|
In this article Janet addresses the issues of asset planning, estate planning and tax minimisation. These issues are particularly relevant for Mothers as it is around the time of motherhood that women start to seriously consider their future and the future of their children. WHAT IS ASSET PLANNING?
Asset planning is the process of devising asset ownership structures for private and business assets. The aim of an effective asset plan is to arrive at a structure that provides a mix of asset protection, effective estate planning, tax minimisation and caters for any relationship property considerations. Looking at each of these elements in turn: • Asset protection describes taking measures to protect your assets from personal and business risk. For example, if you have a business with five employees, you do not want to see your family home lost if the negligence of an employee causes a claim to result against the business. Alternatively, if you have bought and done up a property and then on sold it and a claim is brought against you as vendor for the property leaking, you do not want to lose your savings. • Estate planning looks at how assets are to be distributed from one generation to the next. To illustrate, would you want to pass your assets to your son or daughter only to have their partners take half in a matrimonial split? • Tax minimisation speaks for itself. While we all recognise an obligation to pay our fair share of tax, we are also allowed to structure our affairs so that they are efficient from a tax perspective. • Relationship property issues are relevant in almost every structure I have ever put together. In some cases the solution is straightforward, but in others, structures need to cater for spouses or de facto partners wanting to maintain separate assets.
CONFLICTS BETWEEN ACCOUNTANTS AND LAWYERS
You can get asset planning advice both from accountants and lawyers, however, what I have found in practice is that many practitioners in both of these fields do not offer a holistic perspective. Lets take Juliette and Steve who are looking to purchase an investment property. They go to their lawyer for advice on the appropriate asset ownership structure for the property. Their lawyer quite correctly points out to them that they should consider protecting this property from personal and business risk. Following this, their lawyer recommends they establish a Trust and the rental property be settled into the ownership of the Trust. Then Juliette and Steve visit their accountant and pose the same question to him. He considers their circumstances and note that they are in the top tax bracket and pay a marginal tax rate of 39%. Following this, the accountant suggests they would be better off holding the property personally in order to gain access to any tax losses, so that the tax losses could be offset against their salary to produce tax refunds. The lawyer and accountant have raised some valid points and proposed a structure to address them. However, neither has considered the holistic picture and provided a structure that caters for asset protection, estate planning, tax and relationship property issues. This is the secret to an effective asset planning structure. As an investor you need to surround yourself with advisors that have a background and experience across both disciplines. If you go and see a lawyer that specialises in Trusts and asset protection structures, you will get advice that effectively protects your investment from risk, but you will not necessarily make the best use of any tax benefits that arise. On the other hand, if you see an accountant that specialises in tax, you will have an effective tax outcome, but your assets may not be protected from risk. What follows are some general comments on asset protection and estate planning.
THE BASICS – TRUSTS
A Trust is best described as a legal relationship created by a settlor whereby persons (the Trustees) hold assets for the benefit of beneficiaries. Trusts are most commonly used for asset protection purposes, although they can also be used for trading purposes. The asset protection benefit arises from that fact that when a Trustee holds an asset subject to a Trust and a beneficiary enjoys the use of the asset, neither of them holds legal ownership of the asset.
Applying this to a common everyday example, take the situation where Mr and Mrs Smith jointly own their own home. They wish to protect the home from being exposed to the risks of the family business. To do so, they will establish a Family Trust of which they will be the Trustees along with an Independent Trustee. The beneficiaries of the Trust will be themselves and their children, other family members, such as brothers and sisters and potentially Trusts set up for any of these people. The Smiths will then enter into a Sale and Purchase Agreement whereby they sell the home to the Trustees of the Trust and commence a gifting programme. As Trustees of the Trust, they resolve to allow themselves and their children to occupy the home as beneficiaries. In the future, should a problem arise in the business that mean Mr and Mrs Smith are personally exposed to a claim, their house is protected as they no longer personally own it. This is often referred to as the practice of “controlling everything but owning nothing”.
THE BASICS – WHAT IS AN ESTATE PLAN?
Estate planning involves considering how assets are to be passed from one generation to the next. The usual components of an estate plan are Wills and Memoranda of Wishes. A Will is a document that deals with an individual’s personal estate upon death. It will also deal with guardianship issues of your childen. A Memorandum of Wishes is a letter written to Trustees of the Trust to describe how assets are to be dealt with within the Trust. A common mistake is not to link Wills and the establishment of a Trust. I often see individuals who have established Trusts but have not prepared new Wills to reflect this. In this instance, they often have existing Wills prepared many years before that pass assets to spouses or children personally upon death. Once a Trust is established such a Will is flawed for two reasons. First, you do not want assets to pass to surviving spouses or children personally when they can be directed straight into a Trust free of gifting restrictions. That is, it is important to note that any bequests under a Will are not subject to gift duty. Second, given that a Trust has been established and the individual is seeking to minimise, their personal estate their Will has become redundant to a certain extent. Broadly speaking, the objective of an effective Will is to direct assets into the ownership of the Trust on death. This will prevent assets from accruing in the hands of the surviving spouse and family members and also prevent gifting programmes from being extended. Having directed all assets into the Trust, it is then under the Memorandum of Wishes where instruction is provided as to how the assets of the Trust are to be dealt with. A Memorandum of Wishes is not a legally binding document. It is a letter written to the Trustees of the Trust, describing the settlor’s wishes as to how Trust assets are to be dealt with. The key to an effective Memorandum of Wishes is to provide the Trustees with instruction to consider the asset protection requirements of any beneficiaries when making distributions from the Trust. For example, if a beneficiary is in a relationship, the Trustees should consider the stability of the relationship and the desirability of passing assets through to the beneficiary individually, where they could be subject to a relationship property claim in the event of a separation. SUMMARY
In summary, asset planning involves looking at asset protection, estate planning and tax issues. Your advisors need to adopt a holistic approach when dealing with your affairs. Gilligan Rowe & Associates implement this approach when reviewing all their clients affairs. A well rounded approach is needed, especially if you have children. After all, you are no longer dealing with just your future – you must now consider the future of your family and your children. Should you wish to discuss this article or if you need assistance with any of your matters, contact Janet Xuccoa by emailing jx@gra.co.nz or telephoning (09) 522 7955. The author, Janet Xuccoa is a Partner of Gilligan Rowe & Associates Limited (“GRA”). She holds an accounting and a law degree and is a well known speaker and author on trusts and asset planning concepts. One of the aspects of Janet’s personality is that she enjoys helping others look after themselves. During her years of practice, Janet has found women often carry the burden when financial troubles strike at home. In an attempt to assist us gain more knowledge and to take measures to protect ourselves and our families, Janet is going to be writing articles for us each month. If you have any queries after reading the articles, just email Janet – she is a friendly soul who will enjoy helping you.
|
