Martin: Welcome to 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. So hello everybody and hello Ed!
Ed: Hi Martin and thanks for introducing us, but, Martin I can’t continue or say another word until you give a disclaimer.
Martin: Thank you and thanks for kind of jumping in so quickly on that, I know in prior episodes I have kind of got excited and I might of you know “oops”, given a bit of general advice before we disclaimed and that makes me nervous, so, thank you Ed, I am going to jump straight into 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. Well there we go, I certainly feel better now.
Well Ed, I can’t believe it, we are on episode 6, so the last in our Asset Protection Series.
Ed: That’s right, we can stop being negative in the next series, we get all of this tricky stuff out of the way, but it is important, that is why we are talking about it now, but it is nice to just lay these foundations and then move on to perhaps more exciting topics.
Martin: Yeah, that is absolutely right and I guess it is probably opportune for me now to foreshadow that our next six episodes are all going to be about the other end of the spectrum; they are going to be about exiting your business. So, how can you build and lock in value in a sustainable way, not just on the cusp of selling your business, but in the years before hand, and we have got some really fantastic strategies that have seen our clients exit not only for maximum value, but also with minimum risk, so we are very excited about the second series.
But hey, thank you as ever everybody for your emails and comments on the podcast. I am just delighted to be getting such great feedback and we could have read you out a number of emails this week but there was one that hit Ed’s desk that particularly kind of caught my eye, do you want to talk about that one Ed?
Ed: Are you talking about Brin?
Martin: Brin from Toorak, yes, yes I am.
Ed: You know what, look, it’s a bit weird, she says “that Cameron sounds like he will come good in a few years, his wife Angela just doesn’t know how to look after him”.
Martin: And this is Cameron, the young man that we spoke about last week, Wayne’s son.
Ed: Yeah, he stands to receive control of a large business… “If Angela ever leaves him, I am available.”
Martin: Is that what she said. Wow.
Ed: I don’t know what that means.
Martin: Well at least he has a plan B.
Ed: For counselling? Available for what?
Martin: Well, look, who knows, but, it sounds like a very attractive offer I have got to say.
Ed: I guess it is, look speaking of Cameron, we had that chat with him last time and we got a report back to Wayne on what the strategy is now.
Martin: Yeah, so I might just re-cap for all of our listeners, we’ve now, over six episodes, we have been counselling Wayne our millionaire business owner client and in fact our favourite client. Pleased to say that Wayne is back in the studio with us today we will introduce him shortly.
So you might recall we started off by looking at some asset protection for Wayne and that he wanted to buy a home for his son, Cameron. We helped him to structure that up right to protect that asset against claims. We then did the same with Wayne’s business, so we helped him to restructure his company getting the valuable shares out of his own name where they are exposed to claims and getting them into a family trust for Wayne; so much better for asset protection, much better for tax, it was an amazing result if I might say so myself. And then we moved into the interesting bit, which was really talking about Wayne’s goals for the future, the next five, ten, fifteen, twenty years and how that looks for him as a business owner.
Long story short, Wayne’s goal is to keep his business in the blood line. He inherited the business from his own father and he wants that to continue. He wants his son to take the business and be the steward of that family business going forward. We then met with Wayne’s son Cameron and boy that was interesting and we found out in fact that Wayne’s intuition about Cameron’s marriage was quite right; the risk of transferring this asset to Cameron is: what if he gets divorced? We could lose half of the family wealth in the subsequent proceedings and boy it was a salacious reveal last week. We heard about all of the suspicions that Cameron has about his wife and her extra-curricular activities, so we now know what we have got to do. We have got to transition this business from Wayne to his son Cameron and we have got to do so in a way that protects against a family law claim. So hey, he is here with us in the studio again, welcome back Wayne.
Wayne: Well, hello Ed and Martin, what a journey it has been. I have been up and down the rollercoaster and I just knew it. I knew there was problem with Cameron’s wife. I can barely bring myself to say her name. You know, I knew there was a problem and it has turned out to be right. But, I still want to help him, I still want to get the business to him. You know, I am in my sixties now and I am not in the best of health. Cameron runs this business, I‘ve got to get it to him and I have got to protect it, and I am just hoping that you can tell me how to do that.
Ed: Look, Wayne, firstly thank you so much for instructing us in relation to this project that you have, it has been a real honour talking to you and Cameron about your goals and your concerns. Just want to acknowledge Wayne that this business is really unrecognisable to the one that you received from your father, you say you inherited it but really you incorporated your company and you’ve really taken this to the next level and I just want to make the point to you Wayne, that a lot of the success in this business is you and your abilities and the way you’ve put these processes together to develop all of this value. That said, Cameron has been working incredibly hard as well hasn’t he, he has had a lot of success and he really feels ready to be the main man, just as you feel ready to take a step back and I think that is really fantastic, the two of you have kind of a shared perspective on this.
But yes there are problems around Cameron controlling the wealth that sits behind this business and so what we want to do is recommend to you a structure for control of the trust, not a structure for who will control management of the business. We think you are ready to take a back step there and let Cameron do that, but let me just say there is no bullet proof strategy when it comes to family law risk. If Cameron is not going to get in place an agreement with his wife Angela that is binding, would bind the Court, and is reasonable, and he needs to get specific family law advice about any such agreements, like a pre-nup type agreement I am talking. We are now looking at control and try to protect the wealth for the blood line.
Now, let me be clear, this isn’t about a dodge, this isn’t about trying to get him off a problem or trying to trick anybody into thinking this trust is anything other than it is. This is a trust for your bloodline. He is a member of your bloodline, as all future grandchildren will be, there are other people in the family you may wish to include. With that in mind, our advice to you Wayne is that you cannot put Cameron in control of this trust. Currently, whilst there are a number of risks that everybody is potentially susceptible to, you’re the “safest person (in adverted comas) to be controlling this trust. You don’t need to pass control onto Cameron now, he trusts you, he has faith in you, he just wants to be able to step up and run the business. Now, that doesn’t mean he has got to run the trust, control the trust, it should be you Wayne, during your lifetime.
Martin: And if I could interject there and we will talk about phase two of the strategy once Wayne passes on or loses capacity. But I think it’s a really important distinction that you make Ed, between management control of the business and control of the equity, the share capital in the company which is held through the family trust, because what Wayne can do right now is retire as an employee, right now he can resign as a Director to get himself off those liabilities, he can put Cameron, his son in as a Director, and indeed as the Managing Director to do all of that stuff. And, Cameron can receive profit distributions from the trust, you know, right now, again there might be some family law aspects around that that we can talk about. But to all intents and purposes he can give all of that now to Cameron. But there is simply one thing that he will not give, which is control of the family trust which holds the business equity. Because of course if he does that, then that equity becomes matrimonial property and it becomes exposed to a claim by Cameron’s wife.
Ed: Well this is it, and you know there is no messing around with family law, you are going to need some pretty specific advice around this, as will Cameron, but let’s assume a worst case scenario which would be if Cameron controlled this trust the income that’s produced, at the very least, and possibly even the shares themselves, the wealth and the shares, will be exposed to the risk in a property settlement between Cameron and his wife Angela, and I draw that distinction again Wayne, there’s the resource: the money that is distributed out of the trust; then there is the asset itself: the shares.
Now, we don’t think Cameron should have control so what happens if you have control Wayne, and then you pass away? Well, there are a whole number of potential ways of doing this, our recommendation to you having heard about the two people you trust, your close mate and your accountant, we think that if you pass away you should put them in control and Cameron, but allow your two chosen independent controllers to be able to out vote Cameron. Now some people would say Cameron should have no control, others would say he should have complete control, at this point in time, we think that if you passed away last night Wayne, it should be your two independents plus Cameron, with the two independents able to outvote Cameron. Now, if they felt he was ready to control this trust, they could of course resign in favour of Cameron having complete control. If they felt that Cameron was doing a terrible job as a co-controller, you may consider giving them the right to sack him as a co-controller, which gives them a lot of power. We will drill down the detail with you another time but that is our recommendation Wayne.
Martin: Absolutely, and I would hasten to add that every scenario is different, this isn’t our cookie cutter or default recommendation for everybody’s family. But having been through the process, we have met with Wayne, we have met with Cameron, we think this is right for their family and particularly what makes it work I think is, the high level of trust and the very long term relationship that Wayne has had with the proposed independent controllers.
So yeah, there it is everybody we have got a solution for Wayne which will see him achieve his goal of keeping this business in the blood line; it will take very significant steps to mitigate the family law risk for Cameron and it will allow Cameron to step up and have executive control now and to run and grow this business like he knows he can. So there we have it, that’s the solution for Wayne. I would hasten to add that this is just one solution, we could have done this a number of different ways for Wayne and his family and I probably won’t go into the detail of all of those other solutions, but certainly we thought this was a good solution for Wayne and his family.
I would hasten to add that when we are talking about family law risk as a particular category of risk, nothing is ever bullet proof and the Family Court has very, very wide ranging powers to look through structures and to reinvent the rules when it seeks to apportion property on a separation. So, nobody will ever give you a guarantee in relation to that, however, with this type of control structure which sees Cameron, the son, genuinely as a one out of three voter, it’s very, very helpful in terms of mitigating that family law risk.
The other way to go, as Ed said, would be to do a binding financial agreement or sometimes called a prenuptial agreement, again there can be legal sensitivities with these documents but it can be a very useful additional layer of protection if you follow the rules which are very kind of stringent and proscriptive around the spouse getting independent legal advice, etcetera, etcetera. Ed, any final comments on Wayne and his family?
Ed: No, I think you have absolutely nailed it, it is incredibly complex and quite fluid, because in the future things may change, with the different risks and the different objectives.
Martin: And that is another great point too, and maybe I will kind of finish on that point before we move onto the soap opera, these plans are not set and forget. You know, it is just like business strategy, you don’t set a business strategy and then put it in the draw and then plough that thorough for the next ten years. You constantly reassess by reference to the factors and the fact situation at the time. So for Wayne and his family this must be fluid and we would be looking to check in with him annually on this plan because things change. Cameron’s marriage might improve or it might end. And so we do need some fluidity in the plan because at the end of the day, the Will that you need or the estate plan that you need or the business succession plan that you need, is not the one that you write today it’s the one that happens immediately before you die. So, we don’t want to seem too morbid, we will leave you with that thought. And now we will move on to the final instalment, unless it gets resurrected next series, we will see, we will do a popular vote on that, the final instalment of our soap opera “Business and Pleasure”. Ed.
Ed: Thank you, well, recapping on the background and characters. Gino, 60 years old and owns the coffee shop “The Moral High Ground” which sells ethically sourced coffee has been unwell. He has been very worried about passing away and Lena his wife aged 60 is also very concerned. Lena is Gino’s second wife and Gino has got two kids from his first marriage, David who is aged 32 and married to Annie. David works in the business and they have two young children of their own. There is also Emily, who is aged 26 and in a relationship with Samantha. Lena and Gino have a daughter between them, Susan, aged 18 who is a student. Now what have we done for Gino, well, we have managed to get his commercial property, the business premise, into his self-managed superannuation fund. He has transferred the business to David. Just transferred it across and accessed the small business capital gains tax concessions when he did that. He did that by transferring it into a trust and passing control of the trust to his son. The big issue was, now that the property is in the self-managed super fund, who will control that self-managed super fund, who will benefit from the property if Gino passes away? Well, Gino did pass away.
Martin: Poor Gino.
Ed: But he was very smart, he had a plan.
Martin: I had grown attached to Gino over the series.
Ed: Well, Gino will do that too you.
Martin: I’m feeling a, you know, a gulf.
Ed: Gino is the sort of guy that you look up to, because he faced up to these problems.
Martin: He did, he put it all in place and took good advice before he passed on.
Ed: He did. Well, let me tell you what Gino did. He made sure that Lena was going to have a roof over her head. They jointly owned their home, and that passed to Lena automatically when Gino passed away. He had already transferred the business into the trust to be controlled by his son David, and he saw this as: David has worked in the business all his life, it is really David’s business now.
He had two self-managed superannuation funds. One of them had a lot of wealth invested, control of that superfund was resting with Lena and Lena is making the decision as to who receives that superannuation now that Gino has passed away. Lena has decided to pay a pension to herself a tax free pension. The other superfund had the business premises, Gino was considering making David and his other children members of that superfund, so that the property could stay in super but when he spoke to his children they actually didn’t want to own that property at all.
Martin: Oh. Okey Dokey.
Ed: Now there is Susan, who is the daughter of both Lena and Gino, she was happy not to receive anything, she said “mum will look after me”. Her mum is looking after her.
Martin: Well, she is still only young.
Ed: Yeah. Then there was Emily. His daughter from his first marriage. Well Emily did feel uncomfortable with relying upon Lena for an inheritance. Eventually she volunteered, she said “look, I don’t want to seem to be demanding an inheritance here, but if Dad wants to know what I think I would rather receive a smaller amount now guaranteed, then potentially a larger amount later on when Lena decides to give it to me, because you just never know. There might have been a bit of tension between Lena and Emily in the past.
Martin: Yeah, and we have said this before in previous episodes, it is a complex and delicate kind of balancing of interests, isn’t it?
Ed: It is.
Martin: Yeah, between the child from the first marriage and the spouse and Gino having obligations to both of them.
Ed: That’s right, so what Gino decided to do is, given that David didn’t want to have the property locked up in super, because of course David is in his 30’s, he doesn’t want all of this in super. He wanted to be able to sell the business premises if he wanted to and use the money now. So the property is to come out of the super fund, into Gino’s Estate and to form part of a trust in the will. That trust will be co-controlled by David and Emily, so whist David totally controls the business, he is going to have to pay rent to the trust controlled by David and his sister Emily and between them they can decide how to allocate that income that has generated on the property and if the property is ever sold, they can decide how to share it between themselves and their family.
Martin: And that is really nice I think from the perspective of protecting Emily because otherwise she is in a really difficult position isn’t she? Lena her stepmother is controlling the wealth and you know Lena does have her own child, I can see why Emily might feel very, very insecure about a solution that doesn’t get some of her father’s assets out to her now.
Ed: And it protects her if David turns around and says “I am deciding to get out of the business and sell the property” because it would be very unfair for David to receive the property and the business if he then just goes and sells it.
Ed: But of course he needs to be able to use the property so he has got his lease in place and he co-controls the property with Emily. If he sells, you would expect David and Emily will come to an agreement as to how to share the proceeds.
Martin: And what about the youngest daughter, whose name, just escapes me for the moment.
Martin: Susan! Thank you, what about Susan, because she’s not getting anything and in one sense she is not equal to her siblings, right, but I mean, tell me about her perspective.
Ed: It is pretty tricky, she is fairly young, 18 years old and a student, we don’t know what is ahead of her. She has shown a lot of promise, she might want to be a lawyer, dream big, that’s what I say.
Martin: Oh the lucky thing,
Ed: Or, if she can’t do that she might be a doctor. This is a different dynamic for Susan because you know, not that Lena is the wicked stepmother or anything like that but there is a natural bond there and she recognises that Lena needs a roof over her head, a nest egg and some income stream, she is going to trust Lena to provide for her as well and Lena does provide for her, Lena always makes sure Susan is OK. It’s a little bit different for David and Emily, they just don’t know what the future holds.
Martin: And they are that much older. I get it. Look, if I can pat us on the back, I suppose, you know as with Wayne and his situation, I think that’s a fantastic result for this family.
Ed: Also just make the point of tax on super, because Lena is receiving a pension that is tax free income. With the property that went into super, it’s not grown, since Gino put it in there, it was an after tax contribution and purchase, we have not got a tax problem on any growth since it has been in there. Assume a very small growth and a very small amount of income since it has gone in there.
Martin: Wow, what a result. Well hey everybody we are signing off now, this is the end of episode six, series one. We very much look forward to coming back to you soon with series two, which will all be about business exits, so, goodbye until next time.