Estate planning for business families is difficult. There is a raft of legal terms like enduring powers of attorney, testamentary trusts and complex tax outcomes depending on the structures and the family dynamics. If that complexity is not enough some business advisors in Perth are not independent and everybody has a different approach.
What is important for accountants to note with estate planning is that your superannuation fund is not part of your will. It is a completely separate matter that should be considered in light of your tax and business situation.
This inevitably brings forward a discussion of a binding death benefit nomination.
Simply put a binding death benefit nomination gives clear instruction to your executor on how to pay the superannuation monies. And these instructions are binding. So you executor must do what you say.
And a binding death benefit nomination can instruct your executor to pay monies to your dependants which includes:
- Your spouse
- Your children (including adults)
- A person who is financially dependent on you.
- A person who is in an interdependency relationship.
So why do them?
Speed
A binding death benefit nomination can allow for a death benefit to be paid quickly. As the trustee has no discretion on how the estate should be paid the decision is a very easy one.
Providing certainty
If you have a binding death benefit nomination in place you know what is going to happen. There is no discretion and you have peace of mind knowing that your estate will be dealt with precisely as intended.
When can they be a bad idea?
The primary benefit of a binding death benefit nomination can also be the primary disadvantage. Life changes and tax laws change.
It might be that the payment of a benefit to a child creates a bad outcome.
Bankruptcy
If a child is becoming bankrupt the payment of your superannuation fund proceeds to them will mean the family legacy goes to creditors.
If you gave the trustee discretion on your will the child’s spouse might be bequeathed a greater share of the sale proceeds on the family home and the superannuation fund proceeds might be paid to the other children.
Overseas children
If children are bequeathed certain assets like shares the bequest can create a tax liability to arise.
If a trusted executor is controlling your estate, and a child is living overseas, it might be more prudent to bequest the non-resident child property from the superannuation fund and the Australian resident child shares.
The bequest of property to a non-resident child does not attract a capital gains tax liability.
Marriage breakdown
If a child inherits property during a marriage breakdown the inheritance becomes a marital asset. And a binding death benefit nomination means that there is no discretion on how the payments from the superannuation fund will be made.
So potentially a binding death benefit nomination will allow a former partner access to the family business legacy.
Addiction/Criminals
Sometimes a beneficiary just might not be ready to acquire assets. The family sometimes will think it is better for an inheritance to be delayed as part of a way to support and nuture a family member during a difficult period.
A binding death benefit nomination does not allow for this.
Centrelink
Sometimes a child is happy. They do not want the inheritance. And they will simply pass it on to the grandkids.
However if a child inherits assets and then gifts it to children – the gift will be treated as an “asset” for Centrelink. So they could lose their Centrelink pension and government support.
A binding death benefit nomination does not take this into account. The legal personal representative of the estate is bound to follow the instructions.
So what are the options?
The natural tendency for accountants in Perth is to look at more legal documents to fix a problem. However a business family should consider something more than legal documents to create a good succession.
If a family created a culture of trust, had clear family and business values, and had a good family office and business office in place so that the succession was clear you can often create a better more flexible succession.
So you could create an environment where a family charter, a family constitution and a family council were given the flexibility to deal with life’s events as they came along. A business family can structure their affairs with flexibility and humanity.
This can actually take a longer time to effect. However when you consider that poor tax, legal and investment advice only counts for 3% of failed wealth transfers – the need for a tax advisor who is skilled at family business succession is critical to creating a great wealth transfer.
