RSM Australia

Estate planning and the impact of loan accounts

The impact of loan accounts in business structures on your Estate planning can be far-reaching.

Have you considered all of your assets in preparing your Will?estate planning

You’ve met with your Solicitor and have prepared your Will. You believe that your Will deals with all of your assets, particularly those important ones and just in case you’ve missed one you have advised that anything not specifically dealt with is left equally to your chosen nominated Beneficiaries.

What could go wrong?

Let’s look at a possible unintended outcome in the case of Ted, a hypothetical Primary Producer.

Of course, these circumstances apply to anyone who owns a significant business asset which is not necessarily bequeathed equally to family members for a variety of reasons.

Ted is the senior member of his family farming business and he currently controls, as the Appointor and Trustee, a land holding Trust, which holds all of the farm land. Over the course of many years the various bank loans taken out by the Trust, to purchase the land that it owns, have been fully repaid. These bank loan repayments have predominantly come from funds provided to the Trust by Ted via his drawings from the family’s farm Partnership and also from Trust distributions that have been made to Ted over many years, by this Trust, the funds of which Ted has left in the Trust. Effectively, Ted has become the Financier to the Trust, replacing the bank.

estate planningAlthough the land owned by the Trust is now worth considerably more than its original cost, the Trust still has debt, which is now in the form of a Beneficiary loan account to Ted. Whilst this is a liability to the Trust, it is an asset to Ted and in this example, a significant one, at $3m. It’s also an asset that he hasn’t considered when preparing his Will.

Of Ted’s three children, only one is a farmer and a Partner in the farm Partnership, along with Ted’s wife. It’s Ted’s intention that upon his death, this child will get full control over the Trust and also get Ted’s equity in the Partnership. Ted’s Will provides for his wife and their other children via other non-farm assets.

Upon Ted’s passing there are no initial issues within the family or beyond. While the Solicitor is preparing the required Estate documents, the Trust’s annual financial statements are also being prepared and the question is raised as to whose name is to replace Ted’s in respect to Ted’s Beneficiary loan account held with the Trust.

In other words, who does the Trust now owe the $3m?

Upon review of the Will, the Solicitor advises that Ted’s Will did not specifically mention his Trust Beneficiary loan account but does leave any remaining, non-specified assets equally to his three children.  This would appear to include his Trust Beneficiary loan account.

In accordance with Ted’s will, the Farmer child will get control of the land holding Trust but it comes with an unexpected liability to the non-farm siblings of $2m.

Although the Trust holds more than sufficient farm land to sell and realise, after any tax liabilities, enough funds in order to payout the $2m, what does this mean to the Farmer child who is trying to operate the farm as Ted had planned?

Ted specifically wanted to keep the farm land intact and the operations without any further immediate debt. As noted earlier, this applies to any significant business asset owned by Ted whether it be a farm or anything else.

The sale of any Trust land, in order to payout the siblings, may cause operational issues for the farm. Further borrowings, either from the Bank or even from the non-farm siblings, may cause issues for the farm, such as unintended cash flow pressure.

All of these unintended consequences were not in Ted’s plans and highlight the importance when preparing your will of understanding what assets you have and in turn where you want them to go.

Want to know more about preparing your Will?

For more information, please contact your local RSM office.

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