Gift and loan back strategies are commonly used as a form of asset protection, and are often used by will makers to strip the equity/value out of their estate in an effort to defeat family provision applications under s41 of the Succession Act. This section allows the Court to make provision for a spouse, child or dependent of a deceased person if adequate provision was not made for the spouse, child or dependent in the deceased’s will.

A recent decision from the Supreme Court of Queensland (in which Wilson Lawyers’ litigation team acted for one of the successful parties) has cast doubt on the efficacy of gift and loan back strategies as an estate planning tool. This article, by Kellie Keenan and Simon Thompson, discusses the recent Supreme Court decision and the key takeaways for estate planning.

Here, a technical issue rendered the gift and loan back strategy ineffective. However, the Court also indicated that the arrangement was almost certain to be void and unenforceable as against public policy and on the basis that it was a sham (because no funds transfer was intended to occur during the deceased’s lifetime and her sole intention was to defeat a family provision application by her daughters). As such, the message from the Court is clear: CAUTION.

The Decision: Re Permewan No. 21

The decision relates to the estate of the late Prudence Permewan, who died on 21 September 2019 and was survived by three adult children – Scott, Donna and Marla.

Prudence’s assets were estimated to be worth approximately $3M.

By her will, Prudence appointed Scott as her executor, left shares in a trustee company (Zalerina Pty Ltd) to Scott, and left the rest of her estate to the Lotus Trust (of which Zalerina Pty Ltd was the trustee). Because Zalerina Pty Ltd was the trustee of the Lotus Trust, leaving the shares in Zalerina Pty Ltd to Scott put him in control of the company and, thus, also the Lotus Trust. Prudence did not make provision for either Donna or Marla in her will.

Probate of the will was granted to Scott on 29 January 2020. Subsequently, pursuant to an application by Donna, the Supreme Court ordered that Scott be removed as executor and that an independent administrator be appointed in his place.2 A series of transactions Prudence entered into prior to her death, which Scott was unwilling to investigate, were central to the Court’s decision in that case (in this article, we refer to these as the “gift and loan back transactions”).

The recent decision, which is the focus of this article, addressed the gift and loan back transactions. The gift and loan back transactions were evidenced by a number of documents, including in particular a “bearer promissory note” between Prudence and Zalerina Pty Ltd as trustee of the Lotus Trust, purporting to gift and loan back the sum of $3M as between Prudence and the Lotus Trust.

The intended effect of the gift and loan back transactions was that:

  • Prudence gifted $3M to the Lotus Trust via the promissory note;
  • the Lotus Trust loaned $3M back to Prudence via the same promissory note; and
  • Prudence encumbered her assets in order to provide security for the loan.

Importantly, Prudence didn’t have $3M in cash to gift to the Lotus Trust, nor did the Lotus Trust have $3M in cash to loan to Prudence. On the evidence presented to the Court, the loan was never intended to be called upon during Prudence’s lifetime. That is, the loan was only ever intended to take effect on her death such that her estate would have no net assets.

Ultimately, Scott and the new trustee of the Lotus Trust conceded that the Court could not find that a promissory note, which was central to the efficacy of the gift and loan back transactions, had been delivered. Without that, the gift and loan back transactions remained incomplete, and thus ineffective. That being the case, the decision only addressed the question of costs and the trial judge did not make findings in relation to the validity of the gift and loan back transactions. However, in determining the question of costs, the Court provided some guidance as to its opinion of the gift and loan back transactions.

His Honour, Cooper J, went so far as to say that he was “confident that the Administrator was almost certain to have succeeded on his application, and both Donna and Marla were almost certain to have succeeded on their cross-applications, in obtaining declarations that the [gift and loan back] Transactions were invalid and unenforceable at law for reasons other than the matter the subject of the concession”.3 His Honour focussed on two main reasons in forming that view:

  1. Public Policy

His Honour was critical of Prudence’s conduct in entering into the gift and loan back transactions. He described them as “illusory” and commented that:

“The sole purpose of that conduct was to ensure that there was so little, if anything, left in the estate upon Prudence’s death that any family provision application under section 41 of the Succession Act by Donna and Marla would have no prospect of success. In those circumstances, the effect of enforcing the [gift and loan back] Transactions would be to “defeat or circumvent” the public policy upon which s 41 of the Succession Act is based, and would thereby “be generally regarded as injurious to the public interest”.”4

  1. Sham

Donna and Marla had also sought to have the gift and loan back transactions overturned on the basis that they were a sham. His Honour found their submissions persuasive, and said that:

“the [gift and loan back] Transactions meet that description of a “sham”. Contrary to the terms of the promissory note, Prudence never intended to pay the sum of $3 million to the Lotus Trust. The Lotus Trust, being under Prudence’s control, had no intention of receiving (nor seeking to enforce the payment of) the $3 million. Consequently, the Lotus Trust never had any expectation that it would have $3 million (or Prudence’s property representing that amount) for it to be in a position to lend that amount or those assets back to Prudence. As already noted, the Transactions were only ever intended by her to take effect upon her death.”5

Where to from here?

As always, when considering your estate planning, it’s important to get specific advice tailored to your individual circumstances.

In our view, the continued use of promissory note gift and loan back strategies as a means of stripping value from an estate in order to defeat potential family provision applications under s41 of the Succession Act is fraught with risk. Where gift and loan back strategies involve the actual transfer of funds, in contrast to the situation in this case, then the Court may be more inclined to enforce them. However, the position is unclear and there is a level of risk involved in proceeding on that basis unless and until there is further judicial guidance which addresses those types of transactions.

If you or your clients have implemented a promissory note gift and loan back strategy, for the purpose of reducing the value of an estate, then we recommend obtaining advice from an experienced estate planning lawyer as to whether the strategy remains appropriate.

More broadly, if you or your clients wish to mitigate the risk of someone making a successful family provision application, then there are other options available. However, these require careful consideration and should only be implemented with the assistance of an experienced estate planning lawyer, and with the benefit of advice from suitably qualified accountants and financial planners about any relevant financial, taxation and other implications.

If you or your clients would like to discuss estate planning, then please get in touch with a member of our Wills & Estates team of Kellie Keenan and Simon Thompson – willsestates@wilsonlawyers.net.au.

Important Notice: The information in this article is current as at 23 June 2022. It is for general purposes only and should not be considered or relied upon as legal advice. The law is complex and you should always obtain specific legal advice about your circumstances from a qualified legal practitioner. If you require legal advice, please contact our office to see how we can help.

Written by Kellie Keenan, Special Counsel and Simon Thompson, Lawyer – Wilson Lawyers.

Footnotes:

  1. Re Permewan No. 2 [2022] QSC 114
  2. Re Permewan [2021] QSC 151
  3. Re Permewan No. 2 [2022] QSC 114, [66]
  4. Ibid, [76]
  5. Ibid, [80]