Sunday, February 11, 2024

Why just a will won’t cut it for your inheritance strategy

 Why just a will won’t cut it for your inheritance strategy

This is why Tony – who has a family trust, a company and property in a unit trust – needs an extra 25 documents to sort control of family assets after he dies.

As important as your will is, it may be only one of a number of documents you need for reliable estate planning.
That’s because many people have their assets held in companies, trusts and super funds. All those assets are controlled by that person, often along with their spouse, but are not actually owned by them. If they’re not owned by them, then they can’t be dealt with in the will.
Tony’s task is not so much dealing with the underlying assets held in these structures but rather how he goes about transferring control of those structures. Michaela Pollock
Take Tony for example. He has a home in joint ownership with his second wife; a discretionary trust that owns his share portfolio; a unit trust that owns a commercial property with a long-term lease; and a proprietary limited company that operates his business and leases the commercial property.
His trusts are just two of the almost one million trusts in Australia, and his companies are part of the over 3.3 million Australian companies registered with the Australian Securities and Investments Commission. That’s an awful lot of assets that can’t be automatically gifted by a will.
Tony’s task is not so much dealing with the underlying assets held in these structures but rather how he goes about transferring control of those structures.
It is facile to think that all that’s needed is to transfer the shares in the company and that effectively solves the problem of transferring control of the company – and if the company is the trustee of a trust, then control of the trust as well. This is fraught with traps.
If more than one person holds the shares jointly, only the first registered shareholder can vote the shares – which could lead to abuse. Better to give each person their own shares. But is the total number of issued shares able to be divided easily by the number of likely recipients? If not, then a share issue or share split might be necessary.
The will cannot appoint directors. Directorship is an office, and it is not possible for a company director to simply appoint their spouse or child as a director in their place via their will. New directors must be appointed in accordance with the constitution of the company, and most often with the approval of the other directors. Even the appointment of a relative as an alternate director ceases once the appointing director dies.
It may be possible to arrange for the appointment of a successor director in advance of a director’s death but that will need careful attention to the company’s constitutional requirements and director or shareholder approval in advance.
Even those arrangements carry risks such as if the successor director were to later be legally disqualified from holding company directorship. And what if the other directors were to try to undo the successor director arrangements before the successor could take office?
Control of a trust also needs careful consideration. If the trustee is an individual, trust assets will need to be transferred to a new trustee which in some states and in some circumstances can have major stamp duty issues. It’s better to arrange a new corporate trustee now so that all that needs to happen on the death of a director/shareholder is the transfer of shares and appointment of new directors – neither step attracting duty in most cases.
Most discretionary (family) trusts have an office called “appointor” or some such. This person can remove the trustee at any time and is really the “power behind the throne”. If the wrong person became the appointor, they could remove the trustee and undo all the planning related to the trustee.
The deceased’s ability to nominate their successor to that role depends on the terms of the trust deed, which should be checked and, if necessary, amended to achieve the right outcome at the right time.
It is possible to tailor company constitutions and trust deeds to ensure that the deceased’s wishes are met in respect of who is taking control of those structures and on what terms. This is particularly important where there is a blended family and the deceased wants to ensure that their second spouse is benefited while protecting the inheritance of their children from the first marriage.
In Tony’s case? Twenty-five additional documents are needed to ensure that control of the structures can be transferred in the desired manner and to set in stone how that transfer will occur.

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