ESTATE AND SUCCESSION PLANNING

Transcription

1 ESTATE AND SUCCESSION PLANNING Presented by: JOHN WHEATLEY Wheatley & Sons 8/50 St Georges Terrace PERTH WA 6000

2 What is Succession Planning For Small Business? Transferring the Family Business to the next generation for the benefit of the family.

3 Research Studies Show: Two out of three small businesses do not survive transition from first to second generation 85% do not survive transition to third generation Over 60-70% of high net worth clients are small business owners and few have a succession plan

4 Reasons For No Succession Plan Owner often poor listener and communicator Owner unable to face retirement Longer livety of owners and control syndrome Too busy Family not appropriate

5 Consequences of Ineffective succession Planning Disputes and litigation Size of business reduced Loss of productivity Family relationships harmed or destroyed Missing opportunities Creating tax liabilities

6 When to Start Succession Planning At an early age as plan could take 3-5 years to implement Enables family to accumulate superannuation insurance and other investments Insurance and other investments can then be left to children who leave the business

7 Steps to Successful Family Business Succession Planning Collect information Accommodating family Motivated successors Simple ownership structure Team of key managers Competent advisers Outside Directors Funding growth and retirement

8 Steps to Successful Family Business Succession Planning (cont d) Planning for the unplanned Asset Protection Legal components of modern Estate Succession Plan A planned retirement Estate planning Other matters

9 Family Full details of members of the family Do they really want to? Who can co-operate and work together? If there is a conflict how to resolve it Need to train and educate.

10 Simple Ownership Structure No confusion between inheritance and management Different classes of shares issued to family not in business Shares issued to Discretionary Trust Pre-emptive rights or buy/sell agreement to keep in family

11 Outside Directors Provide counsel and guidance Objectivity to decision making People of similar experience to owner active in business Financially independent so that directors fee not necessary

12 Planning for the Unplanned Succession planning should also cover involuntary departure from the business due to death or incapacity Do they have a contingency plan in place? Who can take on the primary roles? Who else knows critical information about the business?

13 Asset Protection What vehicle to own business? Revenue consequences of restructuring: State stamp duty Commonwealth Capital Gains Tax (CGT) on sale Deemed CGT consequences under S (formerly 160ZZS) and (formerly 160ZZT) CGT value shifting provisions under S and S (formerly S160ZZRP and 160ZZRQ)

14 A Planned Retirement Meaningful contribution after retirement Commitment to other activities Need something to retire to

15 Other Matters Asset register Co-ordinating the team Ongoing review Guarantees and securities Family constitution and retreat What it costs

16 Ongoing Review Need to review plan with adviser every six months Has there been a change in family circumstances? Is the business going through a tough time? Has there been any revenue changes that will require changes to current documents? Do current wills and Powers of Attorney need changing?

17 What it Costs Cost of setting up plan Cost of reviewing plan Cost if don t have a plan: Erosion of wealth through disputes and litigation between family members Size of business reduced to meet needs of claimants Loss of productivity Family relationships harmed or destroyed Missing opportunities Creating tax liabilities that could have been avoided

18 What Forms of Agreement Heads of Agreement ineffectual Mutual Wills pitfalls: Wills can be changed could be set aside under Inheritance action only covers death - does not cover disablement, bankruptcy requires each partner to be owner of business if trust or spouse holds shares or units will not work

19 Buy/Sell Buy/Sell Agreements have two elements: transfer funding Triggered by: death total and permanent disability trauma Usually funded by insurance Avoids: Probate, intestacy, difficulty with executor problems with bank if they seek repayment or renegotiation of loan facility

20 Capital Gains Tax Issues Date of disposal and acquisition of business interest Capital proceeds received by outgoing proprietor on disposal Money paid or property given by remaining partner on acquisition Market value substitution rule Grant and exercise of put and call options CGT exemption for life insurance proceeds CGT exemptions for compensation received for injury

21 Date of Disposal and Acquisition for CGT Purposes Under s104-10(3) asset is disposed of at time contract made To avoid problem use condition precedent Put/Call Options defer date of disposal to date option exercised

22 Capital Proceeds Received on Disposal If outgoing proprietor disposes of interest at market value remaining proprietor(s) pay amount from insurance proceeds owned on outgoing proprietor Remaining proprietor(s) cost base will be market value of interest acquired from outgoing proprietor

23 CGT Exemptions for Life Insurance Proceeds S exempts capital gain from CGT event under life insurance policy where taxpayer original beneficial owner of policy or entity acquired policy for no consideration Other policies which cover permanent disability and/or trauma not considered under section Exemption for compensation for injury received under disability and/or trauma only if received by injured party or relative

24 Who Should Own the Insurance Policy Self ownership - perhaps with Charge of proceeds in favour of remaining proprietor Cross Ownership difficulty to remove or add partners to your business. Problems with trauma. Joint tenancy on policies. Is survivorship exempt? Self insure and nominate third party as beneficiary. Possible problems if change nominated beneficiary

25 Who Should Own The Insurance Policies (cont d) Discretionary Trust trustee owns policies and the trust are principals and members of class of persons. Relies on conduct theory Superannuation policies are owned by super fund of life insured. Considered too dangerous

26 Succession Planning for Farmers Greater problems for farmers due to: Farm often represents bulk of farmer s assets Lack of non-farming assets to leave to rest of family Will challenges are more prevalent often resulting in sale of farm High divorce rate for young farmers causing problems

27 Greater Problems for Farmers Funding retirement of farmer often results in farm being saddled with too much debt Abolition of probate and gift duty has removed incentive to plan for future

28 Key Points for Farm Succession Planning Balancing retirement and inheritance needs Must obtain off-farm investments to achieve better outcome Divesting farm assets well before death essential Abolition of probate and gift duty and elimination of stamp duty on family farm transfers has removed some problems but CGT problems still remain

29 Divesting Farm Assets Well Before Death Reasons: Increasing desire of farmers to enjoy retirement in old age Avoids risks of Will disputes Desire to give younger generation means and incentive to farm successfully during their prime

30 Family Involvement Essential to set down owner s objectives and those of children Examine financial circumstances of both on-farm and off-farm children Family conference possibly with help of facilitator eg family accountant Realisation you cannot divide things equally Need to recognise contribution of child who stayed on farm for low wages People who feel their needs have been recognised less likely to contest Will

31 Transfer of Assets During Lifetime Usually involves sale of farm for less than full value. As parties not at arms length sale price deemed to be market value Can you access CGT small business concessions? 15 years asset exemption for retirees 50% reduction for sale of active assets Retirement exemption for asset sale proceeds up to $500,000. Where individual under 55 roll over to super fund Rollover option for non-retirees who acquire replacement assets

32 Transfer of Assets During Lifetime (cont d) Can you use partnership rollovers for trading stock and plant?

33 Social Security Issues Any gifts made by parents to son will be disregarded for assets test purpose after five years Note provisions of Commonwealth Retiring Farmers Assistance Package Centrelink s foregone wages policy which deems younger farmer acquired capital interest in property through foregone wages over any period. Statutory Declaration required

34 Partnership Rollovers Use of double shuffle to get over livestock and plant to successors at written down values To use this strategy one party must continue to own 25% or more of livestock Rollover for plant does not require 25% continuing interest

35 Transfer of Post CGT Land by Individual plus Livestock and Plant For Land Access the 50% discount If farm is small business asset (within 5 million ceiling) can you claim exemption for remaining 50% capital gain? Considerations involve: Assuming owner is 55 at date of transfer, has farm been owned by him for 15 years and if not how long to go?

36 Transfer of Post CGT Land by Individual plus Livestock and Plant For Land (cont d) Will owner use sale proceeds to purchase replacement rollover asset? Will owner pay 50% capital gain into superannuation?

37 Transfer of Post CGT Land by Individual plus Livestock and Plant For Livestock and Plant Owner brings son or son and wife into partnership for livestock and plant retaining 25% of the livestock Under a second agreement the son or the son and his wife then acquire the owner s remaining 25% interest in the livestock again at the written down tax values

38 Farm Land Held by Family Discretionary Trust Most farm land held by family discretionary trusts for Asset protection Flexibility Avoidance of Will challenge If entity tax gets up family discretionary trust not as advantageous. If held in individual s name access small business concessions but lose above advantages

39 Massive Rise in Litigation Through Poor Estate Planning Family disputes over division of assets held outside your Will, such as companies and trust deeds Problems such as: Who controls the company or trust on death of the original controller Necessity to amend company constitution Necessity to amend trust deed Need for written document - Trustee s Wishes Need for buy/sell Agreement

40 Assets that Pass Outside a Will Assets owned by a private company Assets in a family discretionary trust Proceeds from superannuation funds and insurance policies that are paid direct to a nominated spouse/child/dependant Self managed Superannuation Funds Contractual dealings in relation to a person s assets that bind an executor

41 Assets that Pass Outside a Will (cont d) Shareholder/unit holder/partnership agreements binding a stake holder to sell upon death Assets owned as joint tenants pass automatically to survivor on death

42 Challenges to Wills Under the Inheritance (Family and Dependants Provision) Act 1972 of this State a person can challenge the provisions of a Will The class of people who can make such a challenge does not include persons in same sex relationships The cost of a claim is usually paid by the estate

43 Challenges to Wills (cont d) In WA only assets subject to Act are assets held by deceased at death Whereas marriage revokes your Will in WA divorce has no effect on a Will

44 Legal Requirements for Valid Will Amendment to Wills Act in 1987 under Part X Informal Wills you can get grant of probate of an informal Will e.g. Will not signed by deceased where you can prove Will contained testamentary wishes and was intended to operate as last Will Vital Will-maker questioned on existence of informal Wills and advised of their effect ADVICE to client as to whether he signs instructions as temporary Will

45 Recent Developments Duty of solicitors to give tax advice in relation to wills Duty of care owed by solicitors in drawing up and supervising execution of Will: Is it simply to carry out testator s instructions; or Does it extend to advising the testator and ensuring that the testator s intentions can be carried out? Carr-Glynn v Frearsons [1998] 4 AER 225 supports broader approach For facts of Carr-Glynn case and conclusion see appendix

46 What Happens If You Get It Right Happy contented clients More fees to accountants and lawyers for planning advice and reviews. Avoids business/farm being sold and litigation and disputes Avoids accountants and lawyers being sued

47 What Happens If You Get It Wrong Loss of clients and fees Loss of goodwill and unfavourable publicity Business/farm sold, litigation and disputes Accountants and lawyers sued