FACTS
Prudence Permewan died on 21 September 2019. She was a widow and was survived by her three children Scott, Marla and Donna.
Her will appointed Scott as her executor and gave him the shares in a company which was the trustee of the family trust. The residue of the estate was left to the family trust.
Donna and Marla commenced family provision proceedings, as they were effectively left no share in the estate.
Leaving aside certain transactions entered into by the Testator the estate was valued at approximately $3m at the date of her death.
The transactions were to give effect to an estate planning strategy known as a “gift and loan back” strategy.
The premise is that the testator “gifts” certain assets to an entity, usually a family trust, and then the trust “loans” the assets back to the testator. So, the testator always has the use of the assets, but the ownership of the assets now rests with the entity. The effect of this is that the assets are no longer in the estate.
In this case, the testator attempted to do this by “a series of extraordinary documents:
- Prudence purports to gift, through the provision of the promissory note, $3million to the Lotus Trust. This is despite the fact that Prudence clearly did not have $3million in cash and would have to liquidate all of her assets to pay it.
- The Lotus Trust has loaned $3 million to Prudence. This is despite that fact that the Lotus Trust clearly did not have $3 million in cash to loan to Prudence.
- To secure the loan, so as to give effect to the gift evidenced by the promissory note, Prudence mortgaged or otherwise charged her assets.
- The result of the transactions is that Prudence, who before these transactions had assets worth $3million, now has a debt of that amount to the Lotus Trust secured over her assets.”[1]
Donna argued that the transactions should be investigated with a view to them being challenged. She argued[2]:
- “The document styled “Promissory Note” is not a promissory note as defined by s89 of the Bills of Exchange Act 1909 (Cth) and therefore, does not have the legal effect of a promissory note;
- No gift has been perfected and there is no consideration supporting a promise to pay $3 million to the Lotus Trust;
- The transactions are a sham.”
She further argued she should not have to pursue the family provision application only to discover that there were no assets in the estate. It was on this basis that she sought to have Scott removed as executor and an independent administrator appointed instead.
In addition to these transactions, evidence was adduced in relation to Scott’s attitude towards Donna in particular.[3] This led Davis J to observe:
“Although not directly relevant to the present application, one can draw the inference that it is unlikely that Donna will receive the benefit of an exercise of Scott’s discretion (as controller of [the family trust]) to distribute income or capital of the Lotus Trust to her.”
Scott, through his solicitor made submissions that he was acting properly and on advice and further, that he was acting in accordance with his parent’s long held testamentary wishes.
After setting out in detail an exchange between Scott’s solicitor and the bench about the gift and loan back strategy, Davis J concluded: ”That is an admission that the elaborate web of documents entered into some 17 months before Prudence’s death had no commercial purpose but were designed only to avoid the existence of a fund upon which a family provision application could be made.”[4]
Importantly, the executor had not come before the court indicating that he was considering suing himself and setting aside the transactions The best answer his solicitor could give when asked this was that he hadn’t asked Scott, so he didn’t know whether he would, or wouldn’t.[5]
DECISION
Davis J started by considering that the choice of executor by a testator should be honoured, unless there was a good reason why the chosen executor should not continue to administer the estate. Misconduct by an executor will usually be sufficient, but is not necessary. A conflict of interest is relevant, but not determinative. The key question is the “extent of the conflict and the likely effect on the administration.
Ultimately, he had little difficulty in finding that there was “an overwhelming case for the removal of the executor”.
He considered Scott’s expressed intention to litigate the validity of the transactions in the FPA, using the resources of the estate while Donna had to pay her own way, and the deep-seated animosity toward Donna meant that the proper administration of the estate would be frustrated if Scott continued as executor.[6]
Accordingly, David J made orders revoking the grant of probate to Scott and instead appoint an independent solicitor as administrator.
Read the full decision here.
[1] At [24].
[2] At [26].
[3] At [33].
[4] At [43].
[5] At [45].
[6] At [56].