It is trite to say that estate planning and business succession planning should be done during your lifetime but it is surprising how many planning opportunities are simply missed. Take the example of a typical comparatively wealthy family, with elderly parents and two grown up children. You would normally expect that the family would have superannuation assets, the home would be in the parents' joint names and the business assets would be held in a family Company or a discretionary Family Trust.
The parents would usually retain the assets during their lifetimes and then they would want the assets to pass to the children. Leaving the shares in the family Company or in the Trustee Company of the Family Trust is comparatively straight forward. However, difficulties frequently arise after the parents pass away.
Instead of the Family Trust being controlled by mum and dad whose interests are usually identical or at least similar, it would now be controlled by the two children. Only very rarely would the interests of two independent adult siblings be identical. One son might be financially secure and happy for income from the family investments to be reinvested whereas another might have a more urgent need for capital.
Where there are two equal shareholders and directors in a Company they typically would need to act unanimously and so there is a risk of stalemate. Where there are more than two in a family and they are left equal controlling rights the position is worse. There is a very real possibility of a majority and outvoting the others. Where the assets are held in a Family Discretionary Trust there is every prospect of that majority taking control and claiming the whole of the income and capital of the Trust thereby depriving the outsider of the inheritance his or her parents intended. These difficulties always need to be dealt with in an estate planning exercise and there are a number of ways in which they might be approached. However each of those ways have there own potential difficulties.
In a situation where our typical family intends to acquire a new asset during the lifetime of the parents the standard procedure in the past has frequently been to simply purchase the asset in the existing family entity.
A far better alternative in the case of our typical family would be to buy the investments in two separate Family Discretionary Trusts. Each of the Trusts would in the long term be ear-marked for the benefit of one of the individual children. The parents, the children and their families would be discretionary beneficiaries in both of the Trusts. There would be two separate Trustee Companies. The parents and the first child would be directors and shareholders of one of the Trustee Companies and the parents and the second child would control the other. Each of the Trustee Companies could have a special constitution whereby the parents would retain absolute control while they are alive but control would automatically pass to the relevant child on the death of the survivor of the parents or at some earlier time if the parents chose to relinquish control.
The advantages of this type of arrangement are:-
- the parents still have absolute control while they are alive;
- on death of the parent (or earlier if they wished) control of the Trustee Companies of each of the Trusts would simultaneously and seamlessly pass to the relevant child.
- Each of the children would be involved in making decisions in relation to "their" Trust during the parents' lifetime and accordingly would gain some insight as to the way in which the parents manage the family investments.
Clearly this approach works best when new assets are being purchased. However consideration could also be given to transferring existing assets to the new Trusts at a time when the incidence of Capital Gains Tax might be minimized. For example a sudden drop in asset values might provide such an opportunity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
