For commercial families that own a medium sized or small business; protecting the family assets from the 3 d’s of business – death, divorce and debt – is important. As Perth business accountants we have to balance the desire for simplicity, tax, and asset protection strategies against each other.
Typically, the most simple solution creates the worst tax outcome and the worst outcome for asset protection. So, a quality tax accountant with a deep focus on families in business is important – with both great tax strategies to keep your assets safe together with business strategies.
Every family in business should have a clear asset protection plan in place that is reviewed regularly. And a good time to do so is after your year end statutory work is done (tax, audit, super) etc is completed and the new family situations are front of mind. This process is typically a “what-if” scenario that considers the family situation.
Example one: directors guarantee’s
The difficulty of a director’s guarantee is that it often lives much longer than the directorship. And they are often required by landlords, banks and major business suppliers.
As a guide we typically recommend that directors guarantees are not provided as they can ruin the chances of asset protection. We also recognize that often a director’s guarantee is the only way for a family business to move forward.
So when it comes to a directors guarantee we recommend:
- You keep a record of what directors guarantees you have given.
- You try and ensure that both spouses do not give the same guarantee. Typically a family will have a spouse who is “at risk” (the owner of the family business” and another spouse who is “low risk” (often an employee).
- You cap the amount of the directors guarantee.
Example two: loaning monies to the trading company
Often the family business will be financed by large loans from the family to the trading company. In this instance we recommend:
- The monies lent are documented with a formal loan agreement.
- The loan is from the “low risk” spouse – if the “at risk” spouse is pursued the loan recoverable will be an asset recoverable.
- The loan takes security against the family owned trading business with a registration on the personal property securities register.
If the family business turnover exceeds $20m (as it often does) the loan should be documented in any event.
Example three: the tax structure determines the personal liability
The way you have structured your tax affairs will be a primary driver of how your personal liability is impacted.
The following are typical examples of how to structure your tax affairs:
- The family home is owned by the “low risk” spouse.
- Investments are held away from trading businesses.
- Operate the family business through a company with a single director who is not the “at risk” spouse.
- Separate intellectual property and trademarks way from the trading company through a special purpose stand-alone entity.
- Engage the use of companies as trustee vehicles to simplify ownership.
Example four: death of a director
Typically the death of a director can have a significant impact on the family business. Even in a middle sized family business with over 200 staff – the founding director is typically very hands on in the business and the core of the business itself is the individual skill and capability of the owner.
To help with asset protection for a family business and death you should consider:
- A clear succession and estate plan outlining how the family should act in the event of death.
- Quality insurance positions in place (where relevant) to fund the family and business costs.
- Buy/sell agreements with key management personnel (where relevant) to transfer ownership.
- Strong communication within the family to understand the transfer.
- Making sure that single director single shareholder companies are avoided.
- Ongoing formal family communication strategies.
The succession plan is much more than a will. The use of trusts has created the need for an effective trust will (appointor, guardian, trustee roles), companies with special class shares, and the same for SMSF’s and loan positions between family groups.
10 lessons for asset protection
Lesson 1
Make sure that each discretionary trust has its own corporate trustee.
Lesson 2
Make sure that you do not operate a business as a sole trader.
Lesson 3
Separate the operating business away from investment assets.
Lesson 4
Where relevant, put control and ownership of investment assets in the “low risk” spouse.
Lesson 5
Document the trust positions and review the control chart looking at appointors, trustees, loan accounts and beneficiary entitlements.
Lesson 6
Make sure the dispute and deadlock provisions across your companies, SMSF’s and trust deeds is the same.
Lesson 7
Consider a family charter to increase communication and understanding across the family.
Lesson 8
Reduce the assets held by individuals so the wealth is away from possible inheritance claims.
Lesson 9
Document the loans within the family group to prove ownership. security and terms.
Lesson 10
Ensure your insurance policies are in place through a financial planner or insurance broker.
Moving forward
Understanding the family’s risk for wealthier families can become a daunting task – and this is the case especially for families that engage in a high number of specialists with nobody truly understanding the big picture.
At Westcourt our focus is in one area so our skillset is suited only for families in business. And our deep focus on one market segment gives us the best chance of helping families control and grow the overall business and family wealth across generations. So call us to see how we can assist with helping your family protect and succession your family business and investment assets.
