New financial year goals: Building wealth through the generations

Rebecca Archer 
Welcome to Navigating the New Normal – Grant Thornton’s podcast exploring trends in business and the marketplace. 

I’m Rebecca Archer and today I am joined by Kirsten Taylor-Martin, Partner and National Head of Family Business Consulting and Heather Gouveia, Partner in the Private Business Tax and Advisory service line.

We are just about to enter a new financial year, and so it's a perfect opportunity to discuss how Family Offices can consider their family wealth goals. 

Welcome Kirsten and Heather!

Kirsten Taylor-Martin
Thank you for having us, Rebecca.

Heather Gouveia 
Hi, everyone. Nice to be here.

Rebecca Archer 
So just to kick off, could you remind our listeners, what exactly is a Family Office? And does that differ from a family business?

Heather Gouveia 
So simplistically, a Family Office is really just the way in which a family's wealth is managed, and how it's looked after, and if that family also owns a business, we're talking about the family wealth outside the family business – and that usually comes in the form of property, superannuation and investments. 

So, I guess you'd say a well-run Family Office will not only look after the day-to-day management, and the administration of the family's wealth, it will also have procedures in place to really hold and protect the family's current position. 

So, we'll have things in place around the right structuring, good governance, making sure all family members are educated, and also ensuring that decision making is centred around the family's goals, which is really important. 

Rebecca Archer
And do the goals of Family Offices change or differ from family to family do you find?

Kirsten Taylor-Martin
Absolutely, the focus on priorities of each Family Office is very unique to each family. So, they're all totally different and we need to tailor our services to each particular family. So, when you're working with a family, it's really important – so, we meet each family member, and ensure that we understand their long term vision because we need to ensure they're aligned as well. So, we can really assist in bringing the vision to life via structure and also family governance. But the other thing to be mindful of is that each family's visions change over time as well. So different circumstances could occur, or the family members get older. So, it's really important that they keep re addressing their own vision to make sure that, ‘are we still heading in the same direction as we were when we first said it?’

Rebecca Archer 
Yeah, it sounds like it's not just a ‘set and forget’, you need to regularly check in and make sure that everyone's on the same page, and that those goals are still aligned.

Kirsten Taylor-Martin
It is really important that they do keep at least on an annual basis, touch base again and say, ‘is this still where we want to head?’ 

Rebecca Archer 
As we move into this new financial year, can you take us through how a Family Office can start the year on the right track?

Heather Gouveia 
So, we've put together seven tips to consider to make sure that you and your Family Office are ready to start the new financial year. First and foremost, I think the best place to always start is with structuring. Do you have the right structures in place which hold and control your assets and your income? And does that structure actually allow the transfer of wealth to the next generation. 

It's vitally important to get this right up front; any changes that are made later down the track and have significant tax and transfer duty costs. So it's really important to avoid that at all costs. In terms of a Family Office, we find that trust structures are predominantly used. With trust, it's, you know, it's really important to make sure you understand who controls your assets of the trust, and is that the right person for now, is that the right person for your current circumstances? And for a trust, it's actually the appointor named in the deed that has ultimate control, not the trustee. There's sometimes misunderstanding in that respect. 

Recently, I was actually working with a client who held all of their wealth in a trust structure. The trustee was the husband and wife, but when we reviewed their deed, it was actually their estranged daughter that was the named appointor in the deed. So in fact, it was the estranged daughter who had ultimate control over their assets and income of the trust – something that came as quite a surprise for them. So just a really good reminder that as families change and as they grow over time, regular assessment should be made of the structures that they have in place. Something else too – another consideration required on an annual basis, for those families that own a family business consideration should be made each year as to how much wealth they want left in the business, and how much should be extracted for investment in the Family Office, and is that actually in line with their family's vision? This involves an annual assessment of the business working capital requirements, the business's plans for capital expenditure, and also the debt funding requirements of the business, and that's something that we can certainly help you with. 

Kirsten Taylor-Martin
The third point is to make sure that you're always take your family on the journey. So, in many situations, the parents have a plan to create wealth and to invest it for the benefit of the family. The wealth grows substantially, and the children stand to inherit quite a substantial inheritance. The parents are visualising that the funds are going to be there for generations and generations for the benefit of the family, but the big step that we find that is often overlooked, is actually financial acumen training. So, what we see is they send them to the best private schools and think about education, but they don't think of the basic financial acumen training. 

We are seeing families lose millions in their wealth as a result. So, when I say take your family on the journey, it's really important that the family understands your strategy, why you make certain decisions, who you receive advice from – so, when something does happen to you, you know that they can continue and preserve the family wealth. 

The other thing that we are really seeing is a lot of the younger generation aren't understanding what they need in order to take out a loan for themselves to start their own financial journey. So, they have lived with such wealth, that it's just the basic things of applying for a loan and what documents you require and what the banks are looking for – and this is really what we're talking about when we talk about financial acumen training as well. 

We find that family council meetings are the ideal forum for these conversations to begin, and if you have them independently facilitated, it ensures that they're held on a regular basis, and the agenda always includes educating the family. So, the families that I work with, we always talk about the challenges and opportunities that either the family from a wealth or a business perspective have seen in the last month, and that enables the parents to talk about what challenges they're seeing and how they're going about them so the children can understand that when they're in the parents shoes, what they need to be considering and what they need to be looking out for, and learning from that experience. 

The fourth point is an investment strategy. So, I often refer to the accidental Family Office because, particularly when there's a family business, we see this happen all the time, that families look to take money out of the business. And even if you don't have a business in Australia, so many families where they start their wealth creation journey is through acquiring property. So, when it's a business, they'll acquire the business premises, then they'll buy another property, another one another one, and at no point did they actually consider themselves a Family Office, or do they think that they're creating wealth for their family – it’s sort of a consideration later on and much to the point that Heather's already raised, they really haven't thought about what's the ideal structure to hold these properties in? Should we diversify? Should we have other assets besides just the property? 

So, it is very important that there is an investment strategy in place, that they do speak to an advisor who can assist them, and that it aligns with the vision for the future so they can achieve the wealth creation for their family that they're aiming for.

Heather Gouveia 
So, looking about the future, a vision for your family's future is only possible if it's considered early. An area that's often overlooked is the estate plan ensuring, as Kirsten said, it's in line with the family vision. In many instances, a will is not sufficient. Superannuation and assets held in family trusts also need to be considered as part of the estate planning process – structures that are not always considered in a will. 

Something that is overlooked sometimes also is loan accounts and unpaid trust distributions in family trusts. They also form part of the assets of an estate and must be considered. So regular assessment is required to ensure the will reflects the family's wishes. 

Kirsten Taylor-Martin
The last two things to consider just really going further from what Heather was talking about with estate planning. So, we've already talked about how Superannuation is one of the major assets in a wealth creation strategy for a family, but it's not covered by the will or your estate plan. 

So, point number six is make sure you have a binding death nomination in place. And much along the theme of what we've been talking about today, also review to make sure it's still in line with your vision. So what we often see is, at some point in time, the family will decide maybe to give the family business to one of their children. And to ensure that everything is fair, that means all of the assets outside the business will go to the other child. 

But their binding death nomination probably leaves their superannuation to their spouse then equally to their two children. So, at that point in time, when you decide that one child is going to get the business and all assets to the other, it needs to be updated to go firstly to your spouse, then to that that other child. So, it's, again, another example, start a financial year, the perfect time for people to actually look at, make sure they have a binding death nomination – it’s scary how many funds don't have one in place, and number two, make sure it's still in line with their well strategy. 

Now the last point, point number seven to look at is make sure you have an enduring power of attorney. Now this one is becoming more and more important as we have an ageing population. And it's really looking after – if you lose mental capacity, you've already nominated someone to take over that role for you. So, we see it a lot with self-managed superannuation funds. So we recently had a case – and it was best case scenario, often we learn from worst case scenarios, but this one was best case – but they already had an enduring power of attorney in place. So that meant when the father lost mental capacity, it meant that we were able to resign him as a Director of the trustee company; we didn't have to sell any assets, all the wealth stayed in the superannuation fund – it continued on as usual, and it enabled the family just to look after and to look after his health and make sure he's okay. And they didn't have to do anything financially, because that was in place. 

So we now make it a step, as like a part of our health check, and a really good thing for everyone listening to do at the start of the financial year, but make sure you have an enduring power of attorney in place, and we always make sure also that we have a copy of it on our files because that moment when something goes wrong, the family doesn't want to be worrying about looking for it or worrying about it; they just want it all in place and everything to continue on.

Rebecca Archer
Some absolutely fantastic tips there ladies, thank you so much. I wonder in terms of family disputes, there's been a bit reported that family disputes around inheritance are on the rise because of growing wealth, longer lives, and, of course, more blended families as well. Have you seen any evidence of this? And what advice would you have for people going into the new financial year around this?

Heather Gouveia 
Yes, definitely Rebecca. It can be a really difficult conversation to have with family members around inheritance, particularly as their family circumstances change over time. Change in terms of new members joining the family, you know, new marriages, new relationships, children, stepchildren, but also members leaving the family as well, in the event of relationship breakdowns. But I guess like any difficult conversation, it never gets easier, and the earlier that those conversations are had, the better. The best outcomes that we've seen with the clients that we deal with, when looking at distributing their family wealth is always those families that really communicate well, and make sure that their expectations are really clear. I mean, sometimes family members might not necessarily like what they hear, but it's important that expectations are clear. The primary goal always being centred around preserving the family wealth, while protecting family relationships at the same time. 

You know, the last thing we want to see is for a messy legal dispute over a will, and that's something that will quite quickly erode any family wealth that's there. I mentioned earlier, that it's really important that families understand their structures really understand who controls their assets, and their income, and who that control should pass to. And that loan accounts are sometimes forgotten during the estate planning process. You know, it would be a really terrible situation if say, we had the Jones family, and they wanted Mary to inherit a particular entity and particular assets. And when she did actually inherit it, if the loan accounts or the unpaid trust entitlements in that entity were not dealt with properly under the wheel, and Mary ended up actually owing a significant sum of money to other family members. 

So, for this reason, it's really important to work with both your accountant and your lawyer working together to make sure that all the relevant details are taken into consideration and then most up to date information is used during that process.

Kirsten Taylor-Martin
I agree with what Heather has said and it's quite interesting. We're seeing a fair bit more work in this area of late – I do feel over the COVID years, a lot of people did really reassess, and the estate planning did sort of come front of mind, and they did want to get their house in order. So as accountants, we're currently doing a lot of work with lawyers just to ensure that the family understands their structures and has everything in place and the documents – the lawyers can only put together something as good as the instructions they're provided. And that's where it becomes really important that the accountants involved to make sure that it's really clear instructions, but I'm going to add a few bits of my own. Heather, have you been watching succession?

Heather Gouveia 
I haven't – but I think I need to.

Kirsten Taylor-Martin
So, for everyone who's been watching, amongst all the drama, there are some real key takeaways, and it really does outline why we're currently seeing a lot of disputes, and why there's a lot of wealth that's being lost. 

So firstly, clear communication is essential, and Heather touched on this one, but in succession, Logan told all of his children, they were the chosen successor, and this caused a lot of confusion. And it also caused confusion for the advisors because no one really knew who Logan was going to select as the successor. 

So, the second thing is the estate plan. So you need to ensure that your vision is achieved by the estate plan. So we've already talked about that with the accountants and the lawyers working together, but then also you need to communicate it. So there's a really famous episode where everyone was trying to figure out whether the change to Logan's will – whether he underlined Kendall as the successor or did he cross Kendall out as the successor. And this was really important because he promised succession to all the different children, they all had different views, but because he never sat down with his advisors, and actually told them what his plan was, they were just as confused whether it was an underlying or the name was crossed out. So again, you need to have the estate – and we joke about the show Succession, but if you speak to lawyers, you'd be surprised how many incredibly wealthy families, there is no will, and then sometimes it's just a handwritten scribbled note, and everyone's trying to decipher what the writing actually says. And then they're leaving assets to children assets that they don't even own; they're owned by trusts and different vehicles. 

So as much as I joke about Succession, unfortunately, that storyline has come from true cases that lawyers are seeing all the time. So the third thing is that families and also many advisors – they approach estate planning one generation at a time. But when you're talking about an enormous amount of wealth, and a vision that goes for multi generations, it's really important that you have a multiple generation lens when you're approaching estate planning. 

Now, Heather touched on a number of different things with blended families, stepchildren, divorce – when you take all this into place, it really does show how easy it is – a family that or parents that might have raised 20,30, 50 million, how easy it is to lose it within that next generation, and you have a third generation that might not even walk away with a million dollars. So it is really important that you look at all estate planning with a multi-generational lens. And the whole goal needs to be at least preservation of the wealth, it can be very difficult for future generations to actually create more wealth or substantial wealth, but when parents are putting everything into place, the key is – at least preserve it. And these different strategies will help with that preservation and ensure it reaches third, fourth, fifth generation.

Rebecca Archer 
I'm wondering if structure, diversification or investment strategy are impacted by inflation and the wider economy? So, do the current economic conditions affect how Family Offices should think, invest and operate?

Kirsten Taylor-Martin
They do – but one thing that I will specify that's a little bit different with Family Office is they often have a long-term vision. So ordinarily, where people might panic and they're thinking very much short term, Family Office, particularly once there's been a substantial amount of wealth created, they have a much longer-term vision. So, they're not going to be as panicked. So, they definitely will be reviewing and making sure it's all in place to achieve their vision and their goal. But yeah, for me, the biggest difference to probably most people is just their long term perspective.

Heather Gouveia 
I think also in times of these difficult times that we're being faced with at the moment – increasing interest rates and inflation – just the reporting perspective is really important for the family just keeping up to date with where their actual financial position is heading at the moment, but as Kirsten said, it's a long-term strategy. 

Kirsten Taylor-Martin
And to that point, that's where education comes in as well. If you're actually showing the reporting and you're explaining to the next generation why you're not panicking and why your strategy is currently working in this environment, that's all education for them, and if they don't receive that, when they're in charge that they could be panicking, particularly if you're reading what all the media is saying about the current economic climate. So, I know we're poorly harping on about the same point, but unfortunately, when it comes to family wealth, it's the same issues that keep arising that cause the erosion.

Rebecca Archer 
Just a question about that Kirsten, do you think that that sort of generational hangover, where it's just not the done thing to talk about how much people earn or money in general, even within families, you know, you're sort of supposed to, back in the day, keep that all quite private and shield the next generation potentially, from having to worry or concern themselves with that?

Kirsten Taylor-Martin
It's really interesting. I was speaking to a family many years ago and they said as they were learning about succession and family governance, they were taking it all on board, and they all understood everything, but the very hardest part that they found was actually talking about their wealth, because they said that always been raised to not discuss it. And also with your children as well, they're going to be marrying, and there's going to be new people coming into that into the family. 

And also, I think it's quite cultural in Australia, but a lot of parents want their children to work hard and to make their own money. So, they didn't want them to think I've got money, I don't need to. So absolutely, it is a real, it's a real difficult thing to work your way around, and how do you do it in a way where you're still inspiring them and motivating them to work hard. But I think that's where the family values really play an important part because if the family can communicate and show why they're doing it, and what they're trying to create for their children and their grandchildren, and everything, I do hope it's that education piece that ensures the next generation wants to work as hard as their parents did, and they want to create the same – but absolutely, that's always been one of the hardest parts that families have difficulty in discussing.

Rebecca Archer 
Just before we wrap up anything that we might have overlooked, or that you'd like to delve into a bit deeper or anything that people should really walk away knowing especially with the commencement of this new financial year?

Kirsten Taylor-Martin
For the calendar year, we do New Year's resolutions, but new financial year, I think it's a really good time just to, you know, do a health check, just make sure you've got everything in order. We do rush a lot towards the end of financial year and make sure you've got your superannuation contributions made and all these last-minute things – I think it's good to just catch your breath and go, ‘are we set up how we want to be for the year ahead?’

Heather Gouveia 
I think too, if I could add to that also, is just and, you know, when you're putting in place, you know, your estate planning, your wills, reviewing deeds, I think, you know, it's not a set and forget; it's something that you should pull out every year, but if not every year, every couple of years and just revisit, make sure that everything is still in line with the family's vision, and whether any of your family circumstances has changed, which might change that vision a little bit.

Rebecca Archer 
Wonderful advice in general. Thank you both so much for your time. 

Now, Kirsten and Heather – I wonder if people are wanting to get in touch with you who are listening today, and they're interested in learning a little bit more about specifically what it is that you both do, and how you might be able to help them? How should they find you?

Kirsten Taylor-Martin
Heather and I can both be found on LinkedIn. Or alternatively, if you go to the Grant Thornton website, you can find both of us there together with our email addresses, and we're happy to speak to anyone that's got any questions.

Rebecca Archer 
Thank you for listening to our latest episode as we enter the new financial year. If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton Australia on Apple podcasts or Spotify.