advisor’s role it is often useful to consider some common estate administration aphorisms,

a. Where there’s a will there’s a relative.5
This observation is a reminder that self-interest and self-promotion is a great motivator. As applied specifically to estate administration….

b. Where there’s an estate administration there are a lot of beneficiaries and family members with their own individual focuses.

Another well-known aphorism with application beyond estate administration is:

a.. It’s all about the money6
Estate beneficiaries are generally eager to secure their respective inheritances, however, will often not overtly or openly express that eagerness. Indeed, beneficiaries will often articulate and express quite strongly that they’re not particularly interested in their inheritance. However:

b. When they say that it’s not about the money, it’s about the money.7
…and the more they say that it’s not about the money – the more it IS about the money. An understanding of that dynamic may assist an Advisor to determine the best way in which to administer an Estate and in particular to finalise its administration.

Multi-entity Estate Administration

The administration of complex estates often requires an LPR, in addition to finalising the administration of estate assets (pursuant to the terms of a Will) to have regard to (and to take responsibility for) the administration and status of non-estate related entities such as:

a. discretionary Trusts
b. self-managed superannuation funds (SMSFs).8
c. Special Disability Trusts and other Protective Trusts

and take steps to also attend to the ongoing administration or wind-up of those entities.

As part of the administration of a deceased person’s estate an LPR should identify each of the non-estate related entities that exist. Once that has occurred an LPR can then determine:

a. what action they may take in respect of non-estate related entities; and
b. whether they are required to take action

One example follows

Example – LPRs as Controllers of Discretionary Trusts

Trustees are fiduciaries, and their obligations are determined with reference to the relevant Trust provisions determined objectively, on the same basis as contract law, subject to some limited exceptions.9

If an LPR is appointed to succeed a controller of a Trust actively as part of an estate plan in a Deed of Appointment, or possibly via a Will the terms of the Will, and the intentions of the testator may not be binding in determining the exercise of the Trustee’s discretion unless incorporated into the Trust terms

Ultimately, it may be necessary for the LPR to administer the Trust in a manner inconsistent with the “understood or expected” intentions of the testator/deceased Trust controller.

This dynamic can create issues for LPR clients which need to be identified and addressed by advisors.

Inter-jurisdictional estate administration
About 30% of Australia’s population are born overseas.10 Consequently, there is a strong likelihood that Australian estate planners will act for clients who own or control assets in a jurisdiction outside of Australia. This can result in a conflict of laws when assets are dealt with after death.

In considering the administration of multi-jurisdictional estates, some of the issues that can arise include:

a. The determination of a person’s “domicile’. Sometimes there is a dispute as to which country’s law should apply to the administration of an estate.

b. The law distinguishes between:

A. movable property – chattels not attached to land and choses in action, for example bank accounts and mortgage debts; and

B. immovable property – land and all interests in land.

c. The general rules are:

A. the law of the jurisdiction in which the property is situated – lex situs – will determine the succession of immovable property, irrespective of domicile

B. the law of the deceased’s domicile at the date of death will determine the succession of movables.

The application of laws from multiple jurisdictions can create challenges and complexities for advisors. For example, the limitation periods that apply to causes of action may vary between jurisdictions. Advisors need to ensure11 that LPR’s are equipped with competent advice in each relevant jurisdiction.

ATO’s Requirements

17. It is the LPR’s responsibility to finalise the affairs of the deceased taxpayer,12 which will generally involve the completion of a date of death tax return and the completion of any outstanding prior year returns.

One of the issues facing an LPR is the tension between:

a. the requirement that an LPR distribute estate assets and finalise the administration of an estate in a timely fashion; and

b. the necessity for an LPR to be certain that all tax affairs of the deceased have been finalised before funds are distributed.

and the consequent risk that an LPR may be personally liable if the administration of an estate is finalised before all tax liabilities are met.

Advisors need to manage this tension, and also ensure that their LPR clients obtain bespoke accounting and taxation advice, particularly whenever potential tax liabilities may arise as the result of the passing of the deceased.13

Conclusion

An LPR’s status as a fiduciary renders decisions made and actions taken by them in relation to the finalisation of the administration of an estate capable of challenge by beneficiaries, and scrutiny by the Court.

The administration of complex estates is, by definition, complex and often involves a consideration of the administration of non-estate related entities. That in turn necessitates a consideration of a variety of factors, strategies and sources of law, sometimes across multiple jurisdictions.

It makes sense for LPRs to ensure that they are properly represented by solicitors, accountants and financial advisors.

Advisors working with LPRs in complex estate administration need to:

a. have a thorough understanding of the matters that an LPR needs to be across in order to fulfil their obligations to estate and Trust beneficiaries; and

b. also, to understand when they should seek independent specialist advice for their LPR clients.

The good news is that with a sufficient familiarity of the issues associated with complex estate administration, there are a lot of strategies that Advisors can employ to produce excellent outcomes for their LPR clients in respect of the finalisation of estate administration.

Greg Russo
Principal, Greg Russo Law

Disclaimer
The information given by Greg Russo and Greg Russo Law in this article is given in good faith but is of a general nature only and it is not intended that this article will be acted or relied upon in the absence of individual legal, advice. Each person’s requirements and circumstances will be different and accordingly, each person should engage professional assistance according to their own particular needs. Copyright in this document is owned by Greg Russo Law.

1. This article assumes a general familiarity with the role of an LPR in an estate and a reasonable experience in advising clients fulfilling that role.
2. Any decision in respect of a particular estate should be accompanied with bespoke legal, accounting and financial advice.
3. Per Mason J, Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 96- 7.
4. Pithy (vigorously expressive) observation which contains a general truth.
5. Ricky Gervais – and others
6. Joe Jackson, American businessman 1929 – 2018
7. Abe Martin” in 1916
8. SMSF law is complex, and advisors are recommended to ensure that they are familiar with all of the relevant legislative requirements or that they obtain specialist advice on behalf of their LPR’s whenever and estate comprises an SMSF.
9. See for example Karger v Paul [1984] VR 161; Byrnes v Kendle (2011) 243 CLR 253
10. https://www.abs.gov.au/census/find-census-data
11. Sometimes through a referral to an appropriately qualified person
12. .. and often the estate, which is a separate taxpayer.
13. In 2018 the ATO released a Practical Compliance Guideline (PCG 2018/4) to assist LPRs to finalise the tax affairs of deceased persons and to be able to wind up deceased estates with confidence. The ruling is non-binding but regarded by practitioners as administratively binding.