Business planning also means life planning

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Death and taxes are often quoted as the only two certainties in life. However, many people proceed under the impression they will be around to guide outcomes in their desired direction. 

According to Russell Robertson, director and accredited wills and estates specialist with O’Farrell Robertson McMahon, it is essential that growers include in their business’s strategic plan what should happen if they become chronically ill, unable to work or die.

“Having your affairs in order can make a big difference by alleviating stress in a time when emotions are stretched,” Mr Robertson says. “Talk to your key advisers for guidance in developing or reviewing your strategic business plan to ensure it reflects your goals and wishes both now and in the future.”

It is even better when your key advisers, such as your business consultant, lawyer, financial adviser and accountant, collaborate with you and each other to develop your plan, Mr Robertson advises.

Mr Robertson illustrates different ways in which wills, powers of attorney and estates can be managed as part of the overall business plan.

Illness and incapacity

Every adult needs to consider making an enduring power of attorney that enables financial decisions to be made during a temporary illness or permanent incapacity, Mr Robertson says. “Most people who suffer from a sudden illness, such as a stroke, have no warning symptoms and don’t have time to plan for preparing an enduring power of attorney,” he says. 

The best time to make an enduring power of attorney is when you are fit and healthy. “Your spouse as your attorney is usually a good choice; however, if your spouse is unavailable or not suitable, then you can choose one or more people to be the alternate attorneys,” Mr Robertson says.

Adult children or close friends or family with farming knowledge may be a sensible choice. They can act together or either one can sign documents. It is important to choose an option that best suits your circumstances.

Death

Death will catch up with all of us one day and so proper estate planning is essential, Mr Robertson says. “Making a will is just one part of sensible estate planning, and you need to consider your assets and how they are held,” he says.

The following matters should be included in estate planning:

  • Is your land jointly held or as tenants in common? Is it owned by a family trust, a company or a superannuation fund?
  • How are the assets of the farming operation (such as machinery, plant and livestock) held? Is there a family trust or company involved?
  • Are there sufficient non-farming assets that can be gifted to non-farming children? If not, is life insurance an option to provide for those children?
  • Is there the ability to adequately pay the debts that are outstanding if there is a death, or if those debts are to pass with certain assets, will it be a viable choice? 
  • Are there any tax implications that might occur? 

Possible tax implications can be seen in the following scenario. Two farming blocks of equal size and value are left to Barry’s two children, Jason and Kylie. Block A was inherited by Barry from his own father in 1984, before capital gains tax (CGT) legislation came into play on 20 September 1985. Block B was purchased in 2000 for $400,000, and both blocks are now worth $1 million.

If Barry dies, block A is deemed to pass to Jason with the cost base of the current market value and therefore has no underlying CGT. Kylie acquires block B with a cost base of $400,000. No tax is payable unless the properties are sold; however, their underlying value is different despite the current market value being identical.

Focus on the beneficiaries

While assets are important, understanding the position of beneficiaries is an important part of estate planning, Mr Robertson says.

Consider a second scenario. Carl and Lucy are working on getting their affairs in order. They are a family farming couple with three children.

  • Son Roger, 30, is married to Rhonda and works full-time on the family farm. They have two young children aged two and four.
  • Daughter Sally, 28, runs her own restaurant. She is in a relationship with Jack, but it seems unlikely it will last.
  • Son Gary, 17, is finishing secondary school with no plans to return to the family farm.

Carl and Lucy’s farm is worth $2 million. It comprises four equal land parcels plus stock, plant and equipment worth $600,000. They have shares of $1.5 million, an investment in their own self-managed superannuation fund (SMSF) of $1 million, and no debt.

The couple are wondering if an equal split between the children is essential. They believe Roger should get the farm, or at least have the opportunity to acquire the farm in its entirety. They also recognise that for taxation purposes it might be useful to split the income with Rhonda and the children. In addition, they are wondering what happens if Sally’s restaurant goes bust and Jack runs off with the chef? Another issue is how Gary’s inheritance gets managed until he is older.

Possible solutions for this scenario include the following:

  • Leaving everything to the surviving spouse seems appropriate.
  • If both Carl and Lucy die, then a simple three-way split would result in $1.7 million for each child. However, the farming assets are worth $2.6 million, and Roger is unlikely to be able to borrow $900,000 to pay out his siblings. One option is to give Roger three parcels of land outright plus the stock and equipment worth $2.3 million. The other parcel can be left to Sally and Gary but subject to a favourable lease to Roger for five years and with Roger having an option to purchase this parcel at market rates in the future.
  • Gary should receive a fund to cover educational and maintenance costs of $100,000.
  • The whole SMSF should go to Gary as he is still under 18 years of age, which would make the payment tax free. If Sally received any of the SMSF she would pay 15 per cent tax on any tax-deductible portion.
  • The rest of the estate should be divided between Sally and Gary.
  • Gary’s entitlements should be held in trust until he reaches 21 or 25 years of age.
  • All the gifts to the children should allow for a discretionary testamentary trust for each of them, which would provide significant benefits such as income splitting, asset protection from creditors and enable a much clearer picture if the assets were part of a family property settlement in the future.
  • Sally might be encouraged to consider whether a family law binding financial agreement would be suitable.
  • Carl and Lucy could take out life insurance, which would allow Roger to get the entire farm outright but create a larger cash fund for Sally and Gary.

“There is only one way to get a perfect result, and that’s to outlive your beneficiaries,” Mr Robertson says. This is not likely to happen, so a well-thought-out will is the way to try to create a sensible and fair outcome. While Mr Robertson says it may not be a perfect result, no will or an out-of-date will is going to be a nightmare.

More information:

Russell Robertson
03 5445 1020
r.robertson@ofrm.com.au

Russell Robertson is a lawyer from Bendigo, Victoria, with expertise in both wills and probate and commercial law. He is recognised as an accredited specialist in wills and estates and is particularly skilled in assisting businesses with trusts, ownership structures and succession planning.

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