Wealth transfer isn‘t just about ’saving it up and passing it on’

By Danielle Hart and Jane Koelmeyer

There has been a lot of ‘noise’ in the media lately about the dilemma faced by many families looking to pass on wealth and assets from parents to their children. It’s clearly a concern for many families, particularly those who have different – and often divided – generational perspectives on why this should be done, and how to best do it. As an accounting partner and a family law specialist, we’ve both seen how the wealth transfer process can work well, with inherited wealth helping family groups grow and thrive for generations. We’ve also seen how things can go horribly wrong, either through poor financial structuring, inaction or unwise decisions made around who should get what, and why.

Families aren’t like they used to be

Today’s families are complex, frequently involving second spouses, step-children, step-grandchildren and a wide variety of partnering relationships. The mechanisms to pass on wealth to these dependents are varied, can be complex, and frequently require clear communication, the right timing, right execution and unity amongst the family members, to be successful.

We often don’t see both these accounting and relationship perspectives provided to clients as one strand of advice. So here are some useful points from us, to give you that combined perspective and hopefully help you and your nearest and dearest navigate a successful path through the intricacies of wealth transfer across the generations.

Get the financial structures right, from the start

It’s important to set up the right financial structures, early on, if you as the ‘wealth holder’ are planning to transfer your assets across your family.

Setting up either discretionary trusts or companies are both options that are worth considering as useful structures to hold any asset or investment purchased. As well as offering asset protection and flexibility for distributing income, these can also provide continuity when ‘control’ is transferred from parent to child. When these are properly set up, there is no sale or transfer of assets and the entity continues operating and investing as before, but with the next generation making the investment decisions.

Structuring your family home ownership as ‘tenants in common’ rather than joint ownership can be an important mechanism for passing ownership of the family home to children. In this scenario, once one tenant (owner) dies, their portion of the property can pass directly to their estate. Their Will can then grant the surviving spouse a life interest in the home, so they can continue to live there. This helps to protect against the possibility that future partners of the surviving spouse might claim all or part of the property, instead ensuring that their children retain an interest in the home.

Many parents assist their children with cash and assets while they are alive to see their children enjoy them. But it’s important to properly document the intention and terms of this help. As a parent, you should consider who you want to help and on what basis. Is it a loan or a gift? Is it for your child, or your child and their spouse? A loan should be in writing, on commercial terms and complied with. Loans that do not meet this criteria are unlikely to be considered a liability.

Take a less taxing route

Minimising tax is also important in these situations. Again, having the right asset structures in place is critical here. Conversely, if the right structure is not in place, there can be significant capital gains tax and income tax liabilities that result.

Where assets (including businesses) and investments are owned via trusts and companies, there will often be no adverse tax outcomes when control is passed from parents to children. The children can be appointed directors when appropriate, and will already be general beneficiaries from when the trust was established. As the ownership of the asset is unchanged, there are no tax consequences.

Many people don’t consider the significant tax that can be payable to adult (non-dependent) beneficiaries who receive superannuation benefits upon the death of a parent. A member’s superannuation account is made up of both taxed and untaxed benefits. When these taxed benefits are directly paid out to a non-dependent, they are taxed at 15% plus 2% Medicare levy.

But there are ways to handle this: some strategies to reduce this tax include ensuring the benefits pass to an estate upon death, (not directly to the member), recontribution strategies, and ensuring all estate planning documentation is in order and includes permission to withdraw superannuation benefits for an incapacitated family member.

Managing those tricky interfamily relationships

Structuring is important, but it is not the only thing to get right. Family law – and lawyers – can look beyond the structure, and can alter these arrangements if necessary through the courts.

This requires thoughtful management and we would advise that when it comes to relationships and your financial future, “hope for the best and plan for the worst”.

Relationship breakdown and the financial consequence is a material risk that should be managed. Here are some ways to do just that:

Before you advance money to your children: ask them to sign a financial agreement with their existing or future defacto or married spouse. This should confirm the terms on which you will provide financial assistance, and your requirements for repayment during your lifetime, after your lifetime or if their partnership/marriage ends. Clarify your intentions in your will also. A clear will and associated agreement will help to ensure your wishes are implemented in future.

Before you or your children move in or marry your respective partners: consider whether they or you need a financial agreement to document how things will be dealt with if your relationship does not endure.

Get good advice and get it early. If you are concerned about your relationship or the relationship of a child, consult a specialist lawyer and an accountant as soon as possible, to assess whether there is risk there and if so, how to manage the relationship.

While these conversations seem tricky, they are increasingly common and accepted discussions particularly among those who seek certainty and clarity. In our experience, couples and their families will prefer to do these to avoid the compounding effect of protracted, costly and uncertain litigation upon the pain of separation.

Divorces, wills and other legal instruments

Legal documents are useful things but often forgotten about when it comes to keeping them up to date. You should make sure that all legal documents reflect your current wishes and your current relationship status.

If you have separated from your married spouse, then you should obtain a divorce to sever the legal relationship. There are some good reasons for this, painful though it may be.

If you have separated, the legal relationship and responsibilities of marriage endure until divorce. Significantly, the provisions in a will appointing your married spouse to be the executor or a beneficiary are not revoked by your separation, even if you have formalised a financial settlement. Similarly, the appointment of your married but now estranged spouse to be your attorney in the event of your incapacity is not revoked by your separation.

If you are separated from your defacto spouse, you should get advice urgently about whether and if so how you should properly document that your financial relationship has ended, and revise your will.

Wills often get forgotten about in times of relationship turmoil. Clarify your wishes by updating your will and documents such as a power of attorney. If you intend to benefit your child and their spouse, notwithstanding their separation, then make your intention clear in your will. This will help to avoid uncertainty or painful controversy about who you really intended to benefit. In a recent case, the Federal Circuit and Family Court of Australia considered the circumstances in which a will maker had left gifts to both her child and her former child in law.

Our final top tips for the generations

Five top tips to bear in mind in these situations:
1. Always consult your accountant when making investment and business decisions.
2. Before you hand over funds, check in with a specialist family lawyer and/or your accountant about how your contributions can be best protected.
3. Review your superannuation member statement to see if you are potentially gifting the ATO a small fortune on your death.
4. Ensure that your current relationship and wishes are clearly reflected in all agreements, wills and legal documents. Engage a specialist lawyer to review them regularly.
5. Plan ahead, always. Get advice early. Forewarned is forearmed.

Please do not hesitate to contact us should you have any questions.

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