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

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 these 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 by 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 de facto 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 de facto 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.

 

Danielle Hart, CPA is an Associate Director at Marin Accountants, and Jane Koelmeyer, BA LLB is Principal of Jane Koelmeyer Family Law & Mediation. This article is for general information only. It does not consider any of your personal objectives, financial situation or needs. Before taking any action, you should seek appropriate professional advice.

 

20 Comments
John
August 31, 2024

Bear in mind much of what has been said here like the "Five top tips" and subsequent comments needs to be counter balanced by all the high fees being charged by all the professionals involved. Such as accountants, financial advisers, lawyers, auditors etc etc . I could go on and on.

Leesa Swain
August 21, 2024

Some excellent points raised in this article! We think its best to start in the conversation about wealth transfer with the key people who will be involved, well before the event takes place and to strategically prepare by putting in place adequate mechanisms ahead of time. This can be as unique as circumstances so always best to ensure appropriate advice, including financial advice is sought.

Lucille McLaren
August 20, 2024

Very interesting article. I recently bought Noel Whittaker’s book Wills, Death & Taxes. I got the shock of my life at how much is involved for your executor and how much one should do to ensure your estate has minimal loose ends.

Kevin
August 20, 2024

This is frightening.The letter to the expert in the paper. Single female pensioner.Full pension and $160K in super.75 years old. Owns her house.Due to inherit $300K.What can I do to keep the full pension,I don't want to lose any of it.

You'll lose ~ $530 a fortnight from the pension,then a list of things that she can do.Ending in ,or you could spend it on yourself and have a good time.

Lose ~ $13,800 a year,have $460K to draw down on and have a good time.The money might never run out .Why do people do this to themselves.I'm coming into money,what can I do to avoid losing any pension.The mind boggles.This happens over and over,more money for myself,no thanks,not if I lose a bit of pension

Graham W
August 18, 2024

My wife and I have recently set up a family trust with a company as trustee. We currently have a SMSF which is mainly comprised of tax free benefits to pass on. However we do not wish to rely on our wills to pass on our funds. We are in process of transferring our SMSF funds to the new trust. Most of our non-super cash funds will also go into the trust. A trusted family member and his equally trusted wife are directors of the new trustee company.
As a retired accountant and financial planner I have seen too many wills contested. My wife is not confident managing our funds and I will continue to do so, then in time pass on the duties and shares in the company to my son and his wife.
Our estate to pass on will probably and hopefully be chattels, a vehicle and probably a RAD from a nursing home.
I am not worried about tax as we can each have a taxable income of over $35,000 using old folk offsets and I can't see us getting that high. Investments transferred in specie to the trust should have a high value for CGT purposes if and when they are sold. My wife and I are in our seventies and hope to be around for many more years but we feel getting this sorted now and allowing for the passing of our assets in the future is important, let alone having certainty when we can no longer look after things ourselves. We do not get the Age Pension and due to the poor health system are adamant about having ample funds available to deal with medical issues for both ourselves and our family.

Dudley
August 19, 2024

"My wife and I have recently set up a family trust with a company as trustee.":
Where is the advantage over an investment company with each shareholder having a different class of share?
What advantage over shareholders lending assets to company?

"we can each have a taxable income of over $35,000 using old folk offsets":
$31,005
https://paycalculator.com.au/

Graham W
August 19, 2024

The family trust has unlimited beneficiaries to stream income to, including a bucket company. Making our future estate recipient's shareholders is not a great idea in my opinion. The problem is when would you make them a shareholder? Once you do that, they must disclose that to Centrelink. No such problem if they have no control over the trust or a beneficiary's loan account in the trust. The tax-free amount from 01/07/2024 for over 67-year-olds is actually $31,888 if they are a couple. Good enough for me.

Dudley
August 19, 2024

"The tax-free amount from 01/07/2024 for over 67-year-olds is actually $31,888 if they are a couple. Good enough":
Checking accuracy using https://paycalculator.com.au/ :
2 * $252.33 = $504.66 tax liability
2 * $31,002 = $0.00 tax liability

"Making our future estate recipient's shareholders is not a great idea in my opinion.":
Some (all?) shareholders and be non-voting. Company constitution, and voting rights, can be amended.

"The problem is when would you make them a shareholder?":
When the company sells them a share.
Trying to find the technical name for circumstance where a shareholder buys a $1 non-voting share class share of a company with much more than $1 in assets and receives much more than $1 in annual dividends.

"they must disclose that to Centrelink":
Where distribution from trust, or dividends from company, to welfare beneficiary is $0, no effect on benefits.

Wildcat
August 19, 2024

Dudley, this is the worst of most worlds. You can use a company but only as a last resort. Max CGT, min flexibility. Bucket companies under trusts can work well but only as a last resort when you run out of tax rates. Best shareholder of a bucket company…another trust.

Dudley
August 19, 2024

"company ... Max CGT":
Company capital gains are company income and net income is taxed at company income tax rate.
The amount of the tax paid is added to the company franking account.
When company pays dividend, franking credits are subtracted from company franking account and imputed to the dividend recipient as franking (tax) credits (tax already paid).
Dividend recipient pays at their marginal tax on dividend plus franking credit (gross income).
Company tax pays 0% tax, merely withholds tax for dividend recipient. Like witholding employee income tax.

"min flexibility":
Company can pay whatever retained profit, including none, together with franking credits, to whomever, usually shareholders.
This facilitates income buffering.
A (or many) shareholder(s) of the same share class might not want to receive more than a specific amount of dividends. Example, not more than would increase their income to exceed the tax free threshold.
The company can retain profits until the shareholders want more dividends.
The company tax rate is less than the largest personal tax rate, so leaving profits in company results in less tax.
Company is not required to pay profits as dividends.

David
August 15, 2024

Preserving wealth in families over generations is not simply about handing over money or assets. What needs to be done is to educate the younger generations as to how to manage wealth and preserve it. Much is made of the difficulty of the young purchasing a home, but if the bank of Granddad and Grandma can help their grandchildren in jumping on the property ladder, that should take some pressure off the public purse in helping those who do not have such help available. Tax considerations are extremely important. Personally, I would prefer to leave very little wealth to be inherited at my passing, having given it away while I am living. I certainly do not wish to die with any superannuation left as such.

Jane Koelmeyer
August 16, 2024

Education about wealth management and preservation is important. Understanding the utility of financial agreements as part of asset protection and preservation is a part of this education.

Kelly Buchanan
August 15, 2024

Thank you for this great article. I do have a question about the following bit:
"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....."
Can you explain the strategy "to reduce the tax by ensuring the benefits pass to an estate"? Does leaving your super to your estate negate that nasty 15% tax?

Danielle Hart
August 17, 2024

Hi Kelly
Thanks for your kind words.
When the benefits are passed directly to your Estate you avoid the 2% medicare levy. Unfortunately not the 15%, but it can be a material tax saving.

Kelly Buchanan
August 17, 2024

Thank you for clarifying that. Much appreciated.

Aussie HIFIRE
August 15, 2024

Some good advice here. I would add on that people should be including their financial planner in the conversation with accountants and estate planning lawyers, and all the professional involved should be talking to each other.

There are a number of scenarios where a planner might recommend moving super from an older spouse's name to a younger spouse, for example to increase Centrelink entitlements, which may not be in accordance with the rest of the estate plan.

Similarly if an estate planning lawyer wants the clients superannuation to go to the estate in order to distribute to a beneficiary who can't receive the funds from superannuation, this needs to be communicated to the client AND planner to ensure that the correct paperwork is completed.

Everyone involved needs to work together to get the required outcome, and unfortunately relying on the client to do this is far from foolproof.

Danielle Hart
August 17, 2024

Yes, I agree Aussie HIFIRE.
We always enjoy collaborating with our clients financial advisors and lawyers to make sure we are all working towards the same outcome for our client.

Bily
August 15, 2024

From someone that has just gone thru a dispute, let me tell you the background

Dad and his second wife drew up (virtually) identical wills - giving the assets initially to each other and then when the second died, splitting the assets evenly between the two families.

Only problem was that step mum changed her will after Dad's death, and gave it to her kids only.

So first lesson, you can't trust your spouse.

Next lesson, don't be in a hurry to finalise the estate. You have an additional tax entity "the estate of the late..." - use it to crystalise capital gains, and pay tax thru the estate (it may be nil as there is a tax free threshold, which the beneficiaries may well have used already - eg with their salary). Also, by delaying settlement of the estate, no-one owns those assets, so Centrelink doesn't count them when assessing the pension for the beneficiaries until they are distributed.

Philip Rix
August 15, 2024

Hi Bily,

That's a very good point you raise and reminded me of a potential solution when I was once still practicing in this area.

If your step Mum had also entered into a Deed with your late Dad agreeing not to change her Will would this have been enforceable? Perhaps that's a question for the estate lawyers in this forum or the authors of the article.

Jane Koelmeyer
August 16, 2024

Hi Philip,
The law does recognise the legal doctrine of mutual wills. There have been some recent developments in this area in Victoria. It is a dynamic area of the law that is evolving to keep pace with the reality of modern families. Therefore, it is wise to see a specialist wills lawyer.

 

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