Tara (00:51):
Hello, welcome back to the Art of Estate Planning Podcast. In this episode, I'm actually want to share a conversation we had in the TT Precedents Club.
(01:01):
It was actually at the start of the year, so a little bit behind, but I have had it on my list of things I wanted to chat about in the podcast because I thought it was really interesting. So one of our members asked about what do you change in a standard estate planning matter where you have a high net worth client? So for those clients who have a lot of value in their estate, are there things that we might do differently from a more vanilla estate planning structure? So we had a really good chat about that and I just wanted to touch on it in this episode as well. So the first thing I'll say is you may not actually do anything different, especially if their affairs are reasonably straightforward and all we're talking about is higher values. That might just be you just follow your normal protocol.
(02:01):
However, if they have a lot of their wealth actually in existing structures, then things could change quite dramatically from your standard recommendations and your standard approach. So the first thing I always say is make sure you wrap your head around exactly where their assets are held. Now, obviously this applies for every estate planning matter, but I think it is really important to know which assets are going to be estate assets. Have we got much property actually owned in personal names? Or is a lot of that wealth actually already in existing family trusts and companies or superannuation, like self-managed superannuation funds? And if so, I think you've got to look at if your standard recommendation is like testamentary trust wills, well, if there's actually no assets passing through the estate because they're not personally held, you may not actually find that there's a lot to go into testamentary trust wills as an example.
(03:05):
So firstly, I would say it's really critical that we understand the existing structures in place, particularly are there business partners or existing succession arrangements in place? So shareholders' agreements, partnership agreements, unit holders agreements, insurance funded by sell. Have we got contractual arrangements which override what might normally happen? Have they already worked with other advisors? It's not uncommon for there to be multiple iterations of a succession plan for these types of clients because they are used to, or as an assumption, they can be used to working with professional advisors. So they might have actually implemented some estate planning in the past. So are there succession documents in place for their family trusts already? So as with any client, but especially this genre of client, I would make sure that we have really brought in all of the trustees, constitutions, contractual arrangements, financial statements, make sure you look at the financials and liaise with their professional advisors to get a really good picture and snapshot and that you understand it.
(04:28):
You can't ignore it where there are a lot of structures in the group. The other thing you might need to look at is really working with the structure already in place. So they might only own shares in a corporate trustee and that corporate trustee is the trustee of a trust and it owns all of the family wealth underneath. That is a really common structure in which case, okay, yes, are we going to put those shares into testamentary trust? The shares themselves might only be worth $2. Are we going to look at passing those shares onto key individuals? So thinking more clearly about that, do we want to actually put in place a new testamentary trust? Can we even do that? But if we can, do we want to make the new testamentary trust like the head trust structure? Another thing I would also look at is checking the vesting dates for existing structures and working out, have we got a couple of generations left in our vesting date or are we actually getting close to that ending possibly during our client's lifetime or as part of the handover?
(05:46):
Are they pretty much going to be handed over a trust that could end really quickly? So having a good understanding of that is really critical. Now I mentioned collaborating with the accountants and financial advisors, and I think that is really key where we have clients, particularly with a lot of structures in place. And I would often find a lot of the high net worth clients do have trusted relationships with accountants and financial advisors. So it's really important to get them on board and they themselves might have implemented some reasonably sophisticated strategies. So have we got family trust elections that we need to be wary of? Have they implemented limited recourse borrowing arrangements with respect to their super fund? How aggressive have they been? Are there a lot of loan accounts in place? Working and collaborating with their professional advisors. They're your friends. They'll be able to bring you up to speed or wrap your head around these things that we need to plan for.
(06:52):
You might also find they already have a key vision of what they want to happen. They talked about succession when these strategies were implemented and you don't have to reinvent the wheel from the beginning. Family council arrangements are also really common in this demographic of client. So they might be looking at a lot of shared wealth interests in companies that the next generation simply has to come together to share. So we need to put in place a bit of a council in terms of our professional advisors having a seat at the table and actually playing a key role, not only as a professional advisor, but actually being elevated to something like a director or a trustee as well as multiple family members and really having to think about our decision-making thresholds, what our quorum could be, who has veto powers, that type of thing. So do you want a certain amount of family members to be in the majority?
(08:02):
Do you need one of those professional advisors to be in a majority decision? Can some decisions be made by simple majority, but other decisions need to be made unanimously or by a special majority? Those kinds of frameworks are often common. And you might have one that they've already set up in that case and we just need to continue that or make sure that we don't interfere with that or breach any of the arrangement in place or they might actually be looking for you to set one up. If you are looking at having the professional advisors elevated to key roles like directors and trustees, it's important on us to turn our mind to things like remuneration. How will remuneration be handled? Are there limits in Victoria where you've got professionals charging? I think there's certain sign-off and consents that need to be done and disclosures as part of the estate planning.
(09:03):
Do we want to embed particular conditions on those professionals keeping their position in those roles, but only while they have maintained those specific qualifications? If they get struck off, do they lose the eligibility to be that director? If the family decides that they're no longer acting in their best interests or they're copying a free ride, is there a pathway for the family collectively to remove them or are they in there permanently? What about successor to that role, especially if they're a linchpin? D we need another person who has that sort of qualification to come in and replace them if there's a vacancy and what is that eligibility criteria like? And then another thing also is legal professional privilege. So it will depend on what you're doing, but if it's a type of plan where it's important that legal professional privilege is maintained with the clients, then you have to be careful about what you share with the professional advisors so that you're not waiving professional privilege.
(10:19):
So I mean, it's such a boring thing to think about, but it is really important. And there can be ways that you can go about almost bringing the advisors into the umbrella of professional privilege. So I don't want to go into that here, but it probably is worth turning your mind to. As tied into that, I've definitely worked on matters where I've barely seen the actual end clients. Nearly all of the communication is with the professional advisor, especially if it's like a family office style. I've found that the professional is very protective of the testator's time and energy. And a lot of the time they will want to have everything sort of us done as much as we can together without their client. And then we get to a juncture where we are really targeted on the decisions they need to make and then we go away and then it's a signing process.
(11:23):
And all of the sort of back and forth has actually been with the family office professionals. So again, thinking about how professional privilege might work there and do we need to appoint that professional as an agent for the testator or something like that to maintain the privilege? So just I guess flagging as well, those types of things are not uncommon where you have got this type of client demographic. Family dynamics, obviously that's always important in an estate planning matter, but I wanted to mention it in terms of some things to just sort of have on your radar for the high net wealth clients. So four star, where we have a lot of wealth going around and especially if there is wealth coming through the estate, then absolutely testamentary trust, it's your time to shine. These are incredible wealth accumulation vehicles. It's an excellent opportunity to get assets out of individual names into these trust structures without tax and stamp duty.
(12:32):
And obviously with the concessional tax treatment for minors for multiple generations, absolutely don't sleep on the testamentary trust. And so if there is, I sort of said before, you might find there's actually not much wealth going through the estate that can pass into testamentary trust, which might be the case. But if there is a fair bit of wealth that can go into testamentary trusts, often we have to think about are we doing a testamentary trust for all of the beneficiaries, all of the children sharing one? Or are we doing a testamentary trust per child? Where there's a lot of wealth that can go into trust, you might even consider a hybrid approach where some of the wealth is going into a shared family trust with all the beneficiaries grouped together, but then we have side testamentary trusts where they are earmarked for each individual child.
(13:32):
So we're almost kind of having our cake and eating it too, especially if asset protection and keeping particular assets together as family wealth is important. The shared testamentary trust can really work there. But at the same time, if we're worried about everybody being joined at the hip and that relationship dynamic, you could actually have side or fund money in these separate testamentary trusts where they get a million or $2 million that they have total autonomy over there. None of the control mechanisms apply to that. They just have it as their money in their own testamentary trust. They can run their own race, they can decide what they want to do, and they're not having to go along with the whole family plan for the money in those side testamentary trusts. So that can be a good strategy to keep in the back of your mind.
(14:27):
I also think it's really important for this demographic, if they have got adult children of their own, that the adult children also get their estate planning done, whether it's with you and then you have to manage conflict and just make sure that everyone's interests are aligned and you're not conflicted out or they go off and you refer them off to get their estate plan done. But generally I would say we don't want an adult child who, let's say they don't have spouses and children yet. Often they're like, oh, well I'll just give them under the intestacy rules, whatever they have will just go back to their parents. You might instead have their wills just gifting everything to one of the main family trust or something like that so we're not having more assets accumulated in the personal names of your high net wealth clients. There's an assumption there that they're high net wealth because they have a high risk profile.
(15:31):
So whether they are in a high risk occupation, running a business, directors of listed entities, but usually we're trying to avoid the assets coming into their personal name. So again, just looking at do the children have assets? Have the parents gifted the children wealth during their lifetime that we then want to gift back under their will, but not have it go into mom and dad's name. Instead, it can go in the group pool of family trusts. I also see families of this demographic really invest quite heavily in their letter of wishes guidance and share a lot about the family philosophy, whether it's about investment or philanthropy and just how they have built their wealth and how they want the following generations to manage the wealth. So I would definitely make sure you give them the opportunity to do that. Sometimes, especially if they're not fee sensitive, you might even have a brainstorming meeting about the letter of wishes or they just tell you what they want and you sort of dictate it and then you actually help them get a letter of wishes framework in place.
(16:48):
Again, if it's a family office, they might want to do that instead of you, but I would absolutely be letting them know that option is available.
(18:00):
For the high net worth clients who have businesses and multi-generational businesses, definitely turn your mind to are there key children or beneficiaries in the business and out of the business, same as on - farm, off-farm. And there may be some challenges there about how we're equalising their entitlements and remunerating them, especially where some of them are taking on or inheriting the business and we need non-business or non-farm assets to bring up the value of the other children. And that can be a challenge. I like to start with that scenario with the premise that fair doesn't always mean equal. Often it does, but it doesn't always. And we really do need to think about the types of assets that they're inheriting.
(19:01):
Are we asking a particular beneficiary to assume a lot of debt, a lot of personal liability, responsibility?
(19:14):
Yes, the business might be valuable and it might have a lot of income earning potential or be on paper a more valuable asset, but it has a lot of strings attached versus cash listed shares, other assets that maybe don't have big capital gains, tax latent in them that are low risk. So just factoring all of that in. I do think collaborative estate planning and estate planning family meetings can be really powerful in that type of scenario too, because the worst thing for family disputes is surprises and unexpected consequences. So if you can bring in, I'm assuming that the beneficiaries here are like adult children. If you can involve them in the process once you hit a key juncture where there's an outline and a broad brush plan, maybe bring them in as stakeholders so they understand what the intention is. They can raise any concerns or objections with their parents while they're still alive.
(20:28):
The most heartbreaking thing is seeing family members and beneficiaries who have unanswered questions and they can never ever get them resolved after their parent has died. And so they feel like their only pathway is a legal pathway and even if they win that, it's really not going to give them the solution they are after. It can't heal that heartbreak. So going through a collaborative estate planning process or even just family meeting, especially with the family office, they might facilitate that. Obviously managing your undue influence risk and that kind of thing, but just bringing awareness so that people, if they're like, "I though I was going to be involved in the business," and you might have to have some of those difficult conversations cue the succession style family drama, but you might as well have it out in the open rather than going through a huge amount of family provision application challenges.
(21:36):
As a little sidebar, I know that we have a lot of sole practitioners and boutique firms listening. And just as I mentioned the family provision application and challenge risks, it is worth considering your firm's risk exposure. If you've got clients who have something like a $200 million estate and your insurance policy for negligence is $2 million, maybe you don't necessarily want to take on the matter. Not that I ever think that you would be negligent or I'm not saying that at all. And I know that as a small practitioner or a boutique, you very well may have the skills to manage all of this and I don't want to be coming across as saying that. But if there is a chance that it could be litigious, are you signing your firm up for a lot of pain and stress? And obviously as a small firm or sole practitioner, if this is litigated, it could just suck up all your time to work on other matters and you don't really have enough of an insurance policy if something does happen to show that you didn't do the right thing.
(22:58):
So yeah, anyway, just bear that in the back of your mind. I definitely don't want to discourage you, but the firms who are the full service firms who have the big insurance policy do have a bit of an advantage in this type of matter potentially. But anyway, back to our things to keep in mind. Sometimes we also find that with the big family groups, there could be in - laws who are involved in the business, like son-in-laws or daughters-in-laws who have an active employed role in the business or maybe even have control roles like in Succession as Shiv's partner, Tom, was actively involved in the business. So just getting clear with the client about what role do they play in the inheritance and whether it's the children themselves or the client, sometimes they can or us, we can be confused about the difference between working in the operations of the business versus actually owning the business.
(24:06):
So are they just going to be remunerated well as a salary through employment in the business with no ownership interest and we're keeping the ownership purely in the bloodline? Or do we actually have some in - laws who do need to participate in the ownership and then obviously some who don't and are excluded? So really getting clear on that who's benefiting? Is it just Budline or are there some exceptions to that? I also think, well, I've seen a lot of families in this demographic who have really strong philanthropic objectives. So they might actually already have a PAF, like a private ancillary fund up and running. Is it private public ancillary fund? You know what I mean? The PAF or just a family culture of philanthropic objectives. And again, maybe as part of their estate plan, this is the juncture where they actually go really serious with setting up a charitable structure and it might be worth just talking to them about that.
(25:16):
Do we need to bring in a charitable specialist to help with setting that up or gifting to any existing trusts? And just having that in your agenda on the table. And then another thing we commonly talk about is I call it a hard-wide constitution. Sometimes it's a family constitution. It's basically where we have companies, whether they are a company like a trading company or an investment company in their own right that owns assets, or a corporate trustee that doesn't own any assets but is a trustee of a company where we actually override the Corporations Act rules to create a bit of more of a structured framework. So as a bit of an example, nearly all decisions of shareholders as the members of the company representing the company under the Corporations Act are made by simple majorities. So if you've got three children and that's the test that has to be met for decisions, then two of the three children can just constantly outvote that third child.
(26:33):
They can build little factions. And if this is coming down to decisions like appointing directors or with corporate trustees making decisions about how the income is to be distributed that year, there's nothing stopping two of the three directors distributing to two of the three children and then cutting out a child. So the constitution where you hardwire in the extra rules builds in more protections to override that base case in the Corporations Act. So often you might want to introduce additional rules in a constitution where things like shares can only be owned by people who are lineal descendants of your clients. You might restrict future transfers of shares so spouses can't be involved. You can only transfer to members of the family, you can't go outside the family, or you bring in preemptions or rights of first refusal. Often you could do this now, but the changes only apply after your testator has died.
(27:46):
You can also say each child has a right to own the shares and then they... So you maybe set up if you've got four children, they get 25% each and then their 25% shares can be distributed as they like within their lineal descendant base. Shareholder decisions. So like a quorum, that means the number of people who have to actually be there to even vote. So you need all the shareholders to vote and know about the resolution. And then you might say particular decisions like appointing directors needs to be unanimous or decisions to actually change the constitution needs to be unanimous. With respect to directors, things like each shareholder or each lineal descendant like child has a right to appoint their own representative director. So normally directors are appointed by the shareholders, but you could say it's not the shareholders, it's each lineal descendant, or tie that into the shareholding decisions so that it works out that way.
(28:58):
You can name specific successor directors like when I die, these are the first next directors. You can have a minimum, a maximum number of directors. So that's where you say we want two independent directors and four family member directors to comprise the board. Directors can only be lineal descendants or they need to have reached a particular eligibility criteria like over 25 or accountant or a financial advisor or lawyer. You can have automatic disqualification on certain trigger events. And again, different thresholds. So declaring dividends or trust distributions is unanimous or 75%. Amending the core purpose of the business or selling key assets or things like that require a certain threshold. You actually can do whatever you want. Those are just some ideas and examples. It's usually a highly customised Document based on the family's group, the number of family members involved, the type of asset and business it owns, but really they're just to protect people so you can't necessarily have factions out voting and excluding people because one of the key things, I guess I've been sort of beating around this, but I'll just say it explicitly is where there's a lot of wealth in existing discretionary trusts, there is no fixed entitlement, right?
(30:31):
We know that. So we have to almost create controls and checks and balances so that everyone does have a fixed entitlement through the way decisions are made, even though we've still got that inherent discretionary nature. So we have seen in some of the family law cases where they have tried to fix the entitlements and that really undermines the asset protection. So having the decision-making protocol in a way that creates checks and balances so people can't be disinherited while still keeping everyone's beneficial entitlement purely discretionary, I find is a good balance. A word of warning, the Woodcock and Woodcock decision, which we discussed in one of our recent podcast episodes, I'll see if I can find it, number 82 and also the Caldwell appeal decision, which we discussed in 87. Those are words of warning and caution about still not giving one person too much control.
(31:43):
So the family council idea helps with that if no one person is fully in control. That said, you've got to do what actually makes sense for the group and the business. Now just a few logistical things in this bit of a brain dump of things that could come up. I think you could find that the estate planning exercise for high net wealth families might take longer than your typical plan. It might not be rushing them to do the whole thing within six weeks is the right approach, particularly where you might need a lot more planning and strategy meetings. There's a lot more professional advisors to bring you up to speed or be brought up to speed or weigh in. I don't know. I've always just found usually the testaides are always travelling or have various things going on as well, so you got to fit in around them.
(32:36):
So sometimes you might like to do a quick interim plan, especially if they've got no wills at all, just get something basic, everyone acknowledging that it is not the final plan, but at least they've got powers of attorney and a basic will that does something in place, whether you just give it all to an existing family trust or just all to a testamentary trust while everyone works out the more comprehensive plan. I've literally had them take two years for instance, or they just keep going. And I often find there's a lot of loose ends. So different assets or this or there's an overseas asset like the ski chalet or yep, we're going to set up the charitable structure and the kids still haven't done their stuff yet. And oh, there's a big transaction happening. So after the sale or acquisition, then we've got to revisit things.
(33:28):
So I like to keep a action list. If someone else is already taking responsibility for project management, sure, let them do it. But often I find project managing it to a degree to protect yourself is really important. So I often kept a running action list of the short term and the medium term recommendations, recording the division of responsibility. Is that with us? Is that with the financial advisor? Are they doing something first and then us? Are we waiting on them? So if it's like, well, you've had delays and it's like, well, actually we can't do our step until they've done their step and protecting yourself, as well as putting your pricing in there, recommendations that you've made from a risk management perspective that just never get followed up on. At least it's documented before you close your matter, you can check the action list and go, actually, we still haven't resolved this thing and we said that we would do that down the track, but that day has now arrived.
(34:32):
So do we still want to do it? Here's the risks of not doing it. So I do think you take more responsibility for project management as part of managing your risk and your scope about what you're doing and not doing. Often you might also change your scoping process so your standard pricing may not be suitable, particularly when there's a lot of extra entities and moving parts. You might find that you just quote for a first strategic meeting and preparation of an action list or a position paper or a high level document about some ideas. And then once it's clear what the plan is, you might quote to actually prepare the documents and then you might quote to do something on the family trust and you might quote extra for the family meeting and the scope just keeps growing and expanding. So I wouldn't want you to be caught in going, "Oh, well, it's our $3,500 package." And then you're realising it's pushing at the seams of the boundary of the scope the whole time, especially if your clients aren't even fee sensitive.
(35:41):
I don't want to be like, "Oh, they don't care. They've got lots of money, they'll pay anything." Obviously we still need to have integrity and win-win pricing, but if they're not fee sensitive and you have unnecessarily narrowed your scope, trying to pigeonhole them into the round hole when they're a square peg unnecessarily, you're going to cause yourself a lot of stress. So you might need to take a different approach on pricing and expect it to drag on and there to be delays. But yeah, at the end of the day, every client is different. It could be exactly the same as your mom and dad vanilla clients. It could be wildly different. I think managing your risk is really something to have on your radar and just understanding if it's within your scope or not. So obviously in the TT Precedents Club, we can really support you and bounce things off.
(36:38):
If you find that you just need one or two things that you want to bounce that off, great. Absolutely can step up and help you with that. If it's actually nearly everything in the matter and you're really out of your depth, it's totally fine to refer it on as well. Often we sometimes take on things outside of our depths and then they just end up being a bit of a headache to us on an ongoing basis and really stopping us from working in our space of genius. So bear that in mind I definitely don't want to discourage anybody from working with a high net wealth client because it feels overwhelming or out of your comfort zone. But at the same time, it is worth making a responsible decision as to, is this your ideal client? Do have the systems and processes? Is it a little bit of growth for you professionally or a huge amount of growth for you professionally?
(37:32):
And what level are you willing to tackle on and what are your support systems as well? So look, absolutely no rules. It really depends. It is much harder for these client demographics to sort of be squeezed into the systems and the protocols and the decision trees. You might need to really adapt and tailor it based on how they're presenting and what their existing infrastructure is. But also these can be some of the most interesting, exciting matters. The whole point of this is crafting a powerful legacy. So it really is an honour and a privilege to help these types of clients do that, especially when they take it so seriously and you can see the multi-generational impact that you are creating. So yeah, they are some of the best matters to work on as well. Anyway, I hope that gave you some food for thought. Thank you for joining me as I did that big brain dump and I look forward to seeing you next week.
(38:30):
Take care.
