Family Succession and Estate Planning

• November 2004

It is important for business owners and high net worth individuals to give careful consideration to succession and estate planning in the event of future, planned or unplanned, exits from business, and to ensure that their estate will be handled after death as they intend.

The essential aim of estate and succession planning is to ensure the smooth transfer of assets from one generation to the next, whilst seeking to minimise any taxes payable. An appropriate estate plan can also be seen as an extension and strengthening of an asset protection strategy.

As Australia is about to experience the biggest inter-generational transfer of wealth in its history, with about $600 billion of assets to be inherited in the next 10 to 15 years, this is an area that many families and individuals need to address.

Family Business Succession Plan

Statistics reveal that fewer than 30% of family businesses have a succession plan in place, leaving them exposed to excessive CGT obligations and costly disputes. A disagreement after the owner's death can result in a drawn-out and expensive litigation, and there is every chance that a dispute may result in the court-ordered sale of the business. Such court ordered sales rarely achieve fair market value.

The only way to ensure the successful transfer of your business is through an appropriate succession plan.

Estate Planning

The most common asset protection structure undertaken by individuals is to transfer personal assets into the name of their spouse. This ensures that, in the event of bankruptcy, personal assets are not available to creditors.

However these individuals and their spouses need to consider their estate plan. If they enter into a straightforward Will, where upon death the other is to receive their entire estate, they may inadvertently unwind their asset protection structure. In the event that the asset holding spouse dies, all assets pass directly to the surviving spouse, and are then available to creditors of that spouse. Furthermore there might be expensive tax consequences as a result of such an arrangement.

Many of these problems can be avoided by adopting an appropriate estate plan, such as establishing either a testamentary trust or an inter vivos trust, which both provide asset protection and taxation benefits.

1. The GPS ‘Lineage Trust’™

A GPS ‘Lineage Trust’™ is created in a Will and arises only upon death. It acts to effectively pass assets to the next generation or a surviving spouse without such assets being made available to creditors.

In addition to asset protection, a GPS ‘Lineage Trust’™ is tax effective. It offers the benefit of income splitting and minor beneficiaries are not subjected to the punitive minor beneficiary tax rates that can apply to other forms of trusts. Therefore, children receive a tax-free threshold of $6,000 each year. A GPS ‘Lineage Trust’™ can also be used to restrict children from accessing their inheritance until they mature, and are able to manage the assets effectively for themselves.

However a trust offers no protection if the Will is contested, as the assets / business still make up part of the deceased estate.

2. Inter Vivos trusts

An inter vivos trust may be established at a time before death, giving the benefit of both a secure succession plan and effective and immediate asset protection depending on an individual’s circumstances.

Such a trust operates by placing the assets or business in the trust with the parent/s as trustee/s, and the child as beneficiary. This allows the parents to retain control of the assets/ business, while enjoying asset protection and ensuring that the contents of the trust are not available if the will is contested, as they no longer belong to the deceased from the time of the deceased’s death.

However an inter vivos trust may attract CGT and stamp duties.

Estate Planning and your Family

Estate planning is necessary to ensure wealth and business success into the next generation. By adopting an appropriate plan, and by consulting with your family, you may ensure the smooth transition of wealth or the family business, and prevent costly disputes and tax obligations.

However estate planning must be reviewed regularly to take into account changes in the family and financial circumstances. For instance, it is worth noting that both marriage and divorce may invalidate a will. After either of these two events any estate plan must be revised and updated to reflect changed circumstances.

What can happen without adequate estate planning?

  • In 1996 businessman Franco Belgiorno-Nettis decided to relinquish control of his $600 million construction empire ‘Transfield,’ sparking a bitter family feud. An inadequate succession plan lead to his eldest son taking legal action to wind up the family holding company.
  • A struggle over Len Ainsworth's gaming machine empire ‘Aristocrat Leisure’ eventually resulted in the tycoon being banished from his own company.
  • Dispute over the will of mining-magnate Lang Hancock led to a decade of much publicised bitter squabbling, costing tens of millions of dollars, and eventually ended in settlement.

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued or any information relied upon.