It is often said that the best time to put in place a business exit strategy is when you are first entering into business. At that time everyone is generally agreeable and looking forward to a prosperous business relationship. The same sentiment applies to estate planning and business succession and getting things right at the start usually makes the transition easier upon the death of a business partner.
Whenever a business purchases significant new assets it is important to give consideration to the overall structure of the business as well as the estate planning requirements and desires of the key people in the business.
In a family business context it is often the case that parents leave a greater share of the assets to the child or children working in the business and less to those not involved in the business. Giving consideration to business structures whenever assets are purchased can go a long way to ensuring that a business has robust asset protection, is structured for tax minimisation and decreases the risk of estate challenges.
Quite often it is control of the key assets that is most important and not necessarily ownership of them. When doing your estate planning it is important to ensure that even if ownership of key assets is not, or cannot be, passed either via your will or via some other means at your death, that control of those key assets is passed to the appropriate people.
Family discretionary trusts are very common asset owning and business trading structures and, if structured correctly, provide a good level of asset protection as well as income splitting opportunities. However, family trusts are not generally good business succession vehicles and need to be given extra consideration from an estate planning perspective.
While some trust deeds allow named beneficiaries or the appointor or the guardian to decide while they are alive or in their will who is entitled to certain assets of the trust, many do not and all that can be done is to ensure that control of the trust passes into the right hands. Unfortunately, relying on clauses within the trust deed to determine who receives assets on someone’s death is also likely to have adverse taxation and stamp duty consequences, as it is unlikely that any concessions (otherwise available) will apply.
Control of a trust can be left to someone by naming a successor appointor, should the deed allow it, or leaving shares in the trustee company to those you wish to take over the trust. However, to ensure that the desired outcome is achieved it is essential that the primary documents governing the trust, including the trust deed and the trustee company constitution are reviewed.
The use of family discretionary trusts also gives rise to the “extended beneficiary problem”. Most family trust deeds include a very broad group of family members as potential beneficiaries. It is often the case that some of the potential beneficiaries would never be intended to benefit from the trust. While the risk may be small, as long as a trust has a broad range of beneficiaries (for example, nephews and nieces) who are not involved in the business there is a risk that one of them may mount an argument that the trustee is not administering the trust correctly because they are not being given due consideration when distributions are made.
If it is intended that a certain child will take control of an asset after his or her parents die, it may be wise from a planning perspective to structure the trust used to acquire the asset around that child, rather than the parents (as is usually the case) and to limit the potential beneficiaries. If the trust is structured correctly succession can happen automatically and the asset can be excluded from the risk of estate challenges, even in New South Wales where the notional estate provisions often broaden the pool of available assets.
Business succession and estate planning need to be viewed as a continuing process and not a process which is limited to a point in time. Dobinson Davey Clifford Simpson are able to provide clients with comprehensive estate planning and business succession advice and documentation.
Brendan Cockerill,Senior Associate Business and Succession.
18 Kendall Lane,New Acton, Canberra
phone (02) 6212 7600 [email protected],www.ddcslawyers.com.au