At all costs, avoid giving the state control of your wealth and business, writes Ben Hurley.
Family dynamics are never simple, and drawing a will and making a plan for what happens after the death of a business owner is an especially sensitive matter.
However uncomfortable it may make the business owner to face such tasks, it’s nothing compared to the stress those managing the owner’s estate and business will face without one.
For the business owner, creating a will demands tough calls that can feel unnatural and wrong – in some cases assigning numerical value to the most important relationships in their life. In some measure they also face the uncomfortable reality of their own death.
For those that don’t make a plan, they will die ‘intestate’, which means without a will. Their wealth will be divided up according to varying state legislation, potentially contrary to their wishes.
Control of their business may pass to spouses or other family members who have no experience running it, instead of those the business owner believed would be best to manage it.
Who gets what: difficult conversations
ANZ Private Senior Estate Planning Lawyer, Brian Barlow, says it is not unheard of for businesses owners to pass away without even a simple will in place, creating enormous angst for business partners and family members alike.
“It happens more often than you would think,” Barlow says. “I’ve seen a significant number of business owners with multi-million dollar businesses, who don’t have estate planning in place.”
And that’s not surprising given 10 million Australians do not have a will (a little more than half of all the nation’s adults), comparison site finder.com.au found in 2018. ANZ Private senior private banker Susan Hawkins says there are a range of reasons people avoid planning for their estate.
- Assets can’t always be divided cleanly in equal portions, and estate planning can involve difficult calls about whether one sibling is old enough and responsible enough to handle the responsibility of an inheritance.
- There is the potential for conflict with spouses and children-in-law if assets pass only to blood relations.
- Some with younger children may find it too emotional to assign a guardian in the event of their untimely death, let alone choose a guardian from among siblings they respect equally.
- Cultural factors can also play a role, as some cultures are more comfortable talking about death than others.
It is reasons like these, along with a touch of apathy, that cause the majority of Australians to leave themselves and their families to not control what will happen to their assets on their death, exposing them to an unfavourable outcome.
“We get comments ranging from ‘it’s something I’ll do when I get the chance’, right through to ‘it’s not going to bother me because I’ll be dead and someone else will sort it out when I’m gone’,” Hawkins says.
Facing is better than avoiding
Leaving the division of assets to varying state legislation or government administrators is something to be avoided at all costs, Barlow says.
“[Such a process] may mean the intended beneficiaries aren’t necessarily who will inherit your estate,” says Barlow. “The other risk is your children might inherit too early and not be able to manage it. In your will you could say that they don’t receive control of their inheritance until they reach a certain age.”
Matters could also end up in the hands of the public trustee, which can be an expensive way of having the estate administered. Assets could be realised and cash dispersed in the interests of simplicity and fairness, even in cases where holding them longer term would lead to a better outcome for the beneficiaries.
Some people opt for a simple post office will kit, but these can have adverse consequences. Barlow gives the example of two people who have children from a prior marriage. They buy a house together as joint tenants and each do a do-it-yourself will leaving their half-share of the house to their children from their prior relationship. If one of the parents dies the house will pass in full to their partner because it is jointly held, and their children will miss out. A will kit also does not consider how to make the wealth transfer as tax efficient as possible.
How to start planning your estate
Good estate planning means preparing well before any trouble arises, coming up with an integrated approach to wealth transfer. An estate plan should begin with a face-to-face meeting with an estate-planning lawyer to map out what assets are owned and how. Not all assets are covered by a will.
“Sometimes people have non-estate assets,” Barlow says. “These are things like jointly held property, superannuation, life insurance, or assets in a company or family trust. Even though you can’t direct how those individual assets are passed on, you can in your will refer to the passing of control of those entities.”
Some people who have a principal residence that is owned jointly will sever the joint tenancy, instead owning the asset equally as tenants in common, Barlow says. This means they can dispose of the asset in their will without it automatically passing to the survivor.
Business owners should put more detail into their estate planning. A shareholders’ agreement or buy-sell agreement should be drawn up in addition to the will, which governs what happens in the event of incapacity, death or if a business owner wants to leave.
A range of risks involved in the passing of wealth should also be discussed. What happens if a beneficiary faces bankruptcy, has special needs, or is prone to gambling or drug addiction?
If a beneficiary’s marriage breaks down, is the testator (the person whose will it is) comfortable with a significant portion of the inheritance going to the ex-spouse?
A testamentary discretionary trust or a bloodline trust offer advantages for some situations. Such vehicles have a better level of protection against divorce or bankruptcy proceedings and can also be very tax efficient. But they must be carefully explained to beneficiaries and their spouses.
Quentin Fletcher, a former business owner and client of ANZ Private, broke the news personally to his future son-in-law that he was drawing up a bloodline trust.
Says Fletcher: “When I told my future son-in-law, I said, ‘This is to protect your children. Your children will be protected if they marry and separate. The same applies to you, but you’re not leaving my daughter so it doesn’t matter.”
Estate planning should include making an enduring power of attorney and an appointment of enduring guardian who can manage your finances, make legal, health and lifestyle decisions if you become unable to do it yourself, perhaps due to accident, stroke or dementia.
An advanced care directive can guide family members and medical professionals on how and when to use emergency and other treatments that may prolong your life but not necessarily your quality of life in situations where you are unable to make decisions yourself.
Pre-emptive family conversations are crucial
In some situations, a business owner creating a plan for their estate may feel there isn’t much need for discussion with their family – for example an equal distribution of wealth between three children.
Then there are situations that are more complex, such as leaving a greater share of assets to a particular child or more prescriptive instructions about which assets should be held or sold. In these cases, explaining the reasons for the decision (at the time they are made) with family members may reduce discord when the wealth is finally distributed.
A letter of wishes, while not legally binding, can also give an explanation to executors, trustees and beneficiaries about why the will was drawn up the way it was.
Having all parties as much in agreement as possible not only helps prevent arguments and relationship breakdowns, it can also prevent costly court actions if family members decide to challenge the will and seek to alter its terms.
Use all the right advisers and schedule reviews
An estate-planning lawyer will do most of the work, but other advisers have roles to play in effective estate planning.
It’s important that financial advisers or accountants talk to each other, Barlow says. This way they can be on the same page about things like tax efficiency and non-estate assets.
“By way of example, a lot of people have super in a self-managed super fund or a managed fund, and one of the important things to consider in line with estate planning is what superannuation death benefit nomination should be in place, if any,” Barlow says.
There are also tax issues surrounding who gets superannuation death benefits, Barlow says, and this can fall under the brief of the accountant.
Hawkins says even those with estate plans bedded down should consider reviewing them every two or three years to make sure the arrangements still apply – particularly those with complex instructions about how assets should be handled.
“It might not be the most fun conversation but it really does bring a lot of peace of mind just knowing there is a plan,” Hawkins says.
“You can even have funeral arrangements and quite a bit of detail in your will, and that can be helpful for others to have direction from you in a time of crisis. There’s some comfort in that.”