Trusting trusts and inherited debts

Trusting trusts and inherited debts

In the 1960s and 70s, Trusts were used a lot for what was then called, “Estate Planning”. Changes in tax, land tax and family law have removed many of the benefits for owners of small and medium sized businesses . Trusts in estate planning can often see the next generation facing unfathomable complexity. It can be even worse if a consultant has suggested that a bank loan should be acquired by the younger generation to buy out their parents. Then inherited debt is added to trust complexity ensuring the need for expensive advisers to handling accounting and tax obligations each year.

Business owners should carefully weigh up the pros and cons before letting advisers set up trust for them.

Trusts set up for taxes and duties

The great advantage of the trust is that nobody actually owns the real estate or money, though someone is trustee or controls the company that is trustee.  Death does not trigger death duty, because the business or home is not owned by anyone. But as there is no death duty that is largely irrelevant, though if it was introduced it might then be to late to wish there was a trust.  Capital Gains Tax (CGT) may apply not apply either if the assets have been held for long enough and the transfer is related to retirement. Obtaining specific advice for each family situation is vital. General advice cannot apply to any individual situation without specific modification as applicable.

Many family businesses are handed on to the next generation. The same may apply to homes given the housing crisis inflicted by federal immigration policies, so a trust holding the title would suit. But, if there is no death duty and CGT does not apply, the advantage is not so obvious even from a tax viewpoint. But involving a bank in a succession plan can lead to the burden of inherited debt on the next generation

Estate planning that retains control

What a trust can do is allow the older generation to control what the younger generation does in the business. That is not always wise. Young people need freedom to innovate and make mistakes of their own. That is how we all learn.

A trust used to be a way for a family, handing on the business or home to the oldest son, to ensure that in the event of a marriage split-up, his wife or partner would not end up with a share of the home or business. Family law seems to have scuttled that idea and many would say that is a good thing.

Skip DIY when succession planning

Families business owners should obtain professional accounting and legal advice to determine what happens to the business and its assets. They should learn whether or not it is possible and if so, how the succession plan should be structured. Each family situation is unique so this is not a field for DIY on the basis of a note like this or any other. “When in doubt, find out!”

Danger of using trusts for succession planning

The danger in trusts, is profits distributed to family members to minimise tax rates, are often not  paid out to the beneficiaries in cash. Rather, those profits may credited to them but reinvested. However, the money distribution belongs to those beneficiaries. Parents need to be aware of the risks of them using that money without written permission of the beneficiaries.

Complexity can be a major disadvantage of a  trust deed. It can cost  more in legal and accounting fees to eventually unscramble the trust structure. The results may yield no tangible or financial benefits in doing so.

Sense of achievement

Rather than give the business to the next generation it may be better for all parties to consider selling the business to the children or one child. That way the child gains the satisfaction of obtaining the business through their own efforts rather than as a gift. The parents benefit by having cash to spend after years of pouring it into the business. There are very good ways of doing all of this without involving bank debt. Not handing over debt to the children is fairer .

Why try GBAC?

Big professional firms, those associated with business organisations, banks or  government are not necessarily appropriate for succession planning  due to conflicts of interest. They are often very expensive. Succession  planning should protect businesses from banks and government.

Greg has managed transfers, succession of a major business from his grandfather and a farm that was settled by his great-grandfather, to his generation. Greg and Pat have both been involved in running business and consulting.

In a world of excessive greed, GBAC lets clients say goodbye to that greed and hello to good old-fashioned service. That is where the client comes first and foremost and always deals with the principals.

Family farms and succession planning

Start a succession plan early

Succession planning comes up when mum and dad are looking to the future of      tSunset over the farm hillshe farm and want to leave their legacy to the next generation of farmers.  It may start when the children are in their teens or be left until they are in their 50’s. The earlier the better, but flexibility is important for the plan to succeed.

The end goal of the succession plan

A one size fits all approach does not generally suit and handing over debt to the next generation increases the risk of the farm eventually being lost to the bank. Main factors  to consider are the goals of the parents and children. That sets the pattern, but within those boundaries will be many complex issues, including relationships, finances, taxes, mortgages, competition amongst children and differing views of mum and dad.

Family conferences help

First step is discussions with each family member. This includes a sound understanding of the farm, its operations and finances and patient family conferences where people are encouraged to put their thoughts on the table. This should not be done as a final statement, but to open discussions. We really try at GBAC to get this right. Because, if handled badly  it could make some family members feel badly done by.

Avoid surprises that could cause consternation

Succession planning needs gentle diplomacy. Often some  family members have expectations that others don’t share. In the end we want to make everyone happy. That is why if Succession planning starts in their teens or twenties, everyone has a clear understanding of what is happening and most wishes can be accommodated over time.

Our role

What has helped us with succession planning for clients is experience. From my teens I was raised on Dale Carnegie’s book “How to win friends and influence people”. It gave me a different perspective on working with client families. What I learned about dealing with finances in my Chartered Accountancy courses. Running my own Merino property out west first was a good lead in to me succeeding my 2nd cousin by purchasing from him the beef cattle property in the Araluen Valley out of Braidwood, originally settled by my great grandfather.