Martin: Welcome to episode four 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 joined by my colleague Ed Skilton and together we represent Mills Oakley’s Private Advisory Team. Hi there everybody and hi there Ed.
Ed: Hi Martin, how are you doing?
Martin: I am very good today Ed, yourself?
Ed: Yeah, very well thank you.
Martin: Hey, we are excited to be here, episode four. It has been a great journey for us so far and certainly we have had some really positive feedback about the show which has been wonderful so thank you and please keep sending in those emails.
We are getting a lot out of this in terms of spreading the message and we have said it before on previous episodes but we do feel that business owners aren’t well informed about some of these strategies that we deal with every day about control of assets, asset protection, locking in value and maximising value on the exit of their business. So we are very, very passionate about getting the word out there and hopefully helping business owners of all shapes and sizes to maximise the value of their blood, sweat and tears.
Ed: And we continue to receive interesting emails by way of feedback. This week Martin, I got an email from Angie in Germany.
Martin: Oh, Angie!
Ed: Yeah, she said she has some problems with the temperamental and penniless neighbour.
Martin: Oh, that is interesting.
Ed: Have we got time just to field this question actually?
Martin: Yeah, please, please.
Ed: She said how do I call in my loans when the security seems to have disappeared? I have heard that he recently transferred his land and some valuable sculptures to his wife’s name.
Martin: Well, Angie, a very topical problem, or at least topical at the time of broadcast. Unfortunately in a nut shell, I really think your problems are too big for us. There is a valuable lesson though here about things like clawback periods. Do you want to talk about that Ed?
Ed: Sure, we have raised the idea of clawback periods, people think that when they have got a problem, then they will do something, and life is like that. We kind of view life in this way, in terms of problems, let’s say the problem is creditor problems, “oh well if I have any claims against the business, then I will transfer assets out my name”. It doesn’t work like that, doesn’t work like that because there is a clawback period because you can’t just transfer things out of your name to avoid responsibility for the problems that are your responsibility. There is a clawback period as we said before, assume five years. If you are going to transfer something out of your name, assume it is not safe for five years. So the sooner you deal with this the better.
Martin: That is a great comment Ed, thank you, but I have just been getting panicky even if you have been saying that comment because I have just realised we have breached the cardinal rule, we have given some advice, albeit general in nature before our well-crafted disclaimer.
Ed: Go for it, quick!
Martin: We might need to edit this to kind of flip it around, but anyway, let me go for it. This podcast contains general commentary only and is 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, including the ones referred to prior to this disclaimer. Phew! Thank you! (Martin Laughs)
Ed: My goodness, that was close, so what are we doing this time?
Martin: Well, we are at an exciting kind of juncture in our podcast Ed, we are in episode four of our six episode series about asset protection and I guess we’ve kind of got two separate stories running in tandem, haven’t we? We have got our client business owner, that’s the aspect that I particularly like, Wayne joins us in the studio, he talks to us about his problems and we solve them and we nail it every single time.
We then have the slightly more creative aspect that you lead, being our business related soap opera where we talk about a more hypothetical and glamourised legal or taxation scenario.
So look, let me lead off and talk about Wayne because Wayne is going to be joining us again soon. For those who have listened from the beginning you might recall that Wayne is a very successful business owner. He is also our favourite client because not only is he a long standing client with lots and lots of problems, but even better, he always takes our advice. So Wayne is just a rock star in the Mills Oakley world and we are very pleased to have him back.
We have been talking with Wayne about a number of issues. We started off helping him to protect a home that he was buying for his son, Cameron. We’ve then helped him restructure his business to get the valuable shares out of his own name and into a family trust, which gives him some wonderful creditor protection and other asset protection benefits. The juncture we are now at, though, is that we need really a much more in-depth and detailed discussion with Wayne about this key question of who controls his trust.
So imagine if you are Wayne, most of your wealth is tied up in this big operating business that you own and it is very successful. You own the shares in that business through a family trust. It is really crucial to think about who controls that trust, because if you control it yourself well that is all good you can make all the decisions. But it might give you a problem from a family law perspective for example because those trust assets will be considered matrimonial property or it might give you a problem in terms of creditor risk. If people can pierce that trust because they say “nah, this is just a sham – you say this equity is locked up in a separate trust but actually we think that it is your assets and you have done this as a deliberate strategy to avoid your creditors”. Versus having the trust independently controlled like the Packers or the Rinehart’s for example, or anything in between. These are very, very important and difficult issues that our business owner clients grapple with every day and overlaying the asset protection concerns there is also issues around, you know, what is your strategy, what is the best structure to exit, do you need your structure to be facilitative of bringing on, you know, co-owners, employee shareholders, etcetera, etcetera, etcetera. It’s a big thing.
So, today we have brought Wayne in to talk about that. And Ed, before we do, or perhaps you could tell our listeners a bit about the process that we go through with business owners in order to address these complex issues.
Ed: Sure, look one of the big stumbling blocks in these plans I suppose you could describe it is, a lot of people don’t communicate succession plans very well to the same people that will actually have a significant controlling role in the future. As an example, you see a lot of people that for example, they will make a will, they will set up a trust, they will set up a self-managed superannuation fund or incorporate a company and they will say well “oh if something were to happen to me, these people, or this person will take over in control”. They have never had a conversation with these “people” who are to take over from them. They don’t bother to write down for these people how this will work. So they don’t bother to engage in a conversation with these people as to what do these other people actually want. So in terms of the process with Wayne, it is not just about what does Wayne want, or what is important to Wayne, we also need to ask the question, what is important to everybody else, there is other people like Cameron, who are going to receive control in the future perhaps.
Martin: Cameron being Wayne’s son.
Ed: Yeah, or benefit, who is going to receive, how do they want to receive that benefit? We need to deep dive with all of the family and talk about some of the risks, some of the objectives and then come up with a strategy. That takes a bit of time and it takes a lot of trust which is another factor that needs to be built.
Martin: Thank you Ed, and certainly that is how we like to do it at Mills Oakley, if I can put in a shameless plug for our business. We think it’s a fault of many of these processes that people jump too quickly into solution mode. They have got a cookie cutter or a template control structure for their clients and they essentially industrialise that and roll that out. But we think it’s really important to do it differently, to meet with every family member, to find out what is important to them, and only then, to advise on the control structure and the broader strategy.
Ed: And think of it like this, if something is going to go wrong in the succession plan, is it likely that the thing that goes wrong is a professional mistake? For example, the accountant has not got the tax right, or the lawyer has not drafted the wording right. That is actually pretty unlikely, that doesn’t happen very often that there is a significant error that causes loss or problems. It is much more likely that the problem is a lack of communication. That frankly the person making the decisions did not think through the consequences of those decisions. That is a far more likely problem then some kind of technical stuff up.
Martin: Quite right Ed and the lawyers in our litigation department would testify to that and you overlay a lack of communication with emotions running high after somebody has died or suffered some other health event, it can be a real problem.
So hey, we have been through that process with Wayne, as you know Ed we spent three long hours with him today going really up hill and down dale in relation to his goals, his expectations for the future and what he wants. We haven’t brought him back into the studio, he is pretty drained and I don’t think he wants to go through that chat again and particularly not live on air. But how about we summarise where we got to with him.
Ed: Yeah, great.
Martin: Well look, the key thing that I got from our discussions with Wayne and this point actually came out fairly early on in the discussion was that Wayne has a very strong desire to keep his successful business in the bloodline. And that is really borne out of a few things, you know his name is above the door, his father set up the business, he is frankly emotionally attached to it. And so if there were to be one overriding goal it would be that the business would pass inter-generationally to his son Cameron, and would also be protected particularly against claims by non-bloodline members, or less euphemistically, his son’s spouse.
Ed: Well, that is it in a nutshell, isn’t it, that he has got these two risks, I suppose, one risk is that the wealth leaves the bloodline. And the business name leaves the bloodline, would be the other risk that he has. Now, to an extent it is very, very difficult to ensure that the business stays in the bloodline but it is not exposed at all to the risks that come with the relationship break down, that is, you can’t have your cake and eat it.
Ed: And, we did push Wayne on this a little bit. Really what we are asking Wayne, Martin is “what is important to you?” and he has come up with these two things, but behind all of this of course is he is desperate to leave a legacy for his family, he doesn’t want somebody else coming in and ruining it.
Martin: That’s right and this business. It is his legacy in more ways than financial isn’t it.
Martin: This really is his personal legacy.
Ed: Well, a lot of business owners would sell the business wouldn’t they, they would sell the business and the legacy would include the financial rewards from sale. He is choosing not to sell the business he is choosing to pass the business on and a lot of private business owners will do this and yeah there is a lot of emotion wrapped up in that.
Martin: Quite right, and it’s an interesting conundrum in more ways than one in that yes we have got this control dynamic and our key role as lawyers in this process is to help protect that asset the best we can as it flows down the generations and to help do them in a tax effective way. But of course a bunch of other issues spin off for Wayne. For example, how is he going to fund his retirement, because if he is going to give this thing to his son, well, how is Wayne going to live, or is he going to expect his son to support him? And in which case, you know, his exposure to the business will continue right into his old age. So that is certainly an issue where we would bring a financial planner into the process. But probably for me, the biggest question that this raises and it is such an obvious one, is ok, we know what Wayne wants, but does his son want it, and if we are not rock steady on that point, that is a problem.
Ed: You are absolutely right, because if we stopped here and let’s be honest some clients do not want us to speak to their children, or their spouse or the business partners. Some people don’t want that we are their advisors, quite apart from who advises the rest of the family. But if we just stop here and we say ok this is the problem as defined by Wayne, really, we are looking at control of the trust and benefit from the trust and we are working on the clauses and refining the wording to make sure there is an element of control and benefit passing on to Wayne’s son Cameron, but not so much control and benefit as to completely expose the wealth in the trust to the consequences of a potential relationship breakdown. But let’s not stop there, because we could easily offer up ideas around control and benefit and wording. But you are right, we need to speak to Cameron because at this point in time we actually don’t know what Cameron wants. Does he actually want to have control? If he turns around and says “I don’t want to have any control at all, anyway, I just like working in the business, I don’t want to work “on” the business” well then part of this problem is solved isn’t it because he doesn’t need to have control, well let’s take out a whole load of risk then.
Martin: That’s right, or he’s interests might lie elsewhere and it sounds crazy. But it is not uncommon for us to find that when we open the bonnet on these issues and we speak with fathers and sons, mothers and daughters in a confidential forum where they can speak their mind, they will often say the kind of things to us that they have struggled to say to each other like “Dad, err, I actually don’t want the business, I would rather that you sell it, fund your retirement and I will share in that when you pass on”. And it is just amazing how on these most fundamental things that you know sometimes there cannot be a meeting of the minds.
Ed: Look, I love that point Martin, that is really true isn’t it. We will often see as well as the family grows and we go into new generations there are often more people in the family. Keeping it in the bloodline becomes increasingly complex, okay there is one son Cameron. How many children does Cameron have? Ok, keep it in the bloodline, well let’s say Cameron has two children, one wants to be in the business, one doesn’t. Wayne may say “well then it goes to the one that wants to be in the business”, that one has children, two children. The other one who didn’t want to be in the business has two children. There are now four at the next generation, how do we know which person is going to want to be in the business and which person is not going to want to be in the business, it is not necessarily the case that it follows in a linear sense. As families grow, different people in the family want to be involved in the business and not be involved in the business. Are your kids going to become lawyers? Who knows.
Martin: I hope not. (Martin laughs)
Ed: I hope not! But we don’t know who in the extended family might want to be a lawyer. It’s the same in this business, different people want different things and I think you are absolutely right, just because Cameron is “involved” and showing some interest, that doesn’t meant that Cameron wants his father’s life.
Martin: Quite right Ed, and we are now really getting to the nub of it. So long story short, after three hours with Wayne we exhaustively socialised all of these aspects and we just came to the very strong conclusion that what we need to do is to speak with Cameron and we need to test whether dad’s plan is going to work for Cameron and his family and we need to test whether this, you know, let’s call it a ”rule from the grave” strategy that Wayne has around this business, in perpetuity, going down his bloodline, lets really test and interrogate whether that is the right strategy. So, next week we are going to have that discussion with Cameron and we are going to report back to you and I am sure it will be very interesting.
So hey, we are on the last leg now, we have finished with Wayne and we are back to our soap opera, “Business and Pleasure”, over to you Ed.
Ed: It is still running and we have reached episode four, to re-cap.
Martin: I am amazed (Martin laughs).
Ed: (Ed laughs) I am amazed, I am amazed you tolerate this.
Martin: You have just been hiding all of the derogatory emails (Ed laughs).
Ed: That’s right, all the Gino haters.
Just to re-cap our characters here. There is Gino who owns the coffee shop named “The Moral High Ground” selling ethically sourced coffee beans. Gino is aged 60 he has recently been diagnosed with an illness. His wife Lena is aged 60. Lena is Gino’s second wife, Gino has got two kids from his first marriage, David who is aged 32, works in the business and married to Annie, they in turn have two young children. There is Emily, Gino’s daughter who is aged 26. She is in a de facto relationship with Samantha. The complexity here is that Gina and Lena have an 18 year old daughter named Susan, who is a student. So, as we have discussed previously this blended family scenario that can sometimes cause a bit of tension around succession planning. Re-capping on what has happened. Well, there has been a conversation around the business premises and transferring the business premises out of Gino’s name, into his self-managed superannuation fund and we spoke about how to do that tax effectively. Then we spoke about Gino being diagnosed with an illness and needing to make sure there are back up controllers during his illness to make sure that things are still running smoothly and maybe he should only have one self-managed super fund for the business and a separate self-managed super fund for his other assets, perhaps with Lena and / or with other family members. Now I want to talk about what would happen if Gino passed away and you raised this about binding death benefit nominations and are they the solution?
Martin: And yeah, I heard a lot about this Ed and certainly in our practice we’ve seen superannuation disputes spike up as the next wave of claims that we are seeing in our client base. I guess now we have compulsory super here in Australia people often have a significant asset base in super and yeah the claims seem to be flowing thick or fast and frankly whether or not there is one of these binding nominations. But hey, it would be great if you could firstly explain to our listeners what is a Binding Death Benefit Nomination and then give, I guess three pieces of advice to somebody like Gino. I guess if this was the day before he died what would you say to him.
Ed: Sure, well a Binding Death Benefit Nomination is a document that is rather like a will for a super fund, because of course the entitlements in a super fund do not necessarily form part of someone’s estate to be dealt with, with their will. Sometimes this document is called other things like a Binding Death Benefit Nomination rule or a notice and that sort of thing. But it is a document that is signed, dated, witnessed, specifying to whom a benefit should be paid and in what manner, i.e. a pension to a spouse.
Martin: And Ed is this right, you have, whether it is a self-managed super fund or a retail fund you would have one in either scenario?
Ed: You generally would but, that brings me to my three tips I suppose. Tip number one, read the Deed. When I say read the Deed, with a self-managed superannuation fund there will be a dead, a rule book, that rule book sets out what happens if somebody passes away, is there a Binding Death Benefit Nomination form? Does it need to be renewed every three years? Does it continue indefinitely? Who can you nominate: spouse, kids, your Estate (so it is distributed under your will), anybody else, anybody who lives with you or is dependent on you. That is a rule set out in the Deed which you have got to look at and also whether there is an existing pension, read the pension Deed. What happens to the pension if you pass away? Does it automatically go to somebody else?
Martin: So without reading that Deed you have not got a hope right because you simply don’t know what to do to ensure that things pass as you wish.
Ed: You would have no idea, if anyone signed a Binding Death Nomination form and they haven’t read the Deed, go read the Deed and make sure it is valid. If you are in an externally managed fund, if you are with an industry fund for example, they are probably not going to send you the Deed but you can get a read of the product disclosure statement and you can ask the fund for the form you can normally download it from the website. These forms are normally pretty well explained. There is a big problem with them though, is that generally they lapse every three years, they are not indefinite and very often they will only allow you to nominate your first choice recipient. For example, if you want to nominate your spouse, but if your spouse passes away before you, your children, that form isn’t sophisticated enough to deal with those two different levels. It will just say “who do you want it to go to” and if that person has passed away you have got to make another form to make sure it goes to the right people.
Martin: Wow, so you have got to be really on to it. This isn’t a “set and forget” and this three year thing that is a real worry isn’t it. So what, you have got to diarise every three years to do a new nomination?
Ed: I know, well apparently somebody told me the other day you have got to do a tax return every year, (Martin laughs), I know it’s hard, so hard, but you are right, most people don’t think about doing this every three years. They don’t think about getting their will out every three years, all these things. Yeah you have got to do it at least every three years, if the form is going to lapse every three years otherwise it is not binding upon the trustee and they will decide to whom they are going to pay your entitlements if you pass away. Now, that is point number one: read the Deed to find out what you can do.
Point number two is think about tax. You might not know this but there is often a lot of tax payable on the death benefits, which is the phrase we give to money that is paid out of super when someone passes away. Generally speaking, I will give you a rule of thumb, if it is paid to a spouse or young kids, no tax. Paid to adult kids, generally there is going to be some tax. As a ball park, life insurance, ball park 30%. Any money that you have contributed to the fund that is not after tax money, i.e. not an extra contribution, ball park, adult kids, 15%.
Now there are a lot of complexities to this, there are some subtleties around a lump sum versus an income stream. Some people can receive an income stream or a pension from your super and there can be an offset on the marginal tax rate when it is income coming from the super fund. There is also another kind of payment which is called an anti-detriment payment which is payable to some people and is a bit like re-paying all of the tax that you have paid in super during your lifetime. They can re-pay that to your beneficiaries. It is very, very complex. So read the Deed and get some tax advice before you sign the form.
Martin: And sorry Ed, again I will just quickly interject, that’s a massive one isn’t it, the number of people who we would see would nominate in favour of adult kids. They end up paying hundreds of thousands in tax that they just don’t need to pay that is a biggie and we see that a lot.
Ed: We do, we do and it leads into the third point which is do you actually want to sign a binding nomination.
Martin: So, you don’t have to, it might be a strategy not to sign it?
Ed: Yep, and look, people are uncomfortable with this, we as lawyers we like certainty. We like to say this is going to happen and here are the consequences. But a lot of people don’t want to bind the trustee. If it is a self-managed fund and the person in control of the fund if you pass away, is someone that you absolutely trust. You might place your trust in that person to exercise their discretion and decide who should receive the super, which maybe they decide to pay an income stream to a spouse. Maybe the children are, I don’t know 16, and it would be tax free to them if they received it tomorrow, but it might not necessarily be tax free for them when you pass away. So maybe you don’t want to bind the trustee, you want to leave the trustee with some discretion to assess what is happening at the time.
Martin: Wow, they are three fantastic points Ed, thank you, and just quickly, if, and this might be very hard to answer because we don’t have a lot of knowledge about Gino, other than the kind of skinny fact situation that you have dreamed up. What should Gino do, what would be your advice to Gino?
Ed: My number one piece of advice to Gino would be, to not necessarily just have one self-managed fund. Because I get the impression that Gino wants to ensure that the property itself goes to certain beneficiaries even if the rest of his wealf, “wealth”, that’s the English in me, coming up with the “F”, wealth, goes to perhaps Lena. He might say “oh look Lena and I we built up the wealth I want to make sure she is looked after, that is a priority. But this property I want to make sure my son can continue running the business”.
Martin: And that is because it is a critical asset for the business.
Ed: Exactly, so you might separate that out.
Martin: Yeah, well look that is wonderful advice Ed. If only Gino had heard that before he passed away, he’d have been in a much better position. But hey thank you everybody, we have come to the end of our fourth episode. We do hope that you have got a lot out of it and we look forward to you joining us for episode five. Thank you.