Rural Succession Planning 1
What is succession planning? More than a Will it is a plan for the future What is your plan if: A key member of family ends up in hospital for an extended period? Mum or Dad die unexpectedly? and will: you and the family be ok financially? the farm be safe and remain in the family? all of the children agree with the plans for the farm? 2
What makes a good rural succession plan? Not just a Will, but a joint family decision. A plan to pass farm and off-farm assets to the next generation. Requires input and expert advice from: Family spouse and on and off farm children; Lawyer; Accountant; Financial planner; Banker; and Other trusted business advisors. 3
Protection through insurance Helps to make the succession plan work if something unexpected happens Health insurance assists with medical costs. Income protection insurance pays bills whilst unable to work. Total and permanent disablement insurance assists if unable to work again due to a permanent injury. Life insurance to reduce debt, provide funds to purchase another property or provide for off-farm children. Accident insurance some insurance cover if you can t get life insurance. 4
Your Will Transfer of your assets Do you transfer direct to beneficiaries to keep it simple? Do you use testamentary trusts for more protection? Some assets can t be given under your Will: Assets in superannuation. Assets in a family trust. What happens if you have no Will at death? Assets are distributed under a statutory formula that is usually inappropriate. 5
Enduring Power of Attorney (Living Will) Who should make decisions for you if you are incapacitated? If no EPA the Public Trustee and the Adult Guardian does. Who will have the power to manage the farm if you are temporarily incapacitated? 6
Testamentary discretionary trusts What is a testamentary discretionary trust? A discretionary trust created by your Will when you die; Your assets are held by that trust and controlled by the trustees. What are the benefits of a testamentary discretionary trust? Asset protection; Tax savings; Control; and Flexibility. 7
Example of tax benefits of a TDT Option 1 Option 2 $5,000,000 estate asset Lump Sum transfer to Spouse Testamentary Discretionary Trust $5M invested by Spouse personally $5M held in trust for Spouse and 3 children Est. return on investment (5%) $250,000 Assume top marginal tax rate 45% Income tax approx. $86,000 Medicare levy $3,750 Post tax income $160,250 Est. return on investment (5%) $250,000 Income per person $62,500 Assume only income for income tax Income tax approx. per person $12,000 Tax offset approx. per person ($50) Medicare levy per person $950.00 Post tax income per person $49,600 Total post tax income received $198,400 Total net benefit of Testamentary Discretionary Trust approximately $38,150.00 8
Income tax benefits of a TDT Selective distribution Discretion to trustee to distribute income to beneficiaries with lowest marginal tax rate. Children under the age of 18 Unlike other unearned distributions from trusts, adult marginal tax rates apply; At least $18,000 tax free distribution available. 9
Asset protection Risk losing assets if assets left to spouse, or to children absolutely, if: Spouse remarries; Spendthrift/wasteful beneficiary; Bankruptcy; or Relationship breakdown. Assets held in a well structured TDT are not at risk of claims from a beneficiary's former spouse, a beneficiary s creditor or their trustee in bankruptcy. 10
Control of assets in TDT Distribution of assets of TDT is at the discretion of the trustees in accordance with the rules set out in your Will: You should appoint trustees who you trust; There may be safety in numbers ie more than one trustee; You can set the rules for the distribution of assets; You can limit the right to receive assets to your lineal descendants. 11
Flexibility of asset distribution The TDT trustee has flexibility to allocate income and capital to beneficiaries to take into account the prevailing circumstances at the time: Better tax outcomes for beneficiaries; Preserve estate assets from claims by outsiders; Provide flexibility as to distribution of different types of assets (eg off-farm assets) to different beneficiaries. 12
Case Study How rural succession planning can help 13
Sam and Maria Sam Farmer age 65 Wife Maria; Children John, Michael and Susie. Assets: Family farm inherited by Sam from father; Sam had borrowed to purchase 2 nd from his neighbour; Farm equipment; and Personal items. 14
Family circumstances Farm situation: Sam and Maria were semi-retired; Son Michael lived on family farm with his family; Son John lived on 2 nd farm with his family; Daughter Susie lived in town - assisted with bookkeeping in exchange for payment of her car and other expenses. Sam had no life insurance. Sam died unexpectedly after a motorbike accident whilst working the farm. 15
Sam s Will and superannuation Sam gave the two farms and equipment respectively to sons Michael and John the bigger farm with some debt; Sam gave his personal items to Maria and made her the beneficiary of his superannuation; Sam had intended to get around to doing something for Susie, but never got around to it. 16
After Sam dies Complications with Sam s Will: Susie is disappointed to be left out completely and makes a family provision claim against Sam s estate. Unclear how assets were to be distributed between Maria, Michael and John. Maria let her boys have all the farm assets, expecting they will look after her. Provision made for Susie: Maria and boys agreed to make provision for Susie from Sam s superannuation and a loan against the farms. This left Maria s retirement savings short, but she expected the boys to look after her. 17
That s not the end of the problems Brothers have a falling out: The farms are not big enough to support two families and Maria and to pay the interest on the debt; John gets a part-time job in town and Michael takes a further loan to keep the properties running; Financial pressure causes both Michael and John s relationships with their wives to break down. Marital breakdown: Michael and John do not have enough equity to borrow, to pay out wives they are forced to sell their farms. Maria is homeless, Michael and John working for wages. 18
How a succession plan may have helped Insurance: Sam could have organised life or accident insurance policy with a financial planner to support Maria. Family succession plan: Sam s intentions clearly articulated to the family; Susie given opportunity to voice her concerns, which are dealt with by the family - she does not need to make a family provision claim against Sam s estate. 19
How a succession plan may have helped Farms and equipment left to a testamentary discretionary trust to Maria, Michael and John: Maria s interest in the farms are protected for the rest of her life; Farms are protected from claims by Michael and John s wives during divorce. 20
For more information Juanita Maiden Associate Commercial Practice Group jmaiden@macdonnells.com.au (07) 4030 0691 Arabella Kullack Lawyer Commercial Practice Group akullack@macdonnells.com.au (07) 4030 0695 21