Setting Up For Success
Cathy had been working in the corporate jungle for a number of years and she and her husband, Dan, had really started to think about what their future might look like. They decided that they would like to own their own business. Cathy had the people management skills from her corporate days and Dan had the practical skills. They also thought that owning their own business would give them flexibility as their two sons moved through their teenage years. They started to investigate a number of businesses and settled on becoming a franchisee of a well-known international franchise.
They went to see their lawyer and their accountant to start the due diligence process. Both of them told Cathy and Dan that they should consider setting up a trust. Trusts are a great way of protecting assets (e.g. a family home) if you are in business for yourself or a company director and the best time to set up a trust is on a “blue sky day”, when there are no threats on the horizon. Their lawyer told them that trusts and asset structuring has become very specialised over the last five to ten years. The law has become more complex and the potential issues greater and so he recommended that they go and see a specialist trust lawyer.
Their accountant told them that there was great tax flexibility in holding income producing assets (i.e. the shares in the business which owned the franchise) in a trust. The trust tax rate is 33% (as opposed to the top personal marginal rate of 39%) and any income used to help their teenage boys could be allocated to them at their marginal tax rates.
Cathy and Dan took their lawyer's advice and went to a specialist trust lawyer, keen to set up a trust. She told them that it would be important that she worked as part of the team with their other lawyer, their accountant and also their banker. She wanted to ascertain from their other lawyer if there would be any guarantees within the franchise agreement, and also the lease, that they would have to enter into to secure the premises for the business. Their other lawyer confirmed that not only were Cathy and Dan giving personal guarantees, but the fine print of the franchise agreement stated that the shareholders of any company who was the franchisee would be guaranteeing the terms of the franchise agreement as well. What this meant was that if Cathy and Dan put all their assets into one trust, those assets (i.e. their family home) would be used to guarantee the obligations of the franchisee under the franchise agreements.
Cathy and Dan’s lawyer advised them that in cases like this, it was advisable to set up two trusts – one for their family home and other lifestyle assets and one for the business.
She said that is a common structure for many business owners – having their lifestyle assets (home, bach, boat etc.) in one trust and their business, more risky assets in another trust. It also could help with making sure that any banking arrangements for the business didn’t impact the family home.
The specialist trust lawyer also took them through updating their wills and also a document called a memorandum of wishes, which set out their wishes in relation to the trust. She said it was a bit like a will for the trust and would set out what would happen with the trust assets if one or both of them died or lost capacity. She also recommended enduring powers of attorney which would come into effect if one of them lost capacity.
Cathy and Dan were so grateful to have expert structuring advice at the outset of their business owning journey. They were also grateful to their lawyer for referring them to a specialist trust lawyer. Owning their own business was a massive step for them and to be properly set up, gave them peace of mind.
If you feel you could use some specialist trust advice, don’t hesitate to contact Tammy McLeod or the Trust Team.
tammy@davenportslaw.co.nz | 09 883 4420
