Many clients view a trip to the lawyer as the equivalent of visiting the dentist for emergency root canal therapy. Yet a collaborative relationship between an accountant and a competent lawyer is invaluable for clients who operate family businesses or simply wish to transfer wealth effectively.
Estate planning and business succession planning are obvious opportunities to develop foundation relationships. Ideally, an accountant has a long-standing trusted relationship with the client and will:
- Workshop ideas with the first generation principals (or patriarch or matriarch as the case may be);
- Identify assets by holder, value and encumbrance;
- Facilitate discussions with relevant family members about the aspirations of each of them and any sensitive issues that need to be addressed as part of the process.
The role of the lawyer is to design legal solutions that enable the client to attain those aspirations. A good estate planning lawyer will also bring tax and asset protection expertise in order to optimise client outcomes.
Consider some of the examples below.
Small Business Succession
Clients do not want to have a “small business”. They either want to grow their businesses or retire from their businesses. Questions to consider when preparing for an estate planning discussion include:
- Will the business fold if you cannot run it?
- Will a family member or trusted employee buy the business?
- If the business depends on you (because, for example, customer relationships are personal), have you insured your life risk so that your family obtains the benefit of your hard work?
- Should anything be done now to retain key talent?
- Is there a critical asset that needs protection from the normal business operating risks?
As part of the estate planning discussion it could emerge that the principals have a child with a disability, and that a simple restructure may enable the child to derive income on which an adult tax rate is paid.
Often, the collaborative discussion invites further consideration of whether another structure is appropriate in order to isolate relevant business risks or improve operational outcomes.
Prudent clients will see the working relationship between their appointed professionals as a cornerstone of the advisory group. This may lead to a regular family or advisory council.
Blended Families
It is common knowledge that the number of blended families is increasing. This necessarily changes the focus of an estate planning exercise.
Wives become concerned about the wanton hussy that may replace them. Husbands become concerned about the cad that may seduce their wives and covet their fortunes.
Parents may view the partners of their children with scepticism and distrust, wanting to ensure that the wealth is only shared among members of the ‘bloodline’.
The problem may be exacerbated when partners have had previous relationships and different children from each. Will a surviving spouse have regard to the financial welfare of adult children of a prior relationship of the deceased spouse?
These are all very real fears, and the courtrooms are littered with examples of those fears being realised.
A collaborative relationship between accountant and lawyer should ensure that, where applicable, these fears are articulated and all practical possible outcomes considered before the formal estate planning work starts.
The aspirations of each client are different. Some may give priority to education. Some may wish to donate part of their wealth to charity. All need to consider who is best placed to implement their wishes and act as executor (particularly if there is a SMSF and the executor will become a trustee of the fund).
The lawyer will explain the implications of the relevant Testator Family Maintenance provisions in the applicable jurisdiction. In other words, who can make a claim on the estate…and in what circumstances?
Only after these discussions have happened should the estate plan be designed and drafted.
An International Perspective
Many modern families will have a child living overseas, or have a parent who is a citizen or expatriate of another country or have accumulated wealth either directly or by inheritance, in another country.
Again, an accountant could facilitate the preliminary process by identifying:
- What is to be inherited?
- Where is it located?
- Is there any applicable estate duty or gift tax?
- Who is to inherit, and in what jurisdictions are they subject to tax?
One aspect that is gaining increasing attention, but is not currently well understood in Australia, is the reach of the IRS of the United States of America (US). The US taxes on a citizenship basis (as well as residence), meaning that any long-term Australian resident that has US citizenship (or even dual citizenship) is subject to US tax for all of their lives.
This may change the way the clients want to deal with any gift from the non-US spouse to the US spouse, arrangements for children who are US citizens and the drafting of any intended testamentary trust. At a more basic level, income earned by a US citizen member of a SMSF is subject to tax in the US in the year in which the income is earned, irrespective of whether the member has an immediate entitlement to the income or the extent to which that income is subject to tax in Australia. Similarly, control of a family trust by a US citizen may bring the entire assets and income of that trust into the US tax net.
Both accountant and lawyer must proceed with caution in these circumstances, and work together with the clients to design an acceptable solution.
Summary
Estate planning provides a useful collaborative framework for accountants and lawyers to work together to optimise outcomes for clients. Properly done, this should lead to enduring relationships for both of them with the clients and with each other.
Geoff Stein, partner, Brown Wright Stein Lawyers
