History of trusts for business transfer to the younger generation
In the 1970s and earlier, 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 small business owners.
Many advisers still recommend trusts but their complexity can involve high accounting, tax and legal fees for the clients. Clients should carefully weigh up the pros and cons before letting advisers set up trust for them.
Succession planning for taxes and duties
The great advantage of the trust is that nobody actually owns the real estate or money, so there is not drama when they die. However someone is trustee or controls the company that is trustee so provision must be made for replacement when they die. Death does not trigger death duty, because the business or home is not owned by anyone. Right now there is no death duty in most places and Capital Gains Tax (CGT) may apply not apply either.
Many family businesses are handed to the next generation. That works well with smooth experienced handover. 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.
Succession planning that retains control
What a trust may do is allow the older generation to control what the younger generation does in the business if the parents still control the trust. That is not always wise. Young people need freedom to innovate and make mistakes of their own. That is how they 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 put an end to that idea and many would say that is a good thing as the new partner may put a lot of effort into the business they have married into.
Avoid Doing It Yourself when succession planning
Families businesses should obtain professional accounting and legal advice to determine what happens to the business and its assets, goodwill etc. They should learn whether or not it is possible and if so, how the ongoing business should be best structured. Each family situation is unique so this is not a field for business owners themselves on the basis of a note like this or any other.
The danger in trusts, is profits distributed to family members to minimise tax rates, may not be paid out to the beneficiaries in cash. Rather, those profits may be credited to them but reinvested. However, the money distribution belongs to those beneficiaries. Parents should be aware of the risks of them using that money without written permission of the beneficiaries. Often we see cases where the parents have treated the money as their own and that could endanger the trust structure or result in very expensive legal battles.
Complexity can be a major disadvantage of a trust deed. It can cost more in legal and accounting fees to unscramble the trust structure than it did to set it up. The results may yield no tangible or financial benefits in doing so.
Young people want to feel that they have achieved!
Rather than give the business to the next generation it may be better for all parties to consider selling it 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. This can be a lot fairer to children who are not involved in carrying on the business.
Why try GBAC?
Big professional firms, firms associated with business organisations, those associated with or funded by banks and those funded by and associate with 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 had 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 as well as 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.
