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 represent Mills Oakley’s Private Advisory team.
So welcome again everybody we’re here at episode 2 of our season about Wills and estate planning with my colleague Troy Palmer. Welcome Troy!
Troy: Thanks Martin.
Martin: So hey! If you listened to the last episode, we spoke about why it’s so important for business owners and their spouses to have a Will and we talked about some of the consequences if you die intestate, and in particular the ramifications from an asset protection and tax perspective.
What we’re going to focus on now is a concept that I think us lawyers probably take for granted, but it’s often a bit of a revelation for our business owner clients, and this is the concept of what assets are estate assets, in other words, what assets pass under your Will or intestacy and what assets are non-estate assets which pass outside the Will. So Troy, over to you!
Troy: Thanks Martin, so it sounds quite simplistic in terms of what estate assets are and what non-estate assets are, however, the consequences and the impact is quite important, well, very important. With a Will, as we discussed in the last episode, you can only bequeath, or give away, what you own. So typically in a Will and what we own, it includes personally owned assets. So that might be cash in the bank that’s in my own name personally, it might include real estate that’s in my own name personally, it might include shares that are in my own name, anything that I own personally I can give away via my Will and they’re what’s known as estate assets.
Now, non-estate assets can include things like assets that are held in a family trust, so, I see clients that come in from time to time that accountants might have set up a trust structure and it may hold business assets, it might hold a holiday home, it might hold shares or any other types of assets and the client will say to me, “I’ve got this particular property which I want to bequeath to both of my two children when I pass away, can you build that into my Will?”. Then we’ll go and do a title search on that particular property and see that it’s actually owned via a trust, so, it can’t actually be bequeathed via a Will and clients aren’t always aware of that because they are structures that have been set up for very good reasons in terms of the asset protection and the tax effectiveness that it might provide in terms of being held via a trust, but, you can’t actually ‘Will’ them.
There are some things that we can structure so that the end result is the same, but the means of getting there is quite different. Family trust assets are non-estate assets, superannuation which we’ll touch on in a separate episode for the most part is a non-estate asset. Jointly owned property is a non-estate asset, so if I owned property jointly with somebody else and I pass away and in my Will I say that I want that jointly owned property to go to the RSPCA, that’s not going to have any effect in my Will or any effect at all if I pre-decease the other co-owner because it’ll automatically pass to the other co-owner by way of survivorship. The distinction between estate assets and non-estate assets for business owners in particular is a very important aspect.
Martin: And in fact if they’re structured right, business owners will often have very few estate assets. I remember when Richard Pratt died a few years ago, he only had a very modest amount in his personal name that went under his Will and of course the vast fortune was in family trusts and the like.
Troy: That’s right, and that can be quite a valuable strategy in terms of asset protection whilst the person is alive and potentially tax effectiveness too. Also, when that person passes away and there is a possibility such as in Richard Pratt’s situation that the estate will be challenged. In Victoria at least, New South Wales is a bit different or a lot different, you can only challenge estate assets, so they’re assets which are in one’s own name personally, so, if I’ve got most of my assets tied up in a trust or if I’ve got many of my assets jointly owned with another party, for the most part if I pass away those assets can’t be challenged, so it’s a very important distinction and for business owners, you’re right Martin, there’s quite often the Will might have a limited effect on their assets because they don’t own any assets, they’re tied up in trusts and the like or jointly owned or they may well be governed by a buy-sell deed or a business succession agreement whereby when they do pass away, the assets aren’t covered by the Will, the insurance that comes into the Will may well be covered but not the business assets.
Martin: And that’s a really kind of key estate planning tool, isn’t it, in terms of looking at the assets, looking at which are estate assets which are non-estate assets and thinking about is there or isn’t there scope to move around the estate assets and get them into different structures which might protect those assets from a claim.
Troy: Exactly right. So one of the most important initial steps that we undertake when we have new clients in particular is to get a solid understanding as to how they’re structured and again it may sound simplistic but quite often the client themselves may not be totally aware of what their structures are and what agreements they have or haven’t got in place. It’s like a fact finding mission for us the lawyers, usually in conjunction with a client’s accountant and client’s financial advisor, just to get a really solid understanding as to what the assets are and how to structure because it really impacts the strategy that we’ll implement for that client in terms of getting that solid first step underway.
Martin: And there’s a key point there too, isn’t there, about working closely with the advisor and working with the accountant because I can only imagine without that collaborative approach, things might fall between the gaps.
Troy: That’s right. So to take a holistic approach in terms of estate planning, it is very important because we may be seeing the client for the first time where the accountant however or the financial advisor has worked with the client for a number of years and they’ve got a really solid understanding as to how they’re structured and family dynamics and a solid understanding as to the business and the like, and us as lawyers, we can sit down and look at constituent documents of the company and look at all the agreements from a legal perspective, but unless we’ve got that background that the accountant and advisor can provide, without that you don’t provide a full solution for the client.
Martin: So say if I die and all of my assets are in a family trust. What happens? Who gets my assets?
Troy: It’s a good question – one of the most important things is to look at the Deed of the family trust. Have a look for who the appointor is and have a look at the clauses in the Deed that deals with the succession of the appointor. So find the appointor of a family trust, who assumes that role upon my passing or upon my incapacity.
Martin: Sorry – I think you’re just about to explain. Tell us who is the appointor? What is that role?
Troy: The appointor’s role is to have the ability to hire and fire the trustees. So the trustee manages the trust, however the appointor, depending on the terms of the deed, can usually hire and fire that particular trustee. So in my estate planning, I need to think about who is going to take that role of appointor if I pass away, and also obviously importantly as well, who is going to assume that role of trustee? That’s where it comes back to the structure again, and, is my trustee an individual? Is it myself and/or somebody else? Or, is there a corporate trustee there? So, a company that’s the boss of the trust and are there shares that are owned in that particular trust that I can bequeath via a Will? So, to answer your question Martin in terms of who takes the assets in the family trust, no one really takes the assets as such because the trust continues to live but it’s more about who will assume control of that trust should I pass away, so, who’s going to become the trustee and who’s going to become the appointor.
Martin: That’s great Troy, thank you.
Well look, this has been a really interrogation of the question of estate assets vs non-estate assets and I hope that it’s given everybody some food for thought about their own planning and to think about their own structures – and I guess where assets sit in those two baskets for our listeners personally.
Next episode we’re going to talk about one particular basket of non-estate assets which is superannuation assets, and certainly, it’s clear to us at Mills Oakley that superannuation claims are going to be the next biggest wave as compulsory super means that many people now have a significant asset held either in a DIY super fund or a retail super fund. So, thank you Troy.
Troy: Thanks Martin.
Martin: And we’ll get back together soon for episode 3 of our season on Wills and estate planning. Thank you.