The Whitlam Labor government passed the Family Law Act (Cth) 1975, introducing a no-fault regime which made 12 months of continuous separation the only ground for granting a divorce. Regarded as revolutionary, the reform created many benefits; nevertheless, it has also generated a myriad of problematic challenges.
The no-fault regime has been a major factor in reducing the average length of marriages to a mean marriage duration of 8.5 years. This has prompted the proliferation of ‘blended family’ arrangements, often comprising offspring from previous as well as current relationships.
This recent ‘relationship revolution’ has coincided with the greatest intergenerational wealth transfer in the history of Australia; which is a direct consequence of the substantial level of private wealth accumulated by the post-World War II baby boomer generation. This historical trend has created significant ramifications for family offices when divorce intersects with estate planning strategies.
If a calculated strategy is not considered and adopted, estate planning for blended families can exacerbate the already complicated task of navigating sundry party interests. Without an informed strategy and third-party support, it can be very difficult for families to mediate the perceived rights and desires of beneficiaries so that everyone benefits without controversy and angst, regardless of which partner is first to pass away.
Due to a lack of proper planning difficult issues can arise from asset disputes. These have
the potential to negatively impact on subsequent generations if their domestic relationships fail, in which case the expectation of access to a share of the assets of the family office quickly becomes a heated concern. When this occurs to the extent of requiring family court intervention the same legislative provisions are relied on by the Court when adjudicating on issues relating to the division of property following the breakdown of a domestic relationship regardless of whether the parties are married or not or the relationship is between people of the same sex.
These prospects may seem daunting; however, there is reason for hope! Family offices can effectively empower themselves to address the ‘elephant in the family living room’ by taking the pre-emptive measures to develop a strategy for capital retention and family cohesion.
Inevitably, success in maintaining blended family governance structures is contingent upon the judicious navigation of assets, which have been owned or controlled by, or on behalf, of the surviving member of the older generation, or their spouse, subsequent to their death for the benefit of succeeding generations.
Families, who control a significant amount of private wealth and wish to preserve and control it for present and future generations, need to adopt a multi-layered strategy to guard against the adverse economic outcomes that relationship breakdown and business failure can have on successive generations.
The intersection between an ageing wealthy older generation, and an escalating decline in the duration of relationships as well as the continuing high risk of business failure (90% of start-up businesses are expected to fail in the first three years of operation), has seen a growth in strategies to retain the family unit’s capital. This new strategy deviates from the traditional wealth carve-up model employed after the death of the family’s patriarch or matriarch and their spouse.
The new capital retention strategy assists families in combating the secondary challenge posed by the 1970s divorce law reforms, which granted power to the family court to ‘look through’ legal structures when dividing up the assets of the parties to a separation.
In an effort to pre-empt problems that can be caused by unequal and unexpected asset division in family arrangements as a consequence of this law, family offices must insist that family members sign binding financial agreements (Australia’s version of pre-nuptial agreements), either prior or subsequent to entering into a marriage or domestic relationship. To avoid suggestion of undue parental interference, such agreements are designed to only exclude the parties’ expectancy to any inheritance or benefit from the accumulated wealth which is subject to the family office’s control.
Whilst an estate or succession plan involves consideration for all the assets owned or controlled by the patriarch or matriarch of the family, only personally-owned assets form part of the assets comprising the deceased estate(s). This is because there are assets controlled by the current custodian(s) which are held in structures that are not part of a deceased estate, such as trusts that have been established during the wealth creator’s lifetime including superannuation or retirement benefits. These structures survive the death of a will-maker and it is therefore vital to ensure the governance structures of the family office and those of the wills of the wealth controllers “line up” regarding all these different “classes” of assets.
Will(s) provisions only deal with personally-held assets of the will-maker, thus they should be held in a discretionary ‘testamentary trust structure’ which would be: • Established by the terms of the will in which it is contained
• Funded by either the assets of a deceased estate, and or by payments to the estate as a result of the death of the will-maker, e.g. superannuation death benefits directly paid to the estate or the proceeds of a life insurance policy
• Administered by the executors of the estate of the deceased in their capacity as the trustees of the trust(s). The choice of these ‘appointers’ of the trust is critical as they can appoint and remove trustees and have an element of control over how the assets of the trust created by the will are dealt with. This obviously provides the ideal opportunity for the governance structures of the family office and the assets which comprise the deceased estates to coincide.
A will containing a discretionary testamentary trust needs to be drafted to minimise any risk that may arise from a situation whereby any beneficiary, who becomes party to divorce proceedings, has the power, directly or indirectly, to remove or appoint
a trustee. If that is the case then the details of the testamentary trust will be required to be inserted in the financial statement that is lodged as part of the divorce proceedings.
If assets of a discretionary testamentary trust are made available to a beneficiary to acquire another asset, this should be done by way of loan from the trustees of the trust. This ensures that any such financial assistance does not become part of the joint asset pool of the beneficiary and their partner. For example, if a child wishes to use part of the assets in an estate to acquire a house, then any moneys should be advanced by way of a mortgage not a gift.
The amount of the loan will not form part of the matrimonial pot if it can be demonstrated that the beneficiary was not the source of the funds, that they have been loaned the money at commercial rates by the trustee of the fund and that the beneficiary does not control the trust.
Further benefits to preparing a testamentary include: Tax Savings: A discretionary testamentary trust can ensure that maximum flexibility is achieved in relation to potential income splitting and/or asset allocation. An infant receiving income under a trust contained in a will in Australia is treated like a normal adult taxpayer and does not begin to pay any income tax until they have received approximately A$18,000 per annum.
Insolvency: The use of a testamentary trust provides the beneficiaries with protection in the case of bankruptcy, even if the insolvent beneficiary is also a trustee of the testamentary trust and a “controller” (the ‘appointer’).
Asset Protection: Since the assets remain in the testamentary trust and are not distributed to a beneficiary, it is more difficult for anyone making a claim against the beneficiary to reach “inside” the trust and have access to those assets. This is of particular importance if a beneficiary is involved in a business activity and it, and/or they, become involved in proceedings where creditors seek to recover monies from the beneficiary, In conclusion, though it may take a little time, effort and financial outlay to take this precautionary action it is time and money well spent. In this asset-rich age the returns will be significant when compared with the value of the assets in the pool which is receiving the benefit of the protection gained!
