News – “Succession Matters”

“Succession Matters”

 

A Newsletter for Clients, Associates & Friends of The Corporate Will Company

June 2013

Our inaugural edition brings you articles on:
- Income Protection Insurance
- Superannuation Beneficiary Nominations
- Reviewing your Will
- Business Succession

 

TAKE A MINUTE

Take a minute today to think about the most important things in life.  Is it money? Is it career?  Is it family or loved ones?

For many or most of us it’s family and those close to us that matter most.  So why is it that so few of us plan properly for when we’re no longer around?  Around half of eligible Australians have no valid Will, which means that millions of dollars in personal wealth could finish up in the wrong hands.

Instead of seeing estate planning as a positive strategy leaving behind choices, certainty and minimal conflict, we apparently find lots of reasons not to plan for the inevitable.  We don’t plan on dying (of course); we don’t want to pay for it; we don’t want to spend the time; we don’t want to talk about it.  Whatever the reason we don’t “get around to it”.

Take a minute today to think about what sort of legacy you will leave.

WHAT ARE YOUR MOST VALUABLE ASSETS?

Most of us when asked this are likely to answer “our house” or “our super”.  Perhaps your answer may be “our business”.

You may know the value of these and their importance as an asset springs immediately to mind.

The fact is though for most of us the ability to earn an income is our most important and valuable asset.  After all it’s what produces and sustains everything isn’t it?

Yet Australians, through either lack of awareness or nonchalance, fail to protect their income whilst they protect assets that, if lost, have potentially less effect on their lives.

For example 89% of Australians have motor vehicle insurance, and 77% have home building insurance.  Only 6% have income protection insurance and 2.5% have trauma insurance.

A vehicle is stolen every seven minutes in Australia, and there are more than 10,000 house fires every year.  In contrast one in six working men and one in four working women are expected to suffer a disability between age 35 and 65 that will result in six months or more off work.  Two out of five will suffer a critical illness i.e. heart attack or stroke before age 65.

Depressing yes, but fact.  And with an income of say, $78,000 per annum ($1,500 per week) you can expect to earn $2,843,823 between age 40 and 65 - a far greater potential loss than the average stolen car or house fire!

These statistics provide very good reason to look at either implementing or reviewing an appropriate income protection plan.

 

SUPERANNUATION – DO YOU KNOW WHO GETS YOUR SUPER?

Most Australians have superannuation assets and in many cases these form a major part of their wealth.  It is not always understood, however, that superannuation assets are non-estate assets.  In other words, they cannot initially be distributed to beneficiaries through your Will, but through beneficiary nominations.

These nominations can be either binding or non-binding.  If non-binding the trustees of the super fund have an obligation to consider the position of all dependants and give them the opportunity to lay claim to your superannuation assets.

Whilst they have an obligation to take your nomination into account trustees have some discretion as to where payments are made, being limited to pay benefits to dependants defined by the Superannuation Industry (Supervision) (SIS) Act 1993.

Where absolutely certainty as to distribution of assets is required, such as in ‘merged’ marriages and where there are vulnerable beneficiaries, a binding nomination will remove trustee discretion. Caution must be exercised with these binding nominations, however, as when the trustee’s discretion is removed they are prevented from taking into account taxation and Centrelink implications.  In most cases they also lapse after three years and it is vital to ensure that they are reviewed and renewed regularly.

There are often advantages in directing benefits to your estate (Will) where they can be protected in testamentary trusts.  These trusts provide tax advantages and valuable protection against attack from creditors.  They can also assist in protecting your legacy by keeping your estate in your bloodline.  They are especially useful where there are potentially vulnerable beneficiaries (i.e. people with a disability, people who are financially immature, or where drug dependency exists).

Not all ‘retail’ superannuation funds allow binding nominations, and where you have a Self Managed Superannuation Fund (SMSF) a binding nomination can be made provided it is permitted by the Fund’s trust deed.  The SMSF nomination does not have to be reviewed every three years.

All too often the appropriate nomination of beneficiaries is overlooked when estate planning is implemented with the result that, at best, the effectiveness of the plan is substantially reduced.  At worst the omission can lead to conflict, challenge and the unnecessary loss of estate assets.

 

REVIEWING YOUR WILL – WHO IS YOUR EXECUTOR/TRUSTEE?

Many of us think that our Will is up to date, but we may be making a dangerous assumption!  It’s often the case that when we ask a client “who’s your estate executor” we are met with a rather vague look or the comment “I’m not sure”.

Sometimes there is uncertainty about what the executor does, and often a Will has not been reviewed for so long that, understandably, details of the appointment has been forgotten.

The estate executor ‘administers’ the state.  In summary this means that they have the responsibility of arranging the funeral, applying for probate, calling in assets and distributing the estate assets and submitting the estate tax return.

As estate assets must be looked after until distribution is made, the executor is also a trustee.  This is not to confuse them with the trustee of a testamentary trust, whose role is likely to be longer term and may be given to other individuals or entities.

Wills tend to be “done and forgotten” with the result that the nominations of the executor may no longer be appropriate due to their age, location, lack of capacity or a change in your relationship with them.

So who should you nominate?

Your spouse?  Where the relationship is sound, many couples appoint each other.  The surviving spouse will normally employ a solicitor, accountant or trustee company if necessary to do most of the work.  The surviving spouse remains in control.

Other family members?  There may be other family members who would be willing and able to do the job.  Watch out for age, capacity and location.

A Trustee Company?  A trustee company is an alternative where there are no family members who are up to the task.

The executor’s role can be a considerable burden in difficult estates.  Where the estate is complex, is likely to continue for an extended period, or where there is the possibility of conflict, a trustee company or law firm may be the best choice.

My Solicitor or Accountant?  Some people appoint their solicitor or accountant.  Remember, like a trustee company, professionals will charge a fee for their services.

A combination?  Some people appoint two or more executors who are to act jointly.  This can help share the responsibility and avoid disputes.

Remember:

  1. You should always ask someone before naming them as your executor.
  2. An executor can also be a beneficiary.
  3. Unless you choose a trustee company, you will need to appoint a “substitute” executor to step in if the person you appointed cannot do the job.
  4. If your executor will be required to carry on your business, special care will be needed both in selecting the right person and ensuring that your Will gives your executor sufficiently broad powers to do the job.

 

BUSINESS SUCCESSION – WHY SUCCEED?

 Despite the rewards of business succession planning, many business owners fail to attend to this vital area, usually due to its perceived and apparent complexity, and the difficulty in making some important decisions.

In what Yale University’s Dr Ivan Lansberg describes as “the succession conspiracy” business owners recognise the need for succession but ultimately ‘conspire’ with fellow business owners, employees or family to do nothing - at their peril!

Identifying the real benefits of succession planning assists in providing the motivation to begin.

 

  • The business is an asset
    It is important to recognise that your business is an asset.  With appropriate strategies this asset can be increased in value in accordance with a predetermined plan for succession.
  • Realising the value of the asset
    Without an appropriate succession plan it is likely that your business value will “die on the vine” as opposed to being realised for your personal retirement objectives and/or the benefit of your beneficiaries in the event of your death.
  • Control over destiny
    All businesses have a succession plan either by design or default.  The difference is that a designed succession plan will provide an exit strategy accompanied by dignity as opposed to a default plan which may well be accompanied by disaster.
  • Passing on a legacy
    Most business owners have a passion for their business and/or profession.  It may well be that you would prefer to see your business continue as a legacy, for the benefit of chosen employees and your family, as opposed to being subject to possible attrition.
  • Increasing the value of the asset
    Once a succession plan is implemented it is likely that the development of the plan and the consequential systems and structures it creates would increase the value of the asset for the benefit of all concerned.
  • Creating equity vs income
    In building a succession plan, emphasis is based on creating equity in the business as opposed to creating income for the principal, adopting the concept of the business owner as caretaker of the enterprise for future owners.  This results in greater business value.

 

And remember, it’s never too early to begin Succession Planning, for the future has a way of arriving unannounced!