What Do I Own?
We quite often experience a situation when taking instructions from clients in the preparation of their Wills that they do not clearly understand their business structures. As a result of this it is sometimes difficult to take proper instructions from clients in the preparation of their Wills without consultation with their accountant.
Many businesses are owner/operated by husband and wife teams and although they started off as simple partnerships, have over the years changed their business structure to a company or trust.
Of course with a trust they can either be personal trustees themselves or a corporate trustee.
The situation becomes even more complicated when a husband and wife in preparing their Wills have some children or a child involved in the business and some not involved in the business. It is therefore very important not only to ascertain the correct ownership of assets, but also, in some situations, one business can have different ownership of various assets. For example, a couple may have purchased their own premises to operate their business from which is owned by their own superannuation fund and leased to their business entity. They may have some equipment which was originally owned by them in their old partnership, some equipment owned in their new entity whether it be a company or trust, and/or a combination of both.
The other issue with identification of ownership is in relation to land and more importantly jointly owned land as to whether it is owned as joint tenants or tenants in common.
The general rule is that land is owned as joint tenants, if one of the joint tenants dies then the deceased’s interest in the property automatically goes to the surviving joint tenant outside the deceased’s estate. The exception to this rule is if the tenant classed as partnership land and the joint tenancy rule does not then always apply. For this reason it is sometimes necessary for solicitors when preparing Wills to conduct title searches of the properties.
Mutual Will and Mutual Will Agreement
When a couple are making their Will and they have children from previous relationships to consider, there is always a major concern that after the death of one of them, the survivor may remarry and/or change his or her Will after their partner has died. The concern is that the deceased’s children may then “miss out on their inheritance” and traditionally what some couples would do would be not to leave anything to each other outright but have it in some form of trust to protect their respective children.
If when couples enter into second relationships or marriages, they are able to maintain “separate asset pools” as well as sometimes having a “joint asset pool” then the ability to leave part of their estate directly to their children as opposed to their spouses children can easily be obtained. This however is not always the case and the younger they are at the time of making their Wills the more concern they have for each other in relation to securing their spouse’s position going forward.
One way of achieving some form of equality is for the couple to make a mutual Will and enter into a mutual Will agreement. The downside of the mutual Will agreement is that once one of the parties dies the surviving party is not able to change his or her Will.
What can be achieved however, is where the husband and wife can leave everything to each other and then set out in the second part of their Will how their estate is to be distributed once both are deceased.
How to Deal with the Family Farm
Having a large rural client base my experience shows the most common dilemma for any parents in making their Wills when they own a family farm or a family grazing property, is to try to ensure that the farm remains in the family after the parent’s death.
Invariably there are some children involved in the farming operation and some who are not. Also, the normal situation for any farming or grazing family is although they may have some off-farm assets, whether it be superannuation, a beach house, shares or cash or other assets, these off-farm assets never have anywhere near the same value as the farming assets.
I always say to any mother and father in this situation is if they wish to leave their whole estate equally between their farming and non-farming children, then in my opinion, the only way this can occur is for the farming operation to be sold along with all their other assets and then divide the cash asset pool by the number of children. This however, in my experience, is not a result that the parents would be happy with. They can achieve fairness, but not equality.
I always start the process with them in trying to identify their farm and non-farm assets and the value of these assets. I also try to explain that if they wish the farming child or children to carry on the farming enterprise, then one way of attempting to achieve fairness between the farming and non-farming children is for the farming children to inherit the farming enterprise on the condition that they pay the non-farming children a set amount of money or a percentage of the value of the farming enterprise.
My “catchphrase” is always that equally as important as setting the amount or the percentage is the period of time the farming the children are given to find the money or pay the sum of money to their siblings.
Another very important issue when preparing Wills for farming families is to identify what encompasses the farming enterprise. For example, in a sugar cane farming business, it is not uncommon to have the following variables:
a. Land owned by Dad and Mum together or just Dad, and sometimes common ownership with some of the children.
b. Old plant and equipment which is owned by one or more old partnerships.
c. The crop, plant and equipment and the bank accounts to be held in the name of an operating company but more likely owned and operated through a family discretionary trust which may have personal or corporate trustees.
d. Partnerships with neighbours in harvesting, planting and other equipment.
e. Any farmers who have owned their cane farms for a long period of time would have been issued with Sugar Terminal Shares, which generally parents wish to leave to the farming, as opposed to the non-farming, children.
f. Most farmers who supply their cane to Mackay Sugar would have also in recent times be issued with shares in that company when it demutualised from a co-operative to a limited company.
g. For those farmers who are in the Plain Creek area, clearly this is not any issue, but farmers who are in the Proserpine Sugar Mill area, although they do not have issued shares, are still members of the Co-Operativeand they must consider how they deal with their membership and possibly shares in that entity if that entity ever follows the same path that Mackay Sugar has followed.
h.Water entitlements are another issue to be considered. In the Mackay area irrigators who are either on the Teemburra or Kinchant irrigation schemes have now been issued with separate titles to their water entitlement which separates the water entitlement from the land and a simple clause in a Will leaving the farming property does not necessarily achieve vesting of the water entitlement to the farming child.
i. Once again Proserpine is a little different in that the irrigators on the three (3) various irrigation schemes from the Peter Faust Dam are yet to receive titles separate from their land for their water entitlements. However, a draft operation plan for the whole Proserpine Irrigation Scheme has been pending for quite a number of years and must be finalised one day.
As in preparing Wills for any couples who have a family business, it is important for this exercise to be carried out in conjunction with their accountant.
