Every business family has worries. Money worries. Strategy worries. Staff worries. Tax worries.
One of the biggest worries is that somebody outside of the family will attempt to gain access to the family wealth. This outsider attacking the family asset might be a liquidator, the Tax Office, an in-law of a child, or simply an opportunistic creditor. So the desire to protect and safeguard the family wealth is of primary concern.
And this concern is only increased for families who own businesses because the business risk in today’s litigious environment is high.
Interestingly there are solid tax strategies that also work incredibly well from an asset protection viewpoint. And tax is always a great place to start. However there are also additional considerations (outside tax) when structuring your assets including estate planning, business progression, income tax planning, government reporting and the costs of administration.
A quality advisor who can bring the competing priorities together (family, financial and legacy) is imperative to creating a great outcome. And the following strategies in particular are sound for the purposes of protecting the family legacy.
Keeping it in a superannuation fund
Superannuation is more than just a great tax haven.
If you contribute money to your superannuation fund the money is no longer yours. It belongs to the superannuation fund. So a creditor who is attacking the family is unable to penetrate the assets of the superannuation fund.
Of course for matrimonial law the family court will be able to access the superannuation funds; and the protection of that asset from a family law claim might be better served using the family court. And it is imperative that this is dealt with professionally by a lawyer.
Of course if the superannuation fund has borrowed money from the bank, and the superannuation fund itself cannot repay the debts it owes, the bank can access some (but not all) of the assets in the superannuation fund.
If you are a trustee of your superannuation fund you might want to consider using a corporate trustee. The primary benefit here is that the ownership of the superannuation assets is very clear. If you are a personal trustee the trustee in bankruptcy might incorrectly perceive the superannuation fund assets as being held by you personally.
If you are receiving a pension from your superannuation fund this income might be considered by the trustee in bankruptcy.
The primary reason we use discretionary trusts is so that a range of people in your family can benefit from the income and capital of the trust. That person might be your children, your siblings, parents or spouse.
In effect you are not the sole owner of an asset that is held in a discretionary trust. The ownership line is blurry and this can help a family protecting assets from attack. Normally one person is being attacked by an outsider, and if you can prove that the person under attack does not have sole beneficial rights you can also prove that another innocent person is being affected by the loss of that asset to the outsider.
Of course this area of law is not cut and dry. The way in which the trust is operated and managed can potentially demonstrate that the asset is clearly controlled and used for one person only. That is a bad outcome.
If the matter is of concern to a family a good tax advisor who is fluent in family businesses is critical to ensure that the asset protection plan is operating as intended.
Good business practices
One of the most obvious ways of protecting assets from outside attack is to do the right thing.
If you are operating a business it is imperative that you are committed to safety within your business, you are financially sound and you have well documented procedures.
Also ensuring that your insurance coverage is robust and deep is important. The insurance is a primary way of protecting a business operator.
Single director company
The directors of a company are statutorily liable for a range of company debts. So the simple act of engaging only one family member as a director of trading companies is a simple way to mitigate the business risk of operating a family business.
Using a company
A company has the benefit of “limited liability”. So if the company is ever facing outside attack the ability of the outsiders to penetrate the assets is limited to the net worth of the company.
Now over time the benefit of limited liability has diminished. Company directors are now personally liable for certain tax and superannuation debts. And limited liability does not work if the company is trading while insolvent.
However this is still a significant benefit than compared to other structures like a sole trader or partnership. In these tax structures the individuals are liable for all debts of the trading business – so the family home can be exposed to an outsider.
Quite often the outsider is attacking the family for good reason. And a classically good reason is that the family cannot pay its debts.
A good family business will insure itself against loss of income in the event that a tragedy strikes a family member. This will give the family an ongoing income stream, and/or a lump sum payment in the event of a tragedy.
A good insurance broker will be able to review your families insurance provisions and recommend an insurance plan and policies that will protect your family well in the event of a tragedy.
We know that 25% of wealth transfers fail simply because the next generation have not been properly prepared to receive the family wealth (*). So the risk of a family business “losing” the family legacy due to the next generation not managing the legacy is much higher than losing it to an opportunistic outsider.
There are ways to deal with this. One way is a properly run family AGM, which discusses the family business, the financials, the tax outcomes and the assets. You can then extend that discussion to the progression of the family legacy.
Whatever you do a discussion is critical in getting the next generation ready to receive the assets. You are not simply enrolling the kids into a university degree on this stuff.
At Westcourt we start slow on the process of educating heirs. The first step might simply be getting all of the important information about a family together in the one place – medical, financial, legal and business. This clear and complete picture of the family’s assets requires a collaboration among the advisors and the family.
Once the records are collated a family might choose to then present these same records to children – in a way that is the best fit for the family. It might just be a facilitated discussion to introduce advisors or something more.
As a guide we run family AGM’s and then everybody goes off to play mini-golf. A family is often fun and a lot of families want to keep that going.
However your family business wants to progress the matter it is important to note that you start. And an external advisor is a great way of making sure you start. And getting the legacy protected – from both the outsider and inside – is a critical step in making family owned businesses great.
At Westcourt this is our core service offering. It is fascinating and exciting work and we do it really well. It is the benefit of dealing with a firm of advisors who only focus on family businesses.
* – Preparing Heirs’, Williams and Preisser © 2012