Next generation time to step up

The next generation: it’s time to step up

By Chris Maher, Marin Accountants

As baby boomers settle into retirement, more and more children and grandchildren are staring down the barrel of inheritance – be it money, property, shares or other assets. But it can be easy to overlook an important aspect of this wealth transfer: how the inheritance will be managed.

Inherited assets come to their beneficiaries via different types of group structures. These structures can pose significant tax issues, and yet are often not discussed amongst the family. As a result, many children inherit assets and structures which they know nothing about.

So if you are a child or grandchild set to inherit a group structure, it’s time to pay attention!

What is a group structure?

A group structure is a term used by accountants and other professionals to describe the entities that are controlled by one or more people of a family group. Entities can include companies, discretionary trusts, family trusts, unit trusts, hybrid trusts, partnerships and self managed superannuation funds. These entities can exist for a number of reasons, but the main reasons are running a business, investment purposes such as holding shares and/or property, and providing for retirement.

First, get interested

If you stand to inherit a group structure, the first thing to do is get interested. Talk to your family to gain as much information as possible on what you will be inheriting. Don’t stop at the dollar signs but ask about the structure and the assets and liabilities that exist within them. It can be as easy as inheriting the family home, which you may then use as your main residence. Or, it can be as complex as inheriting a unit trust that owns a property, with the unitholders being a discretionary trust and a company. Knowing these details in advance is much easier than discovering them later, when emotions may be running high.

What are your responsibilities?

Let’s say you have just inherited some family assets, a company, a discretionary trust that has a trustee company, and a self-managed superannuation fund that you are a member of. In the past, you were happy to let you parents manage these assets – and pay the bills! Now, it is the executor’s responsibility to lodge income tax returns with the Australian Taxation Office (ATO) and documents in relation to the Australian Securities and Investment Commission (ASIC) on behalf of the estate.

But if you are a director of a company or trustee company, you will be required to lodge the documents with the ATO and ASIC. If this is the case, are you aware of your responsibilities in relation to the ATO and to ASIC? These are important questions to ask now, as there are legal ramifications if you do not perform certain roles that may become your responsibility. Burying your head in the sand is not advisable.

Getting the right advice

To understand your group structures and responsibilities, it’s important to have trusted advisors such as accountants, legal advisors and financial planners. Your parents and their advisors are a great place to start, as they will know the intricacies of the existing structures. They can guide you on the most cost and tax effective methods of accessing your new wealth. For example, you may inherit a company that has $1M cash in the bank. Why not just pull the money out and buy yourself a new house? But you’ll find decisions that seem simple can have serious, adverse tax consequences – so use your advisors.

You also need to understand the cost of such advice. If you are unsure about, for example, the costs of preparing financial statements and tax returns, or the costs of legal advice for a lease negotiation, talk to your parents who currently pay these costs. While costs may not seem cheap, the old adage “short term pain, long term gain” certainly applies here.

Plan your own succession

So, you now understand the structure you will inherit, you know what your responsibilities will be and you have access to some trusted advisors. The next question is what happens to your assets, and those you have inherited, when you pass on? Is your family wealth protected, so it stays within your immediate family? Or can your recent ex have a claim to the family assets? While no one likes to think about their own death, it is best to plan for it while you are happy and of sound mind. Again, talk to your advisors to ensure your wishes will be met wherever possible.

Understanding different types of entities, your roles and responsibilities and, ultimately, managing your family wealth can be daunting. Be prepared to learn and surround yourself with expert advisors – then enjoy, not worry about, your inherited wealth.