A family business, complicated relationships… then a death. How poor succession planning saw a father’s wishes come undone.

The family thought there was a plan in place. For many years, a father and his two adult sons had run the family business successfully. In that time, a great deal of the business profits were distributed on an annual basis to the mother who was not involved in the family business. This made perfect sense for family tax planning as she earned no other income.

However, as is commonly the case with trusts, the profit distributions were made to the mother ‘on paper’, as the cash profits were ploughed back into in the business. This meant the trust was accruing a significant amount of debt to the mother – often referred to as a ‘beneficiary loan account’ – over time.

Then his wife died and the father later remarried. Over time, the relationship between sons and stepmother soured.

Determined to establish a plan for his death, the father decided that, when this occurred, the business operations would stay under the control of his sons while his second wife would inherit his personal assets such as the home where they lived and his super.

But even with the best of intentions, it didn’t work out that way.

The fallout from one decision

In the family business, the operations were established under a family trust. In theory, the sons would continue to run the business after the father’s death, when they were appointed trustees in line with the trust deed.

However, years earlier he had inherited the beneficiary loan account on the death of his first wife, as it had formed part of her deceased estate. It had become a debt payable from the trust to him. Under this structure, he was able to access that money on demand and, at the time of his death, the loan amount owing to him had reached $1.8 million.

This meant that, when he died, that loan was owed to his estate; that is, his second wife. And that meant his second wife was now owed that money from the business.

As a result, despite the father’s intention that the business continue to operate under his sons, the lump sum of money owed to their stepmother meant that she inherited effective control of the business.

Why it makes sense to plan for the worst

Business succession planning is critical for any business. Without a clear plan, relationships and unforeseen events can disrupt operations and generate unintended costs, hurt and hardship.

Jeff Baldwin, one of MLC Advice’s Head of Advice Experience Centres, says people often assume their business and relationships will continue, or that relationships will never become strained or sour, but that just isn’t the case.

“You never go into a business thinking it’s going to end,” he says. “The best of intentions are always there, but people don’t know what they don’t know.

“It becomes really complex really easily. It’s the lack of planning for the bad stuff that then causes the complications.”

Baldwin explains that, when there are no clear processes and structures in place to protect a business or individuals, various confusing scenarios can play out, leading to not only business disruption but personal distress.

The flipside is, that through careful succession planning and clear structures, owners can protect businesses and individuals.

How to ease succession planning

This scenario of the family business highlighted above could have been avoided, Baldwin says, pointing to a range of solutions that would have protected the father’s wishes.

  • Asset protection insurance

    One strategy would have been for the father to sign the business up for asset protection insurance before his death. Then, following his death, his sons could have repaid the $1.8 million loan to their stepmother and kept the business under their control.

  • Commercial debt forgiveness

    Another strategy would have been for the father to forgive the loan in his will without Commercial Debt Forgiveness tax clawbacks applying to the trust.

  • Company structure set-up

    The ideal way that this family business could have avoided succession planning going wrong would have been to set up company structures well from the start. . The trust structure would have been fine had not the father remarried. But of course, life’s what happens when you’re making plans and this case study is a good example of why seeking regular advice along the way – as events occur – is a worthwhile exercise.

    Depending on your business and how it is established and operated, there will be optimal set-ups that may apply. Ensuring these structures are kept up to date through any relationship or business changes is also vital, Baldwin says, as is having a clear plan that factors in the financial and emotional upheaval of succession, such as unexpected financial or tax costs, relationship breakdowns, operational changes and conflict.


Get your foundations sorted

Ideally, owners should seek advice when setting up their business or introducing a new structure, Baldwin says.

“You want to establish structures as early as possible,” he explains. “Sometimes accountants set up these ‘really cool’ tax structures, but they don’t think about what happens if things go wrong, and about how to unwind them. Plus, if you establish them when there is ill-health or marriage breakdown, that can set things up for conflict.”

Baldwin adds that, from the start, it’s good practice to assume you are going to be successful. “It’s much easier to unwind a larger structure than it is to build one as you go. That’s where the planning comes in.”

Finally, he says that if an exit strategy is not established from the outset, then any major growth or change point can still be an opportunity to reset and put one in place. If you haven’t got a plan, do it now while you can and embed an annual review into your end of financial year administration. That way, it will stay up to date, like your tax returns, which is as crucial in a family business as it is in any partnership.

“The ideal part is how to get into a structure and, at the same time, advice on how to get out of it.”

Important information and disclaimer

This communication has been prepared by Bridges Financial Services Pty Ltd ABN 60 003 474 977 AFSL 240837 (‘Bridges’) trading as MLC Advice, a member of the IOOF Holdings Limited ABN 49 100 103 722 (‘IOOF’) group of companies (‘IOOF Group’), registered office Level 3, 30 Hickson Road, Millers Point NSW 2000, for use and distribution by representatives of MLC Advice. MLC Advice financial advisers are representatives of Bridges.

Any advice in this communication is of a general nature only and has not been tailored to your personal circumstances. Accordingly, reliance should not be placed on the information contained in this communication as the basis for making any financial investment, insurance or other decision. Please seek personal advice prior to acting on this information.
If any financial products are referred to in this communication, you should consider the relevant Product Disclosure Statement or other disclosure material before making an investment decision in relation to that financial product. Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market.

Information in this communication is accurate as at the date of issue. In some cases, information has been provided to us by third parties. While it is believed the information is accurate and reliable, the accuracy of that information is not guaranteed in any way. Any opinions expressed constitute our views at the time of issue and are subject to change. While care has been taken in the preparation of this communication, subject to any terms implied by law and which cannot be excluded, no liability is accepted by Bridges, IOOF or any member of the IOOF Group, their agents or employees for any loss arising from reliance on this communication.

Any tax information provided in this communication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.

Please note that any advice you receive is provided by Bridges, not IOOF or any other member of the IOOF Group. An investment with Bridges, or any other member of the IOOF Group is subject to investment risk including possible delays in repayment and loss of income and capital invested. The repayment of capital, the payment of income and any particular rate of return are not guaranteed by Bridges or any member of the IOOF Group, or any other company, unless specifically stated in a current PDS. Neither Bridges, IOOF nor any member of the IOOF Group in any way stand behind the capital value and/or performance of any investment you may make as a result of the advice you receive.