DBA Lawyers special counsel Bryce Figot explained that while it is not an SMSF case, the decision provides some basic but important observations for SMSFs in relation to estate planning.

The case involved a couple, Geoffrey Lewis and Pamela Lewis, and their four sons — Peter, David, Roger and Hugh. In addition to their family home, the couple’s other major asset was an investment company, the Lewis Company.

The Lewis Company had a portfolio of listed securities worth around $9 million, with 50 per cent owned by Geoffrey and 50 per cent owned by Pamela.

Peter and David expected that the assets of the Lewis Company would be split up following the deaths of their parents and they wanted to avoid as much tax as possible when that happened.

Some of the listed shares owned by the Lewis Company had been acquired prior to September 1985, and therefore, any capital gains made on their ultimate realisation would not attract capital gains tax (CGT), explained Mr Figot.

“[However], other shares had been acquired since September 1985 and were therefore subject to CGT. In an attempt to avoid this CGT, a series of transactions were undertaken at David’s instigation so as to transfer the listed shares out of the Lewis Company.”

A new company was registered called Arthur Hughes Pty Ltd. A further five companies were then registered, with Arthur Hughes owning 100 per cent of all those shares.

Arthur Hughes then started to act as trustee of various trusts and Arthur Hughes owned the shares as trustees of those various trusts, with the first four of the five trusts earmarked for each son.

There was a fifth trust and a fifth company and that was a unit trust rather than a discretionary trust.

The plan involved transferring money from the Lewis Company to a subsidiary company in exchange for a loan.

The judgment noted that the implementation of the succession plan made the situation far more complicated.

According to the court documents, the testator did not have any direct or indirect ownership of them. She had control but that was because of her ownership of the trustee company, backed up by her position as appointor under the trust deed. At her death, these rights would cease. Immediate control would pass with the ownership of the trustee company, but the testator had the opportunity to divert that control elsewhere by nominating someone else as appointor to the trust in her will.

“Thus, while the testator acquired through the succession plan practical control over the assets of the Lewis Company, that was only temporary. The assets could not be bequeathed and all the testator could do was to pass on control of them through the [various] mechanisms,” Justice Parker stated.

Justice Parker stated that the testator seemed to have subscribed to the “popular superstition that by putting assets or income into a trust, tax liabilities can be made to disappear. There is no evidence that she had any understanding of trusts, or how they actually work.”

After the death of Geoffrey in 2002, Pamela made various wills and codicils.

A conflict arose between David and his other three brothers, in and around March 2012, shortly after the restructuring of the family investments occurred and the litigation spilled over into the Supreme Court.

The surviving members of the family were separated into two camps, Pamela and David were in one camp, and the other three sons, David’s brothers, Pamela’s other three sons were in the other camp, Mr Figot said.

“In 2013, one of the sons from the other camp, who was not aligned with the mother, made an application to the Guardian Tribunal regarding Pamela, and identified disabilities affecting Pamela’s decision-making capacity [including] her advanced age and macular degeneration,” he explained.

“The application stated that the testator at this stage, Pamela, had a close relationship with David and he had acted at best imprudently in undertaking the restructure and that David lacked the professional qualifications needed to protect Pamela’s interests.”

The Tribunal found that Pamela did not fully understand the succession plan. She did understand the motivation behind it, to avoid tax, and she trusted her son completely.

“[However], making an unwise or unfortunate decision around whom to trust is not the same thing as a lack of capacity to make decisions about one’s financial affairs. The Tribunal was not satisfied that Pamela was incapable of managing her financial affairs and dismissed the application,” Mr Figot said.

This 2015 decision held that entering into that succession plan constituted a breach of duty on behalf of Pamela and that David was liable for having instigated the transaction.

The 2020 decision, Mr Figot said, concerned which of the wills was valid and whether Pamela had capacity.

“Depending on which will or codicil was valid, [it] would significantly change how much different sons received because there was bad blood in the family,” he explained.

Mr Figot said some of the simple but key takeaways from the case for SMSF professionals relate to proper witnessing of documents and ensuring the right procedures are followed where incapacity is in doubt.

“This could be very relevant, especially if you’re assisting or implementing this, and the binding death benefit nominations, pension documents, deed updates, changes of trust deeds, these are very common documents that a lawyer might draft, but even if you’re not a lawyer and you work in the SMSF industry, those four documents might be things that go through your office every day,” he explained.

“In the same way that a will can later alter who gets what, those four documents can also significantly alter who receives what, and the question of capacity can play a huge role.”

One of the issues that emerged in the case was witnessing not being physically present when signing occurs, despite one of the sons being a solicitor.

“There was a will where people had turned up to sign a pre-signed document and the judge said that they were flabbergasted that a solicitor would be involved with that,” Mr Figot noted.

The case also shows the importance of following the recommendations from the Law Society of New South Wales’ When a Client’s Capacity Is in Doubt: A Practical Guide for Solicitors.

Some of these recommendations include reading a document to a client, and then asking a client to summarise the effect of what has been said, inviting the client to state in their own words what plans they wish to make and asking open-ended questions rather than questions in a leading form.

The recommendations also urged professionals to send a client a letter of the document before executing it, ensure file notes are taken and ensure that those file notes are informative such as where instructions came from.

“These are items for solicitors, but are also relevant for accountants and financial advisers dealing with SMSFs,” Mr Figot said.