Excluding Entitlements from your Estate and Family Harmony

In the context of your estate planning and major assets of an estate such as a business it is essential to consider who is to control, manage and receive entitlements from the estate.

Who is In or Out?

In order to ensure that not inadvertently benefit from your estate, the required provisions in your estate plan, your business succession plan and your children’s estate/succession plans.

This takes co-ordination, co-operation and trust, as each person’s Will may need to make similar provisions in relation to the assets being passed to children by a trust rather than to the children directly.

It is also preferable for each Will to have similar provisions in relation to:

  • The age at which children will be entitled the family business assets absolutely
  • Who will act as trustee in respect of those assets until the children reach the specified age

Your children’s spouses must also be considered to ensure that they do not inadequately benefit.

Before your children reach the age at which they can inherit an asset or capital from the estate in their own right, income flowing from your family assets would normally be paid to your spouse for their advancement, maintenance and education. However, once your children are able to inherit in-laws often become more of an issue.

Where discretionary trusts are involved, some families have a policy of continuing to make distributions to the widowed spouse even though the children have gained control. This kind of arrangement is much easier to put into effect in this type of structure — distributions can be made to people other than the owner/controllers. Ideally, the trustee of the discretionary trust will take out life insurance cover on the lives of family members, which will provide funding for capital distributions to your widowed spouse, enabling your spouse to be financially independent of the family business.

Have your financial adviser prepare financial projections to work out the amount of insurance cover needed to maintain your children’s spouses and then regularly review the amount of cover that is likely to be required.

Buy/sell arrangements are recommended where the intention is for your children and their spouses to be bought out of the family business rather than have equity/ control of it. This ensures that your family pays your spouse the required amount in exchange for the equity and that your family can obtain the equity in the business from your spouse.

Again, insurance cover help fund the buy-out. In the absence of insurance cover, it will be necessary to provide for terms in the buy/sell agreement; such as, over what period the buy-out can be made and whether interest is payable. Payment terms need to take account of whether CGT will need to be paid up front by your spouse (which is generally the case where the asset is transferred subject to vendor terms).

The Matter of Trusts

Further complexities arise where trusts contain assets that are intended to benefit different family members. This will typically occur where the business is held in the same entity as other investments. In such a situation, you may want your spouse to gain control of the investments but not the family business. However, with the removal of the CGT trust-cloning exemption, this has become more difficult and potentially costly from a tax perspective.

Some professionals recommend trust splitting to deal with such situations. Under these arrangements, a new trustee is appointed to some of the assets of a trust and those assets are transferred to the new trustee. However, the Commissioner of Taxation’s view is that such arrangements do not avoid CGT on the separation of the assets (ATO lD2009/86). Without splitting or cloning, it is difficult for the trust to provide for one appointor to have control of the business assets and another to control the other assets of the trust.

A problem with joint appointors is that trust deeds generally require them to act jointly — that is make joint decisions on all issues.

One approach is to appoint joint successor appointors (one of whom can be your spouse) who enter into a Deed of Agreement with the current appointor, whereby they undertake to administer the trust so that:

  • The non-business assets are administered for the benefit of the trust beneficiaries as one of the appointors (such as your spouse) determines
  • The assets representing equity in the business are administered for the benefit of the trust beneficiaries as the other successor appointor determines. This successor appointor may be a trusted family member or external adviser who is appointed until your children reach a specified age, at which point the children become joint appointors themselves

Under the same agreement, the current appointor can express how s/he wishes the assets of the trust to be administered. For example, the business assets should benefit the children and the non-business assets should benefit the children and the spouse. The appointors each agree that, if they do not wish to comply with the undertaking to act in accordance with these wishes, then they will resign as an appointor of the trust in favour of the remaining appointor(s) (with a failsafe appointment of a professional trustee company if the joint appointor has ceased to act for any reason).

This is a somewhat cumbersome method of separating the control of trust assets but, where there is a significant CGT and stamp duty cost involved in transferring the assets to a separate trust, it may be a serviceable, if not perfect, strategy.

If you have sufficient estate and non-estate assets including the business to provide for all your beneficiaries, you may be in the fortunate position of being able to leave your spouse with sufficient capital to enjoy a comfortable lifestyle; gift the business assets to children who are active in the business and gift other assets to other children.

However, in reality this ‘ideal’ position does not exist simply because the business represents a disproportionate percentage of the estate or liabilities to or from the business are disproportionate to the assets of the estate.

Book now