Martin: Welcome to episode three of the business owners podcast, where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I am accompanied by my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Hi there Ed.
Ed: Hi Martin, and hi to everybody listening in and thank you so much for coming back, if you haven’t heard the first couple of podcasts, I’ll say it again, this podcast is really about giving you information and strategies that you can deploy in your own business. This series is on asset protection, we have six episodes on this subject covering off on different aspects of asset protection each episode. I really hope you find some value in this as that is what it’s all about for us, is giving you this education, empowering you to make some smart choices in your own businesses.
Martin: Oh, that’s great Ed, thank you and it certainly is something that we feel very passionate about. Asset protection is the bedrock that’s why we are focusing on that topic for our first series of six. If you like it and if you come back we are then going to move into some other different areas and particularly the areas of growing and exiting your business. But before we begin, as ever, I am a conservative lawyer, I am a partner in Mills Oakley and I am concerned about my PI policy so Ed I just need to get something off my chest, do you mind?
Ed: No, no go for it. Yeah.
Martin: Oh thank you, I just wanted to say this, this podcast contains general commentary only, it is not, I repeat, not, a substitute for independent professional advice. Always seek specific advice related to your circumstances before looking to implement any of the strategies referred to in this podcast.
Ed: Would you like to give everybody your phone number Martin, perhaps.
Martin: I would, and perhaps I should have said independent professional advice from Mills Oakley (Ed laughs), of level six, 530 Collins Street, Melbourne, or around the country. (Martin Laughs)
Ed: Can you give us all the addresses (Martin laughs).
Martin: Not off the top of my head, not now, we have got five offices which we are all very proud of (Martin Laughs).
Ed: And hey, we have got some more emails come in from our listeners, ah, this one, that I want to draw your attention to Martin, this is from Anon.
Ed: Yeah, the other emails where quite uplifting, this one not so much so, although I take some pride in this one. Anon says “why don’t you two shut up, giving away all of the great strategies that us gold diggers are using to rip people off.”
Martin: Well, dearie me. Well it is kind of a backhanded compliment Ed, really.
Ed: Look, I suppose it is, and not going to be put off by this sort of abuse, and we are going to give away even greater strategies.
Martin: And maybe we could set up a sister publication: “The Gold Diggers Podcast”.
Ed: “The Gold Diggers Academy”.
Martin: That’s right, or maybe one of our colleagues, we can maybe cover all bases, if you will (Ed and Martin Laugh).
Ed: Well look, I’ll tell you this, let’s just nail this and then we will move onto the gold digger one in a few years.
Martin: (Martin Laughs) Okey Dokey. So hey, our listeners might recall we have been talking a lot about asset protection, and we have been talking about the best structures within which to hold assets, and a really common theme of the work that we do is around helping business owners to get assets out of their own name and helping to get those assets into a better structure and in this way we separate asset from business risk and that really goes to the heart of the work that we do in the Private Advisory team. Because you simply do not want your valuable assets exposed to all of the creditor and other trading risks of your business, or indeed exposed to what we describe as internal creditors such as family law risks or estate risks. So getting those assets out of your name into a better structure is at the heart of what we do. Now, we spoke last week about Trust structures and in particular, the benefits of holding the shares in your trading businesses, not in your own name but through a family trust which is much, much better for asset protection, because if you get sued personally, then generally the asset being the share capital is insulated in that trust. And, it is also better in terms of tax effective distributions, and we spoke with our business owner client Wayne in relation to exactly that scenario. Ed, anything to add on that before we re-introduce our client?
Ed: No, I think that is a great summary, I am looking forward to seeing Wayne, because I know the point he wants to raise this time is “the” point that comes up most frequently in my practice.
Martin: Wow, and are you going to tell us, or should we let Wayne tell you?
Ed: Wayne, take it away.
Wayne: Well, Ed and Martin, thank you again for having me back to the studio. Look, I know that I am putting my problems out there to your very broad listener base, but I don’t care I am getting so much benefit out of these discussions so thank you again. Last week you helped me get the shares in my company out of my own name. I was worried about that and you helped me to hold them in a family trust, and you explained how much better that was for me. Ed and Martin, I am still worried about something. You told me that the family trust needs to be controlled by a Trustee company and it has got Directors and Controllers and Appointors and my head is spinning and I don’t know which way to go and I am hoping you can tell me about that.
Ed: Wayne, I am really glad that you raised this, of course you want your son to eventually succeed you to control this, you have already told us that and naturally you have some concerns around asset protection. I really don’t want to bog you down in too much of the hard core technical, Wayne but let me just explain four key roles in terms of most trusts that are out there. Well obviously there are some beneficiaries, who may or may not be entitled to receive income and / or capital, then we have got a Trustee who will decide whether or not to distribute income and or capital to those beneficiaries and they have discretion around investing and that sort of thing. Then we have the Appointor, the Appointor has the right to hire and fire the Trustee so might say the Appointor has the biggest stick of all because the Appointor can choose the identity of the Trustee who can choose how to allocate income and capital between the beneficiaries. Now there is one more role that you sometimes see in a trust and that is the role of the Guardian and the Guardian will often have to consent to certain key decisions by the Trustee, for example, a decision to allocate capital, or a decision to allocate capital to someone other than your son, for example.
Martin: That is a great summary Ed, of the different roles in relation to a trust. From Wayne’s perspective, I guess he’s still got this conundrum of what he does because I guess on first blush, if I were Wayne, hearing what you just said, I would say “well great, I want to be the Trustee and Guardian and Appointor and I want to control everything.” What are your thoughts about that?
Ed: In some respects, it is not that crazy an idea. What we would often see would be, let’s say, Cameron would be the Appointor-
Martin: Cameron is Wayne’s son.
Ed: Yes, Cameron would be the Appointor, he would be the primary beneficiary and anyone related to him including Wayne may be a beneficiary, maybe Cameron would be the Guardian, who would be the Trustee? I would expect a company and perhaps a company that Wayne and Cameron co-control. Now, let me just take a step back, think of a spectrum, on one end of the spectrum, you’ve got yourself, Wayne or Cameron with total control of this trust. All of those four roles, let’s say you hold all of those four roles, that is one end of the spectrum – complete control. The other end of the spectrum, you control none of those roles, so you are not the Appointor, not the Trustee or the director of a corporate Trustee, not the Guardian, and you are not the named beneficiary and conceivably you can qualify as a beneficiary in some way, you might be excluded as a beneficiary at the extreme end of the spectrum. On one end complete control, on the other end, zero control. Somewhere in the middle it’s a massive grey area. Now, there are different types of threats. So at this point we have been talking about threats and sort of lumping them all together, asset protection concerns, we lump them all together and we give them different labels, it’s crucial when looking at a discretionary trust, however, to separate out these risks with the trust and to really drill down just to how real and present that danger is. With creditors, I am not too concerned Wayne, about the ultimate beneficiary, or the person you expect to receive a benefit out of this trust having a lot of control. I think that it is pretty clear that that’s permissible. However, when it comes to family law risks, that is a totally different risk in the context of a discretionary trust, the more control somebody has over a trust, the greater the risk that on a separation, the resources of that trust, at the very least, possibly even the assets owned by that trust, are at risk of being taken away and given to somebody else.
Martin: And those are some great examples Ed, and again I think that this really kind of what goes to the core of what we do. It’s assessing the benefits of control against the benefits of asset protection and often the two things don’t go together. So it’s really a fine tuned and a detailed analysis just as Ed said, around the particular business owners circumstances and which risks are real to them and then having regards to that, what control structure suits them, and it is often not a simple answer, it is a balancing act and there could be a myriad of deep and personal factors that go into that decision.
Ed: That is absolutely right, this is not a cookie cutter approach, there are some obvious, from a professional perspective, obvious ways of structuring these controlling roles, and often these documents are almost downloaded and printed off with a lot of assumptions in place. That is not the way we like to do things, we really need to interrogate what those risks are, what the possible solutions are, given what is important to you. If it is very important to you to protect these assets in the context of family/relationship breakdown, then we have got to be clear, are we protecting this money for future generations or not?
Martin: Quite right Ed. So in fact Wayne, what we are going to do, we normally like to give you a clear and robust answer in the session. We have actually decided not to do that this time, we think that this issue is too important to you and we really want to do a deep dive with you into your personal situation, we want to find out about any estate risks that might lie in your family, if you leave property in your will is there going to be an estate claim, family law risks both yourself and with your son Cameron, and then through to other risks such as internal creditor risks, thinking about those risks, thinking about the control structure and putting in place something that works for you. A key aspect of this that we haven’t touched on and I don’t propose to talk about it on any detail not at least in this episode, is the question of independent control of trusts, and certainly what we are seeing as a trend it the market and particularly for high net-wealth families would be to have an element of independent control in their structure which might be an external trust company or it might be a trusted advisor such as the long term family accountant for example. And we can often find that by bringing in an element of independent control and it could be a little or a lot that it can really, really help in terms of de-linking the assets from the individuals and protecting them against claims. But again, very big step to put independence and control of your assets and that topic is very much worthy of a more detailed discussion later down the track.
Ok so, that’s what was worrying Wayne this week. Apologies Wayne, that we haven’t yet got for you the precise control structure of your trust but hang in there because next time we are going to have a detailed chat with you about that and together we are going to devise a ripper strategy for you.
Ok Ed, well it’s about that time, it is over to our soap opera.
Ed: “Business and Pleasure”. Well, welcome back everybody to the soap opera. Re-capping on where we got too- I’m starting to win Martin over with this idea of the story around Gino’s family.
Martin: I am thawing a little bit (Ed Laughs) but only because I loved that fantastic insight around getting the property into super. So Ed, that was from last week, I very much hope you are going to trump that today.
Ed: We’ll see – (Martin laughs) Gino.
Martin: I’m not convinced (Martin Laughs)
Ed: I don’t want to over promise to you, I know how you get crushed. (Martin laughs) Gino owns the coffee shop, “The Moral High Ground”, which sells ethically sourced coffee beans. Gino is 60 and he is married to Lena, who is also 60, it is his second marriage. Gino has two kids from his first marriage; David, who works in the business, he is aged 32, married to Annie and they have got two young kids; and there is Emily, who is aged 26 and she is in a De facto relationship with Samantha. Lena and Gino have an 18 year old daughter named Susan who is a student. So you see the blended family scenario here. Susan is the daughter of both of them. David and Emily, they’re the children from Gino’s first marriage. We spoke last week about the commercial property, so the business premises that Gino purchased in his personal name that he transfers in to his self-managed Superfund. That was a really great strategy for him because we think he gets it in there tax free, mostly stamp duty free, if not totally stamp duty free, and he gets it in there very quickly, so now the growth in terms of capital gains when he retires will be tax free, and the income is going to be tax free as well. But, there is some bad news Martin.
Martin: Oh, some bad news Ed! I can feel the dramatic tension increasing!
Ed: Well, one of the reasons that people start thinking about succession is not necessarily that they’re prudent. It is that something has happened. Very often we find that there is a trigger event which causes people to reflect upon their own mortality and consider succession planning, succession planning is something that we advocate strongly when a business is set up and we have spoken previously about not everyone wants to spend a lot of time or money or even just thought or energy on succession when they are getting a business up and running, even though we wish they would spend some time. It is often when something’s happening or something went wrong in life. Gino is sick, now he needs to talk about succession. So there is a bit of pressure on this now, especially because a very valuable asset has been transferred into a self-managed Superfund. We have been talking today about control of a discretionary trust, well a self-managed superfund is a type of trust. A self-managed superfund as a trust though is much more restrictive than your average discretionary trust, there are beneficiaries, i.e. members of the fund, and there are Trustees.
Martin: Hey, Ed, and I am sorry for interrupting, because this detail will be really important, but do you mind if I take it back a step. Gino’s sickness, I mean this is something that we see really commonly, isn’t it, as you have said. I think it is human nature to kind of think that you are a bit immortal and bullet proof, but it would be more common than not I would say in our practice, and whether that is representative of Australia or the World, I don’t know, but in what I see it would be more common than not that succession planning, succession issues, strategies, solutions, are driven by illness, actual or anticipated. Give me your thoughts on that Ed, or maybe a no-names example.
Ed: Look, I think you are right and maybe it is just because you only want to see a lawyer when you have a serious problem rather than when you want to talk about planning and foresight. That is a part of it, I think. But certainly, especially with very driven people and a lot of business owners are very driven, it is about priorities, and we make excuses, and we say it is not a priority right now to talk about succession. My priority is growing the business, I have got a lot of staff depending on me, I have got mortgages to get paid, I have got to make sure the business is profitable, succession can come later when I am ready, when I have decided that I don’t want to keep growing this business and it is time to move on, that is when I will talk about succession, and then somebody gets sick, or worse still, somebody has an accident or somebody passes away. It is a huge tragedy for the individual and their family, their loved ones, their friends. It is a tragedy for the business because nothing is going to cause such volatility as the principal of the business getting sick or dying.
Martin: Quite right Ed, and so sadly this scenario about Gina and we will get back to it very shortly, it is really not very uncommon and we see a lot of Gino’s in our practice who come in right at this moment. So sorry Ed, back over to the detail.
Ed: Now look; and I can see I have really drawn you into this soap opera now, you see (Martin and Ed laugh). You were sceptical, but I see now, you can relate in some way albeit by a third party. (Ed laughs)
This is a real issue for all of us frankly, we need to think about the ‘what if’s’. Big, lumpy asset goes into the superfund, Gino will be a Trustee of that superfund, now the reason I say that is he’s a member, a member of the self-managed superfund must be a Trustee or a director of the corporate Trustee. Now there are a few scenarios where that is not absolutely necessary. For example, if Gino has appointed someone under an enduring power of attorney, that someone can step into his shoes as Trustee or director of a corporate Trustee. There are very narrow exemptions to this rule that a member must be a Trustee or a director of the corporate Trustee. Now that might not sound like a big deal but when somebody gets sick that is a big deal because if they cannot continue as a Trustee, somebody else is going to have to replace them, that somebody else is going to be making decisions.
What will the decision be in this case? The decision in this case will be, should we “A” Sell that property, should we “B” transfer all of Gino’s entitlements out of the self-managed fund and into his personal name? Why would that occur, and I will tell you why this occurs, and this is a hypothetical story, but there are cases out there, especially in the last few years, involving blended families in particular, and family feuds. When you have got entitlements in a superfund, in order to nominate someone to receive those entitlements on your passing you sign what we talk about as a Binding Death Benefit Nomination form. There are different ways of describing this form but imagine it’s a will specifically for the superfund because, it is an asset of the superfund, not an asset in Gino’s personal name to be dealt with under his will.
Now we already know he wants David to come into the business. He doesn’t necessarily want David to own that property. He has assumed that he himself, Gino, will receive the income from the property and continue to control it, live off the rental income. But David is taking over the business. Part of this plan is that David needs to have somewhere to operate the business, so he has got to get his lease in place, and these are just warning signs for anybody listening of things to do, get that lease in place, Gino never bothered with the lease, he didn’t bother because he controlled everything. It is different now, looking at succession he needs to professionalise this slightly, superfund as the land lord, David’s company which is currently Gino’s business, will be the tenant. Therefore we have bound in some ways the controllers of the fund to continue with the property, leased to David’s company. If Gino hasn’t signed a Binding Death Benefit Nomination form, whoever is going to control this fund on his passing, which would be his Executors, perhaps, will be able to make decisions as to who receives the benefit out of the fund. As a hypothetical, he has got no nomination, he passes away, let’s say Lena is his Executor and takes control of the fund and she has got discretion as to whom she wishes to pay the death benefit, which may be the property, or she may sell the property and distribute the money, maybe she is not the best person, maybe he wants to have Lena and a child, maybe someone independent as you raised before, someone who is not going to stand to benefit themselves, there are so many issues here we can’t cover them all off today but the central point I wanted to make is when you are in control of a self-managed superfund, especially where it holds the business premises, you must think about who would control this fund if you were sick or passed away.
Martin: And in the case of this family, it’s really the blended family dynamic that makes this interesting, isn’t it because as you say, if Lena is in control, well she may be very well disposed to all of the children, she may think of them as her own, but we don’t know. Only one of the children is in fact her natural child and look unfortunately we could recount and we won’t of course but we could recount a number of client situations that we have seen where this tension arises and it can often end very nastily.
Ed: It can, and that is the point that we don’t want this family to suffer that because it is quite a volatile time. It may be that Gino wants to pass control of the business to David and Lena is not happy with this, we don’t know, but this is the sort of issue that can arise at a time in Gino’s life where he doesn’t need to be dealing with this.
Martin: So what is the answer Ed? You know, because we are all going to get sick and die one day, what can Gino proactively do to ensure that his wishes are respected?
Ed: Let’s deal with death separately next week because I think that this asset is a very important asset, it is not just the value it is the asset itself and I will talk about that specifically next week.
What I want to talk about here, though, is key tips. Firstly, if you have a self-managed superfund, get an enduring power of attorney in place, if there is going to be dispute between the families, two things to do:
- Have somebody independent act on your behalf as Trustee or director of a corporate Trustee.
- If you can, think about whether you want to have family in this superfund with you, we can have up to four members, it doesn’t mean you have to have four members, you can have one member. Something that I have advised clients in the past is to have more than one self-managed superfund, maybe you have one which is more of a family vehicle, you have four members for example, or just a spouse. A second one which is just for the business, initially, you are the only member. Gino would be the only member of this fund. The business premises, his other investments are in there, some liquidity. He is the only controller of that fund. When he gets sick, his independent trusted person can step into his shoes and control that fund, it is not his kids, it is not his spouse, it is nobody that stands to benefit, it is someone that he feels will respect his wishes and even if it upsets a few people, do the right thing.
Martin: And why is that important, particularly for the superfund that holds the business assets?
Ed: It is important for two reasons, one of them is, you have got to have a Trustee. If he can’t be the Trustee it can’t be a self-managed superfund anymore, so he must have somebody who can step in in his place. Secondly, the business continuity requires somewhere to operate from, we need to have someone who is going to ensure that this property is looked after, the proper lease is in place and the business can continue operating. It is not necessarily the case that everybody in the family would want that to happen. Some people might just want to sell that property, so we need someone who is “friendly” if you like, to Gino’s plan.
Martin: That’s great Ed, I can just see the benefit of that advice because there are a number of very different vested interests here, there’s Lena the wife, has one child in common with Gino, doesn’t work in the business. Then there’s Gino’s son David, you know Lena is not his mum and he does work in the business and in fact as is often the way he considers the business as morally his, right, because he is the man, he has been building it up all of these years and yes it’s potent recipe for a dispute isn’t it.
Ed: It is, and it is very easy to side with one of these characters here, let’s side with Lena for a moment, married to Gino. Lena says “hey Gino, come on retire. Let’s go and enjoy our retirement” she has been suffering with him. You know you ask any of our spouses, is there a downside to this? Is there a downside to being a fairly driven person? Ask a spouse of a business owner, is there a downside of being with this person, well yes, they stress about this, they stress about that, you know “I can’t get a proper holiday”, you know this sort of thing I hear all the time, “I can’t get a proper holiday”, “I can’t get them away from the business, even for two weeks let alone a decent tour overseas”, that sort of thing. She is waiting, waiting, waiting, to be able to enjoy this stage of life with Gino. She might think that she is owed something, and I will tell you what, it is a pretty easy argument for her to run isn’t it, “come off it Gino, what you are just going to give this to somebody else, this is our nest egg, ok it is legally in your name, this is “ours” and that is supposed to fund some fun for us, sell it, let’s go get some money, let’s do something great”.
Martin: Oh, absolutely, you could also equally see the perspective of the son which would be very very different. But hey, just talk to me quickly and we will have to finish up shortly, but just talk to me quickly about the Binding Death Benefit Nomination. Does that cure all ills?
Ed: I have to leave you with a cliff hanger for next week, look it is an interesting point for the lawyers and I will try to make it interesting for the business owners (Martin laughs).
Martin: I can feel a red flag coming up now. (Martin laughs).
Ed: It is definitely something of a cure in some circumstances but let me tell you if you are relying upon that I will tell you some things next episode that might cause you some concern and cause you to re-visit the idea of a Binding Nomination solving all of your problems versus having the right controller.
Martin: Wow, to be continued next week. What a cliff hanger and I for one, Ed, am at the edge of my seat waiting for the next episode. But they were some really useful insights, I think both about control of trusts but in the soap opera context specifically control of self-managed superfunds. So hey everybody, thank you again for listening we do hope you have got something out of it. We are conscious that this episode was probably more about getting you across some concepts than giving you any really kind of hard-core strategies but don’t worry they are all going to follow in the next episode, so stay tuned and thank you.