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NEWS - PLANNING
Succession plans take care of business
3/11/2002
If the main asset of a family dynasty is a business - which is often the case - it is vital to seek expert advice about passing wealth down the line.
"If you have built a business and want that business to pass on, and continue to survive and prosper, then you had better put a lot of effort into business succession planning," says a senior financial consultant at Tynan Mackenzie, Tony Nash.
"I have personally witnessed situations where the business almost ceases to exist because of disputes between family members."
A partner at law firm The Argyle Partnership, Andrew Frankland, says the head of a family business needs to decide who will take over management of the business when he or she dies. "They are often the keeper of relationships with suppliers and customers, and that has to be 'downloaded' to the right people," Frankland says.
They must also decide who will own the business after their death. "The matriarch or patriarch is saying, 'who do I want to get my shares in the family company' or 'who do I want to take control of the family trust' or '[who do I want to] take control of the partnership'," he says. "The succession of ownership may be different from succession of management."
This might be the case if, for example, some family members are involved in the business and others are not. In other cases, the matriarch or patriarch will be in business with someone outside the family, and the plan may be that upon their death the business will pass to the non-family business partner.
"For example, when Andrew dies, we might want Jocelyn to have control of the business," Frankland says. "But we want my family to get the right amount of money. We want Jocelyn to pay the proper purchase price. Documenting that plan is critical. Otherwise, disputes can happen. The plan generally involves buy/sell agreements and life insurance policies to deal with insurance-related events, and business owners' agreements to deal with events such as retirement, resignation or a forced leaving."
The manager of technical services at Westpac Financial Services, Kim Cowie, says death does not normally trigger capital gains tax. But when a business is transferred under a buy/sell agreement, it is deemed to be a CGT event.
Whether the business is a true family business or some other sort of business, it's important that it's structured to meet your long-term objectives, Frankland says. "If succession planning is the main objective, then often a discretionary trust is a good vehicle. If you want to float the business in a couple of years, then a company might be best. It's simply a matter of working out what your objectives are and then prioritising those objectives."
If the aim is to pass the business through the family, it's important that the assets are protected in case, for example, there's a divorce in the family, or one of your children is sued. "Most successful families have at some point in time in someone's life identified and planned for asset protection," Frankland says.
Many people focus on the potential tax benefits of effective estate planning. "But the protection aspects are the drivers, and the tax benefits are the icing on the cake," he says.
"If you can get good tax benefits from properly structuring superannuation death benefits, or from other estate tax-planning strategies, that's great.
"But it's the protection issue that is often the driver."
If that's taken care of, there is more chance of passing wealth down several generations, Frankland says, despite the old saying: "The first generation creates it, the second generation preserves it and the third generation blows it."
Although tax should not be the focus, it's certainly worth knowing about the generous CGT concessions available to small business owners when they sell the assets of a business, or the business itself, says the head of technical services at ipac, Colin Lewis. "If this sale happens on the death of one of the owners, then these concessions could make a significant difference to the tax payable," he says.
A director of specialist law partnership Greenwoods & Freehills, Gordon Cooper, says it may be worth considering these tax concessions before someone dies. For example, if mum and dad own a growing business with net assets of $3 million or $4 million, which they intend to transfer to the next generation, they might think about passing it on before net assets breach the $5 million ceiling, Cooper says.
In some cases, this means no CGT will be payable on the transfer. "They can hand it over to a trust, so they don't lose control during their lifetime," he says.
"Ultimately, on their death, it has to go to the children or the grandkids who are the named beneficiaries."
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