How do business, or goodwill, licences work?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘How do business, or goodwill, licences work?’. If you would like a link to the video please let me know.

As usual, a transcript of the presentation for those that cannot (or choose not) to listen to the presentation is below –

The key idea, and it’s probably not dissimilar to some sort of service trust arrangement, is having the two arms of the business being conducted by different entities.

An example, particularly for those that are currently in a partnership of individuals is that if the right to run the business was able to be utilised by someone else or by another entity, for example a partnership of trusts, then there's arguably the ability to create a licence arrangement that would say that the partnership of trusts has the ability to do everything to conduct the business and to enjoy the fruits of conducting the business, the income that’s generated for the payment of invariably a relatively nominal fee back to the actual original owners of the business.

Now the idea of that arrangement obviously, particularly from an asset protection perspective is that, if you can get the risks associated from running the business away from the individuals, that’s obviously a very attractive thing.

It also gives the partners the ability to think a little bit strategically about how they would want that income derived. So in other words, rather than earning the income in their own name, they have the ability to earn it through a company or trust environment.

Until next week.

What are some of the issues with a professional partnership ‘rolling over’ into a company structure?

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘What are some of the issues with a professional partnership ‘rolling over’ into a company structure?’at the following link - http://youtu.be/pIwVOyEAeBA



As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

The rollover at face value is always the easiest way to go, because it removes one seriously significant transaction cost being the capital gains tax implications. The problem though is that when you dig a little bit deeper, that is a little illusionary at times, particularly for a group of individual partners rolling over to a company. The attraction of taking that style of rollover can be diminished by the fact that they will still individually own the shares in the company.

So if it's a standard rollover, for example a partnership to a company under Division 122B of the Tax Act, ultimately, the individuals would still actually own the shares in the company. What they will have done is taken away 100 cents in the dollar, if that’s the right way to say it, of income that they’ve historically been enjoying and replaced that with 70 cents in the dollar and an imputation credit or franking credit.

This can lead to a situation where people, having done a rollover are then looking to restructure again anyway. So effectively it's a double restructure because they'll want to divest themselves individually of shares and make those shares be owned via some sort of discretionary trust arrangement.

It can also lead into a range of other potential restructures, dividend access shares and these types of arrangements that certainly get away from the overall goal in the first place, which was to simplify arrangements and get true limited liability.

The other areas (and some of these touched on in other parts of today's program) that obviously need to be taken into account include that while there is no stamp duty on unlisted shares, there is certainly stamp duty in every state moving from an individual or partnership arrangement into a company arrangement. That's a significant transaction cost that cannot be avoided in any way, shape or form currently and needs to be paid upfront effectively to get yourself into the new structure. The other ancillary costs that go around an incorporation include issues such as payroll tax, which is inevitably a lot more expensive if you've moved into a company structure as opposed to remaining in a partnership structure.

Until next week.

Company owned insurance policies for business succession

We recently had an adviser seeking more detailed comments about company owned business succession insurance policies.

In particular, feedback was requested about the specific reservations with insurance policies for business succession being owned by a company. In summary, and with thanks to co View Legal director Tara Lucke, we provided the following reasons:

1   while capital gains tax (CGT) should not be payable on receipt of life insurance proceeds, it will be payable on any total and permanent disablement or trauma proceeds that are paid to a company. In contrast, no CGT should be payable on receipt of the insurance proceeds where the policies are self owned;

2   there can also be significant practical difficulties in extracting insurance proceeds from a company to the appropriate recipient. This is particularly important when the main purpose of the policy is for an equity payment, as opposed to debt cover. Again, where the policy is self owned, the exiting principal or their estate will receive the proceeds directly and none of these practical issues will arise, as long as an appropriate agreement is implemented;

3   where insurance proceeds need to be accessed by the exiting principal (or their estate) this is generally only achievable via a share buy-back or dividend. A dividend will likely be tax inefficient and generally a buy back will also have an inefficient tax outcome for the following reasons:

(a) the consideration will be split between an assessable capital gain and a dividend, which restricts access to the full benefit of the CGT 50% discount and small business CGT concessions;

(b) while a company may be able to pay the proceeds to the exiting shareholder/s as a partially or fully franked dividend, this will use franking credits that would otherwise have been available for distributing profits; and

(c) the surviving owner/s will own 100% of a company after a share buy-back, however their cost base in the shares will not have increased;

4   insurance proceeds will be under the control of the remaining director/s of a company, in contrast with a self owned or superannuation owned policy where the estate directly receives the benefit of the proceeds; and

5   finally, the legal documentation required for company ownership is comparatively complex to all other policy ownership approaches.

Until next week.

Family courts' power to adjust inheritance rights

With thanks to co View Legal director Tara Lucke, this week’s post looks at the widely publicised High Court judgment of Stanford v Stanford (2012) HCA 52 from the end of 2012 and the Family Courts’ powers to potentially displace the distribution of assets under an estate plan. A link to the full copy of the decision is as follows: http://www.austlii.edu.au/au/cases/cth/HCA/2012/52.html

As many will be aware the brief facts were that Mr and Mrs Stanford had no children together, although both had children from previous relationships. The Stanford’s had both crafted their estate plans to provide for their respective children, without making provision for each other, other than a life tenancy in the family home. The house was owned solely in the name of Mr Stanford (he had bought it before the marriage), although it had been lived in by the couple for over 40 years.

Critically, Mrs Stanford appointed her children, not Mr Stanford, under her guardian and attorney documents.

Due to ill health and mental incapacity, Mrs Stanford was moved into residential care. Despite no suggestion that the couple were anything other than happily married, on her mother’s incapacity Mrs Stanford's daughter initiated proceedings in the Family Court (as Mrs Stanford's legal guardian) seeking orders for equal division of the marital property (the main asset was the family home) between Mr and Mrs Stanford.

The initial Judge ordered that Mr Stanford pay a fixed sum of approximately half the value of the marital property to Mrs Stanford, which payment would have effectively passed directly to her guardians. To fund the payment the family home would have needed to be sold, forcing Mr Stanford to leave the house.

Mr Stanford appealed the decision, however Mrs Stanford passed away before judgment was delivered by the Court of Appeal. The Court of Appeal ultimately decided that Mrs Stanford's legal personal representatives should receive the fixed sum upon the death of Mr Stanford. This decision effectively altered the distribution of Mr Stanford's estate (which Mrs Stanford had agreed with while she had capacity) under his will as the house (following his wife’s death) would have otherwise passed to his children.

The decision of the Court of Appeal was ultimately set aside on appeal to the High Court, on the basis that the order was not just and equitable. However, importantly, the High Court confirmed that the death of a party to a marriage ‘does not transform the nature of the claim (for example, into a claim by the beneficiaries of the wife’s estate)’.

In other words, the right of a guardian or attorney to commence property settlement proceedings was effectively confirmed, even where (as here) they would have no entitlement to challenge the estate of their step father.

The decision highlights the risks that in some cases, particularly in relation to blended families, estate distributions may be fundamentally altered by way of ‘pre-emptive’ proceedings through the family law court.

Until next week.

Final post for 2012

With the annual leave season starting in earnest over the next couple of weeks and many advisers taking either extended leave or alternatively taking the opportunity to catch up on things not progressed during the calendar year, last week’s post will be the final one until early 2013.

Similarly, the Twitter and Linkedin postings will also take a hiatus until the New Year as from today.

Thank you to all of those advisers who have read, and particularly those that have taken the time to provide feedback in relation to, the various posts.

Additional thanks also to those who have purchased (via donation) the various versions of ‘Inside Stories’ – the consolidated book of posts.  An updated version of this book, containing all posts over the last 3 years should be available in the new year.

Very best wishes for Christmas and the New Year period.

Single v multiple testamentary trusts: The ‘hybrid’ approach

Recent posts have looked at various aspects of the debate in an estate planning context of whether a single or multiple testamentary discretionary trust (TDT) will provide the best outcome.

As highlighted in those posts, there are a myriad of issues that should be taken into account and often the approach that best suits the client may change over time.

One mechanism that we have seen used with increasing regularity is a ‘hybrid’ approach.  Under this model, elements of both the single and multiple testamentary trust solutions are combined.

For example:

1              a set percentage (or certain assets) are distributed to a TDT which includes all lineal descendents as potential beneficiaries (i.e. the ‘head’ trust);

2              the control of this ‘head’ trust is jointly shared amongst various family members and any nominated independent trustees;

3              a separate TDT is also established for each child and their respective lineal descendents;

4              a separate percentage share of the estate, or discreet assets, are then gifted to each of these ‘sub’ TDTs; and

5              normally each child would control (perhaps jointly with a co-trustee) ‘their’ TDT.  Each child would also have the ability to independently regulate succession of control for their trust.

As in any estate planning exercise the appropriateness of the hybrid approach will depend on a range of issues including the exact objectives of the client, the overall family dynamics and the nature and value of the wealth involved.

Until next week.

Single v multiple testamentary trusts: The debate continues

Last week’s post set out a number of reasons as to why a single testamentary discretionary trust (TDT) might be the preferred structure, even if there are multiple family members to benefit under an estate plan.

As noted there are a number of factors that need to be taken into account in any particular estate planning exercise and there are a wide range of the factors that might be relevant in deciding to implement multiple TDTs.

Many of these factors have a practical focus and can include:

1              the different geographical locations of the children - particularly if one or more children live overseas;

2              poor relationships between siblings (or their respective spouses) meaning that jointly controlling wealth is likely to further fragment family dynamics;

3              the risk profiles of each child’s investment outlook;

4              the underlying nature of the wealth – for example, if particular assets are earmarked for the sole control of a particular beneficiary;

5              differences in the ‘life cycle’ of each beneficiary – for example if one child themselves has young (or no) children whereas another child has adult children, their investment objectives can look quite different;

6              the desire to have different control mechanisms in relation to different children – for example one child might be the sole controller of their TDT whereas another child may have one or more co-trustees, or indeed, not be a trustee at all; and

7              there can be a myriad of difficulties that arise if a single TDT is utilised and it is still running in, say, two generations time both in terms of overall management of the structure and how income and capital is ultimately allocated.

In the next post we will look at one further variation on this debate, the so called ‘hybrid’ approach.

Until next week.