Family business and investment structures can be complicated: often they were structured some time ago according to particular circumstances but those circumstances have now altered dramatically.
To ensure the continued effectiveness of these structures, the people involved in them need to monitor them and review them periodically. Reviews often reveal that the structures do not accommodate unexpected absences of key persons from the business or that there is an absence of effective business succession plans. Part of revisiting these issues extends to planning for how families may make decisions on behalf of a family member who can no longer make decisions themselves.
Careful planning is required and clients and their professional advisers may wish to consider:
The popularity in the 1970s of using family trusts and companies to hold assets, and the recent rapid growth in investing through SMSFs has made the careful structuring of intergenerational wealth transfer and succession arrangement significantly more important.
In the 1970s, due to Federal and State death and gift duties, there was a boom in estate planning designed to minimise their effect. Soon it was recognised that the best way to avoid such duties was not to own assets directly, but instead to hold assets via family trusts and companies whose ultimate demise (if necessary) could be carefully orchestrated.
These structures also carried with them potential income tax planning benefits. As a consequence, tens of thousands of family trusts and company structures were established to take advantage of the tax and estate planning opportunities that were then available. Holding assets (including businesses) in trusts became a normal ownership structure.
Today, long after death and gift duties have been abolished, but with some tax and advantages still available, the growth in numbers of family trusts is modest, but there has been a boom in the establishment of SMSFs, which, as at September 2005 were estimated to hold assets of approximately $180 billion - more than 20% of Australians' total superannuation assets.
The net effect of these developments is that with the exception of the family home, many "wealthy" families own only modest assets. Instead, their wealth is owned through structures which they control.
For such families, managing the intergenerational transfer of wealth is not simply a matter of visiting the family solicitor and signing a straightforward will. Managing how the family wealth is to be transferred to future generations is now as important as ownership structures were thirty years ago.
Succession to the control of family entities needs to be carefully planned, and it is important people understand the limitations on what can be done both via those entities and by will — having particular regard to possible taxation implications.
The successful structuring of intergenerational wealth transfer and succession arrangements needs trusted advisors who are fully acquainted with (and understand) the intricacies of the ownership structures and who have the skills, experience and resources to deal with the full range of issues which arise.
In the commercial world, normal business planning includes continuity and disaster recovery plans. A similar approach to risk can also be appropriate to private individuals — particularly those who manage substantial family or personal assets.
An untimely accident or illness can frustrate or complicate substantially what might otherwise have been a straightforward transaction. Planning for such unfortunate events makes good business sense.
Strategies for preparing for the unexpected can include:
In a very real sense, it is now possible for individuals to put in place personal business continuity and disaster plans to take account of the unexpected.
Part of planning for the future includes putting into place arrangements so the right decisions are made in the event of incapacity. A 'living will' may be the solution to ensuring that your wishes are likely to be accommodated.
A 'living will' is the popular term given to arrangements that are made to ensure that health care decisions are made by trusted family members or friends in the event of incapacity.
Generally, there are two elements to a living will. The first is a written statement of wishes directed to the medical practitioners who provide treatment. The second is a medical treatment power of attorney.
The statement of wishes has no legal force, but obviously has some moral sway both on the medical practitioners treating the maker of the will and on anyone appointed as 'agent' to make medical treatment decisions if a person is incapacitated.
The medical treatment power of attorney enables the appointment of a single 'agent' (and an alternate agent who can act in the agent's absence).
An agent can agree to, or refuse, medical treatment — but refusal is only possible if the medical treatment would cause unreasonable distress or it is reasonably believed that, if competent, the patient would have refused the treatment.
Clearly, an agent who is appointed to make medical treatment decisions on a patient's behalf needs to be very much on the same philosophical wavelength as the patient! Often this can rule out close family members whose emotional response may be at odds with the patient's wishes.
All these issues are worth thinking about and planning for as part of normal business and investment management.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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