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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.
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