Act Today and Live Happily Tomorrow - by Toby Winten | Eternity Hillross Financial Services

No matter your net worth, some time spent planning your finances today can help ensure that you, your family, and your business are well positioned for tomorrow.

Consider the following:

Tom Smith (51) and his wife Jane (48) own their own family business.

Their oldest child Chloe (28) is a single parent with 2 young children. Their son Adam is 21, lives at home, studies part time and works in the family business. He has no intention of leaving home, and hopes to one day take over the family business when Tom and Jane retire.

Two years ago Tom had their family business valued at $2 million. The only liability of the business was a $300,000 bank loan, and business revenue was sitting steadily at $150,000 - $200,000 per year.  

Jane’s name is not on the title of the business, and in the event of Tom’s death, their will clearly leaves the business to Adam, on the provision that Jane will be able to remain in the family home for the rest of her life.

Tom and Jane have no superannuation and no life insurance – they always considered their business would fund their retirement. 

In a typical situation such as this, there are a number of things to think about. What if:

• Tom (Dad) and Jane (Mum) retire and Adam (Son) continues to run the business
Tom will remain the business owner, and Adam will run the business. Tom and Adam will both receive an income. Chloe may not be happy with this situation, particularly if she struggles financially raising her children.

• Tom (Dad) dies and the will is executed
Adam (Son) will get the business and Jane (Mum) will remain in the family home. If Centrelink is satisfied that Jane meets the assets and income test, she may obtain a fortnightly benefit until she can find a job, or until she reaches pension age and eligibility.

• Tom (Dad) dies and Chloe (Daughter) contests the will
If Chloe(Daughter) successfully contests the will she may be entitled to half the family business. Chloe may decide she wants this in cash to help cover the cost of raising and schooling her children.

• Tom (Dad) dies, and Chloe (Daughter) successfully contests the will – How can Adam retain the family business and buy out his sister?
Adam needs to get a loan of $1 million ($2million / 2) to buy out Chloe’s share. If Adam obtains finance, Adam would need to obtain $1 million to buy out Chloe’s share with business debt being the $300,000 existing debt.  Can Adam afford to repay a loan this big, with an income of no more than $200,000 per year?  If Adam can’t get finance for the loan to buy out his sister, can she force him to sell the business?  If it becomes a forced sale, would it realise the $2 million value originally assessed by the bank?

The value of professional advice
In the example above, Tom and Jane’s accountant could help review the business valuation, and calculate the impact of current and potential changes to taxation legislation. They may also advise on implications of the current valuation, including the effect it may have on estate planning. Their accountant may also discuss CGT issues and ownership transfer on retirement or death.

Further to this, Tom and Jane’s financial adviser could implement wealth creation and business protection strategies to help maximise their business value before retirement. These might include strategies to fund insurance, superannuation and other investments. The financial adviser could also provide contingency planning around premature death and asset transfer to Adam.

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You might be surprised how you could benefit – give me a call today or speak to your WHC accountant.

Please Note:
The case study above is hypothetical, and not based on any person’s actual circumstances. All information in this document is provided by Eternity Financial Services, an authorised representative of Hillross Financial Services, and is of a general nature only. As it does not take account of your personal situation or needs, you should consider your own circumstances and see a financial adviser before making any decision.

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