How to stop paying tax and other debts on your inheritance
The best way is to ask your parents to see an expert business and estate planning lawyer (like Owen Hodge Business Lawyers) who can structure their affairs tax effectively before they die; Good estate planning and good business structures are two sides of the same coin. Check out these four case examples:
1. Family investment companies which pass their use-by date
We act for two baby boomer children. They are both in their late 50s and whilst their mother died some years ago, their father, aged 89, is alive but not very well. He has dementia and a history of other medical issues.
The problem is that their father has an estate worth about $11.5 million. All the assets consist of publicly listed shares, cash and term deposits held in an investment company which was set up in 1954 – well before capital gains tax, GST and hefty stamp duty (which although introduced in 1920, has only increased substantially in recent years). The children are both directors of the family investment company. The shares in the investment company (all two of them!) are held by the father.
Their father’s will provides that each child will receive one share in the investment company. No transfer taxes or CGT or stamp duty there. What a brilliant set-up for an intergenerational transfer!
The only downer of course is that in a practical sense, these two adult children have adult children of their own. Each child (and each grandchild) has their own needs and wants. The investment company will be unsustainable in a practical sense once their father dies. Each child sees the writing on the wall as far as the practical application of the current structure when he passes away.
The investment company’s accountant calculated that if the company was wound up on their father’s death, the tax payable would be about $3,000,000 – reducing their inheritance by about $1,500,000 each. Share buy-backs would have a similar result. What can they do?
Our suggestion is that after their father’s death, each of the children use the provisions in SMSFR 2010/1 to transfer their inherited shares into their respective self managed superannuation funds. That way each will be able to transfer shares to the value of $540,000 into their respective self managed superannuation funds.
We suggested effecting a suitable ”share split” so that the exact number of shares worth $540,000 can be transferred to each beneficiary’s self managed superannuation fund, subject to meeting the provisions of s 66(2A)(c) – the in-house asset limitation rule. This way, when each child turns 60 and seeks a pension from their respective self managed super fund, their super fund will get a full refund of the company tax which is currently being paid by the public companies whose shares are held by the investment company.
While the children contemplate the best way to deal with the clumsy structure that they have inherited, substantial tax will be saved. Our principal is an Accredited Specialist in Business Law. So our clients were able to appreciate that quality advice is a given.
2. Life insurance for hopeless business people – are you kidding?
Last month, the widow of a very experienced physiotherapist came to see us. He was a clever man technically, but in buying his new franchise from the franchisor, he had:
(i) Agreed to guarantee the payment of the fit out of the premises;
(ii) Agreed to guarantee the overdraft of the franchisee business;
(iii) Agreed to guarantee all debts owing by the franchisee business to the franchisor, including all lease payments under the real estate lease.
He had a heart attack two months later and died. Distraught, his wife claimed on his life insurance and she was advised by her financial planner to use the proceeds to pay out the mortgage over the family home which was in his name.
The problem was that all the debts which the deceased had guaranteed exceeded the value of his estate. If she paid out the mortgage, she would be adding to the value of his estate and effectively using her inheritance (the proceeds of the life insurance) to pay out his debts. She would be left penniless.
Fortunately, we were able to advise her just in time to prevent the life insurance from being used to fund her deceased husband’s creditors.
We then had a closer look at the assertions of all of the estate’s creditors. Various finance companies, the real estate lessor and others were very co-operative in meeting our request to forward to us the documents upon which they relied in support of their various claims on the estate of the unfortunate physiotherapist.
On close examination, many of the claims were indeed justified, but one of the documents had been signed incorrectly. The creditor (a company) had had the document signed by a person who was only appointed as a director two days after it was signed. That meant that the whole claim was invalid and this saved the estate from a claim worth $450,000. The husband’s estate could therefore meet all of its other creditors.
Our client was then able to pay out the mortgage with the life insurance and she was very happy that she was able to keep the matrimonial home.
3. My mother is a doctor
Recently, we acted for a doctor who had been advised that a good way to provide for her children was to transfer the business premises from which she practiced into her self managed superannuation fund. For financial reasons, it had to be done by 30 June.
But the doctor only practiced from part of the premises. The other part of the premises was occupied by two radiographers under a lease that had terminated a month before.
The lease said that when it ended, it reverted to a month to month lease, and one of the radiographers had just given notice under the month to month lease. Due to the short notice, there was no way the doctor was going to get in a replacement tenant in time. In fact, it was likely that the property would be partly vacant for several months. Furthermore, both radiographers had only just started their practices and had been running their businesses at a loss.
The doctor’s previous advisors had told her that each of these issues would prevent her from obtaining the stamp duty concession otherwise available. Her self managed superannuation fund would have to cop standard stamp duty on the transfer of the property into her fund. It was going to be about $20,000. She was also told that the superannuation fund would have to actually pay for the property in dollars and that assets within her super fund would have to be sold to fund the transfer of the acquisition.
All of this advice was incorrect. With the help of a statutory declaration, we were able to ensure that the doctor was able to transfer the property into her self managed superannuation fund and only pay $500 stamp duty. Any investments she already had within her superannuation fund did not have to be sold.
The upshot? More money and assets in her super fund and less stamp duty. In consultation with her accountants, we were able to use some of the CGT concessions to reduce the CGT on the transfer to zero, leaving more for her in retirement and more for her family when she eventually passes away.
4. My father is a dentist
Dental equipment is expensive. Understandably, most dentists lease their equipment. And most equipment lessors know that if their equipment is bolted to the premises, and if the dentist falls into arrears or dies, then any rights the lessor has under the Personal Property Securities Act 2009 (Cth) (PPSA) to repossess the equipment can vanish, even though the equipment lessor has a registered security interest.
The equipment can’t be repossessed because it belongs to the owner of the premises (it is a fixture – and the PPSA does not apply to fixtures). That’s why they want the dentist to guarantee the loan. This can leave the dentist’s estate with a big debt if a claim is made under the guarantee for the shortfall owing under the equipment lease. Instead of inheriting assets, his offspring can end up with nothing. One of our dentist clients came to us with this problem.
The solution? Prepare a deed between the dentist, the equipment lessor and the property owner, by which the property owner agreed that despite the fact that the heavy equipment was to be bolted to the floor of the premises, it always remained the property of the equipment lessor who was permitted to remove it and sell it upon default (or the dentist’s death).
We also negotiated a bank guarantee (similar to what is required under a real estate lease) The deed and the bank guarantee worked together and ensured that the equipment removal costs and any shortfall owing to the equipment lessor on any sale of the equipment following default by the dentist or his unfortunate demise, would be covered.
If you want to minimise taxes and other debts on your inheritance, call Leigh Adams of Owen Hodge Commercial Lawyers. We get you there.