Intergenerational Wealth Transfer

Intergenerational Wealth Transfer – Podcast Episode 11

Welcome!

Raffi – Welcome everybody to the latest episode of the Unlock Your Business podcast. I’m lucky today to have one of the financial planners, mortgage broker and partner at Manly Financial Services. And what we’re going to talk about today is different ways to own property, different benefits in terms of buying property in different entities.

We’re also going to talk about wealth transfer because what we do see in a lot of cases are scenarios where our clients unfortunately pass and then we’ve got to deal with inheritance and transfer.

Introductions

Intro – Hi, you’re listening to the unlock your business podcast where we discuss ways You can unlock your personal and business wealth with financial investment and business strategies.

I’m Raffi Pailagian I’m a financial advisor and run financial services businesses This is a video I created in collaboration with my business partners, that aim to help individuals, families, and small to medium business executives manage, grow, and protect their wealth.  Through this podcast, I share my experience and knowledge from a financial advisor and business owner’s perspective, in addition to my wins and struggles.

So if you want an authentic and honest discussion on personal and business growth, visit my website. Investment, management, and unlocking wealth creation strategies, you’ve come to the right place.  The Unlock Your Business podcast is brought to you by financial advice firm Manly Financial Services.

Please see the website links in the show notes. We hope you enjoy the discussion.

Raffi – Firstly, let me introduce Zareh. Zareh is a partner, financial planner and broker at Manly Financial Services. So welcome to the podcast, Zarah. This is going to be a lot of fun and hopefully this is going to be the first of many of these discussions.

Because we have a lot to talk about. And, and they’re going to become more comfortable. Well It’s a bit early in the day for a whisky, but maybe if we do a later one, we can even crack up in a beautiful bottle and talk through that as well.

But let’s maybe start with I guess your experience, your position, and how you sort of look at things from a planning and broking perspective.

Zareh – Okay, so let’s start off by saying I started planning first, became a broker second. And  going off what you said with the different entities.  I’m seeing a lot more of that, right.

And I think I’m in a position of advantage because I have the planning background, so I can, I’ve got more experience in at least setting up these loans as if the person wants to purchase a property in a family trust or a company. Look, at the end of the day, we want to do what’s best for the client and sometimes these entities help save thousands in tax for the beneficiaries which Hopefully one day will be our clients as well.

Raffi – Definitely. Definitely.

Raffi – Yeah, isn’t it interesting how like you look back when you started planning?  And you know, I started planning maybe 10 years before that. But I mean, we’ve done a lot of work together through that period where we’ve both sort of developed and we’ve seen the firm develop and the clients develop.

But isn’t it interesting how we’re now working on these more complex structures, whereas maybe back then, primarily, predominantly around the time of the GFC. It was almost,

Zareh –  it would be individual Work.

Raffi – Yeah, all individual. But the investments felt like they were more complex. Yeah. Like, and obviously a lot of those things fell apart.

Changing Requirements

Zareh – I’d say the last five years. Big change in the last five years.  And it’s also, we’re working closely with accountants. Yeah. Accountants always wanting customers.

Raffi – And incomes are going up. We see more clients who are earning, you know, over three, four hundred thousand dollars, and they need a lot of this.

Zareh – And the partner might not work. Or they want it for asset protection. Seeing a lot more of it. And the value add.

Raffi – Yeah. You know what I’m seeing a lot of is, um, I’m starting to see more referrals from my clients of their kids and their kids may be sort of my age, might be a bit older but it feels like they come from a position where they don’t really know what parents have done. And they don’t really have a lot in their wheelhouse from an investment education point of view. And also, you know, they might have a super fund or an investment property, but they don’t really understand some of the intricacies that their parents understand, even if their parents aren’t really investment savvy style, sophisticated people.

What do you find around, I guess, you know, education?

Financial Education

Zareh – I was going to say, first it’s an education piece, right? You’ve got to make sure that the customers understand that. The beneficiary or the kids understand why it was put in the first place.  A lot of the time it’s because of them. That’s right. So they can save on the tax or save on the eventual inheritance.

So once they understand or they’re comfortable with that I guess entity and structure then you can talk about, okay, let’s start planning for your kids and, you know. But I think education is a big thing because you don’t want clients going into something that they don’t understand.

More Complex Requirements

Raffi – Yeah, exactly. And a lot of our clients have.  you know, I’m not going to say complex structures, but a lot of them do have, you know, self-managed super funds, trusts, companies, whatever, and if the kids who again might be in their forties and fifties don’t understand it, then the chances of that wealth being maintained and continue to grow. So, you know, you see those families that have this multi generational family wealth. I mean, that’s really what we’re trying to build, right? Yeah.

Zareh – Yeah. I actually, I’ve got a story for you for a client. Okay.  So this this client unfortunately lost both parents within, within a year and a half, say, and they were quite, quite well off. Few investment properties, own occupied property. It was Battleaxe property, two properties. And they were very comfortable with their accountant. It was based up in Queensland.  And I actually wasn’t the advisor of the, of the spouse. I was the advisor of the spouse. of the, of the husband. And then, sort of it was just a natural progression becoming the adviser for both of them. Anyway, long story short they got the tax bill, from so they sold, they sold their own occupied place, and there was two investment properties they sold.

Raffi – So they, they inherited, they inherited the property and then they went to sell?

Zareh – And the unoccupied property had two dwellings on the, on the on the block. And they said, oh, can you just have a, a, have a look through this? And, and this the example that I’m just saying, here’s more of a, you know, it’s good to have a, an advisor just to, you know, even if you’re comfortable with the accountant. Just to help through it. Second set of eyes.

And it was like a bill for close to $350,000. And I said, hang on, something’s not right here.  And I, and I saw that the accountant had put a, a, a capital gains tax on the own occupied property… the second property. Okay. Right.  So I said, don’t pay, just give me a week let me do my research, this doesn’t sound right.  What had happened was the, the parents, had split the, the, the block and they built a second property back in 2005. Right, but the land was purchased pre-85 (1985).

Raffi – Oh, so it’s no CGT.

Zareh – No cgt. So then, so I said, well, I went back and I said to the, the car, the client, I said, well, really, if you’ve built a house in 2005 the dwelling doesn’t appreciate the dwelling depreciates. The land appreciates.  So I reckon you should be paying zero tax.  Sure enough, they went back from a $350,000 bill to zero. And that was just a, you know what, really the accountant should know more than me when it comes to, but it’s just about. And you know, they had investment properties, they had to pay tax, that’s fine.  And you know what, maybe, you know, going off this topic, if there was property in trusts and companies, it might be a different story for this. Cause they were all individually owned by the parents.

Raffi – And that’s interesting. We’ll talk about this in a sec, but like the I just saw some clients only today and they had four properties owned individually and I just, you know, and I get it when you buy properties, maybe you don’t think these things through and it’s not, your first thought isn’t a trust or a company or something like that, but, but it would, it would have made it, once you accumulate multiple, you, it does definitely make a difference.

Zareh – You know what Raf, like you said, if you’re going to be looking to buy a property, you’re not thinking about 20 30 years down the track. You’re looking about, okay, how can I get finance?  Now I’ll tell you right now, finance, getting finance through a company or a trust is going to be a little bit more difficult than getting your personal, like, that’s just one  example, right? Right. Yeah, not every bank will lend to a trustful company. At the end of the day, if someone likes a property, they wanna, they wanna buy it, you know?

Raffi – As soon as they can get the finance, they’re off and away. We can invest in a super fund, so we’ll put that one aside for the time being. We might touch on it actually.

Zareh – That’s becoming, that’s becoming very popular as well.

Personal Investment v Owning A Property

Raffi – So let’s talk about personal investment, but let’s talk about personal versus owning a property or an asset through a trust versus owning it in a company where the individual owns the shares in the company or the units in the trust. And then we’ll talk about Superfund because that’s a different tax environment as well.

But, but let’s talk about some of the benefits. So, obviously, let’s talk about income. I mean, you buy a property. Well, actually, let’s talk about from the start. We go and buy a property. The main costs are, we’ve got to come up with a stamp duty. We’ll borrow the  money. So, so I guess it’s more difficult within a company or trust versus individually?

Zareh – So off the bat, you’re not going to get the choice. So not every lender will, right?  But let’s assume you do find one. They’re just they’re, I can’t even think of St. George. One of the lenders actually are now against corporate trustees as well.  99 percent of them are all corporate trustees, you know I think, I think it’s more so the choice because not every lender is comfortable in that space.

Trusts & Companies

Raffi – And I guess they assess, they’re going to assess.  Let’s look at trusts and companies. I mean, personal is easy. They look at my income and they assess serviceability.

Zareh – It’s the same thing. If the entity or the company doesn’t have any other assets, they will if there is, but if it’s a brand new entity set up just for the purpose of buying that security, that property, they’re going to take the members of the trust or the directors of the company as guarantors because they’re going to use their income.

Serviceability & Trusts

Raffi – Okay and serviceability. So that makes that easy. I guess you still pay stamp duty in all cases, right?

Zareh – Yeah.

Raffi – Yep. Properties purchased. The income is flowing through – For the individual it flows through to their tax. So if it’s jointly owned, they’re both going to pay tax on 50 percent of that net income, obviously after, after expenses and interest.

What Combining A Trust & Company?

Zareh – Look. The main, the big advantage of having the trust is you can, you’ve got the discretion to offload or distribute the net income to whichever beneficiary you want.  So that works really well with you know, husband and wife, husbands or any husbands on $400,000 and wives on nothing, it makes sense to distribute the money. So that makes sense. Adult kids is a big one. We’re seeing a lot more of that now. Yeah, that’s the main advantage besides asset protection and stuff. We’re just talking about income.

Raffi – Just talking about income at the moment. Yeah, exactly. And in a company, we don’t really have to distribute that income.

Zareh – Yeah. You can keep it as retained, retained earnings. And then pay, pay out as dividends if you want in the future.

Raffi – Yeah, a hundred percent. And, and the interesting thing is from a tax perspective, if I’m on high income earner earning in the top marginal tax bracket, and let’s assume that my average tax rate’s around 40% or 45%, whatever it is if I’m personal ownership, I’m paying tax at that amount via a trust, I’m paying tax on the net income at that amount. In a company, however, we’re only taxed at the company tax rate.

Zareh – 30 or 25%?

Raffi – Well, 27, unless we Unless it’s a trading company.

Zareh – Unless it’s a trading company.

Raffi – Unless it’s a trading company, yeah, exactly right, if we’ve got some other consulting income or whatever it may be through that. So, so 27% is a hell of a lot better than 40% plus.

Zareh – Yeah, absolutely it is.

Raffi – And then you can, you know, when you decide to take that income as in a form of a dividend you can.

Zareh – You just pay the top up tax.

Raffi – Pay the top up tax.  Again, you get that credit back. That’s what you do. Then we’ve got, so we’ve talked about tax, taxation, I guess, also not only about tax, but you’ve got tax control with the trust, like you said, beneficiaries.

Let’s talk about capital gains tax, because I think that’s the main area where a company, is the most disadvantages.

Zareh – Well, it’s, you can hold it for 10 years, six months, five years, you’re going to, you’re going to get taxed at the same rate.

Raffi – the same rate on a hundred percent of the gain.

Zareh – Obviously personally you get 50% discount. And with a trust it depends on the beneficiary.

Raffi – But again, all each beneficiaries get the distribution. And then they each get their discount. The discount, so it, it works out really well.

Zareh – And if they’re, if they’re at a higher tax bracket, let’s say, they can still, you can still use a bucket company. We even mentioned before, with a trust, you can have a bucket company. And have the, all the benefits of a company tax, right? With the company being the beneficiary.

Raffi – Yeah.  Isn’t that crazy? I mean, there’s so, there’s so, there’s so much, there’s so much we can do now. It’s actually quite exciting times.

Zareh – Until the government changes.

Raffi – Until the government changes the rules. And then we’ll find other ways to get the same benefit for our clients. And I guess from a, we, we talked about so that’s the biggest benefit sorry, disadvantage of a company in that we don’t have that 50 percent discount. In saying that a high income earner earning the top marginal tax rate at 47, 47 or 45, 47, anyway, the highest marginal tax rate. That’s fine. They’re gonna, they’re still gonna be paying a bit more, even if they pay on 100% of the gain through a company at 27%. But there are ways to sort of manage that super contributions, whatever it may be. So then we get to the point where, let’s say that we bought the property, we’ve managed our tax as well as possible. Well, let’s, let’s talk about asset protection. I think that’s important to, to touch on, even though we want to talk more about transfer of assets through estates and this and the other. Company trust a hell of a lot better, right?

Zareh – Touch wood I haven’t come across anything like that with my clients, but I’ve heard horror stories of people being sued and stuff, and at least, at least, you know, with a major asset like a property being protected in a, in a, in a family trust. Yeah, it’s a lot more comfortable for the, for the client knowing that, that’s almost untouchable.

Raffi – And I think that’s where the importance of the company structure comes in, in terms of how you set it up. So we talk, you said before that if it’s a trading company then it gets taxed lower, right? And that’s obviously something that we like obviously lower tax is what you prefer, but, but the scenario is that if the trading activity is one where the client may have risk of being sued or this, that and the other, then you really should be careful about doing that and maybe having those operations separate.

Zareh – Pay the extra tax.

Raffi – Pay the extra two percent and use a different entity. Have you, have you seen the scenarios where, you know, you have multiple beneficiaries, property, and we want to sell, some of the mess that can occur?

Zareh – I have. Yeah. I have multiple times, only one of them was messy.

Okay. But all the other ones, at least the beneficiary were all on the same page and stuff. But yeah, I did, there was one instance where it was quite messy. One, one of the beneficiaries wanted it sold straight away. The others wanted to fix it up. They thought they’d add value. Yeah, it gets quite messy.

Raffi – It does, it does. Everyone does have to be on the same page.

The Value Of Advice

Zareh – You know, you know, this, if this conversation has taught me anything, man, the value of advice is, is priceless almost. A simple thing, right? It’s sort of, sort of got to do with this. A client emailed me the other day,  I want to update my beneficiary forms, for a standard super fund, okay? I want to nominate my boys.  I said, okay, that’s fine. How old are your boys? They’re adults.  And I just, it was a simple line. You know, the tax is different to,  it took me two seconds, but that’s probably saved so much for the client, but yeah. I know it’s not part of this thing, but it’s, it’s  crazy. And then just going through this, we could go on for hours and hours a lot of stuff that our clients, well it’s our job to educate the clients,

Raffi –  It is, but at the same time it’s our opportunity to do that, and unfortunately you know, there’s so much noise in our industry, whether it’s about compliance, whether it’s around what’s happening in the markets. I mean at the moment all we’re talking about is US election that’s coming up in November. We’re talking about interest rates. All that noise stops you from talking about the important things. And realistically, market volatility is just a blip. And unless it’s something like a GFC, we’re going to forget about it in no time. I mean, so GFC is the last one I really remember. And prior to that was say, dot com.

Zareh – Yeah, but there was a, there was a big dip during COVID as well.

Raffi – But we forgot that because it was such a quick, short, sharp, V shaped recovery.

Zareh – Yeah, but yeah, you’re not investing for two years, you’re investing for 34 years.

Transferring Assets

Raffi – But this is the point, right? When we’re talking about transferring assets at a time of inheritance, time of death, you talked about that scenario where you’ve got a family where not all the beneficiaries are on the same page. You know.  with all the noise and everything that happens out there in everyone’s life, whether the clients and advisors, whatever it’s, it’s really important.

And we’re seeing a more and more just to be able to stop. And this is why we’ve, we’ve, we’ve, we’ve developed this family financial planning and intergenerational wealth transfer sort of program to educate clients. in their own time around, hey, we need to sit down and plan this. We need to sit down and even if we don’t do it as around the big table with, with all the beneficiaries and the parents, even if we do it individually, let’s get everyone on the same page.

Let’s give everyone the same level of education. So they’re on the same page.

Zareh – That will add so much more value.

Raffi – Yeah, let’s facilitate.  Oh, I want to keep it. I want to, I want to sell it that kind. Let’s facilitate those discussions and then work to be able to come up with a solution that works for everyone.

Yeah. I think, I think that’s, you know, I think that’s definitely something that should happen. I mean, one of, you know, we talk about clients who pass away or who were on their deathbed. I know it was a morbid topic, but with superannuation and how important it is for people to call us so we can save them that tax you’re talking about to the adult children, 17%.

That sort of planning has to happen before, before the untimely death event. That’s that the key. Yeah. I tend to agree with you Zareh, I think it’s really important that, you know, we are hoping to do that with our clients to try to get in front of them earlier on just to plant a seed to say, hey, we’ve got to talk about these things. It’s not just a will, power of attorney,  you know, and testamentary trust.

Zareh – You know what the key is? It’s not, it’s not just about implementing it. You really want, you really want them to understand because,  I mean, sometimes the client will come in and, and get everything done and then they’ll walk away and they’ll, they’ll live their life, you know,  and I don’t know, like, appreciate is the wrong word it’s more like  maybe they don’t, maybe they don’t see the true value that was added.

Raffi – Maybe they see it today, but they don’t see, oh, well, what we’ve got to do in 10, 15 years.

Zareh – Yeah, that’s, maybe that’s the point I’m trying to make.

Raffi – I think the, the notion of a family financial plan is not, not in terms of the traditional statement of advice that we give that is really stupid and written for compliance people and, and, and doesn’t really make a lot of sense.

Zareh – 80 out of 100 pages is useless.

Raffi – But more, more so maybe a presentation or some sort of thing to say, okay kid A and their partner want this, kid B want that, and kid C, because I mean you have a kid who’s, if you, if you’re, you know, if you’ve got a child who’s got an intellectual disability and you’ve got a super fund, well, they can benefit from the tax implication of the super fund. One, it’ll be tax free pension, right? It doesn’t matter what age they are.  But two, it’s in a, it’s in a separate vehicle. So they’re not going to be taken advantage of. The assets protected. The income that’s going to come to them is protected.

There’s that longevity, you know.  Whereas the other children will be treated differently. So you can sort of equalize the the estate without going, you know, 50 50 or 30 30, you know, 33 percent on everything type of thing if there’s three kids or whatever it is.

Current Financial Market Insights

So, let’s finish up I guess by talking about what you’re seeing in the finance market. Banks, rates,  what type of offers they’ve got, who are they more willing to lend to, what’s easy, what’s hard.

Zareh – Let’s start off by saying the market’s slowed down. Look, I’m still getting inquiries come through, but it’s not as busy as it was last year, the level of transactions, and also banks say when it’s busy, they’ll have turnaround times of, you know, up to a week; whereas now most of the banks, they’ll pick up a file within a day or two, so that says that they’re not getting a lot of volume.

With interest rates you’d be, you’d be very, you’d be very lucky to get anything under 6%. There are some banks still offering that, but the majority of them are low sixes, and then investment you’re looking mid sixes.

Um, borrowing capacity is still an issue. You know, you know, because property prices have still been creeping up. People’s wages haven’t and they want to get into their desired area.

Raffi – Well, you think that’s going to have an effect on property prices at some point.

Zareh – At some point, yeah. You think so? Yeah. I I feel as though a lot of the, a lot of the time the clients are like, What’s the max I can borrow?  Because they want to go into a particular area and and we can help with that because every bank has got a different borrowing capacity. Yeah. You know, CBA compared to First Mac is a  massive difference in borrowing capacity.

Raffi – And it changes, right? Because based on their appetite at the time to, to borrow or, or, you know.

Zareh – Yeah, it, it changes. But say the top five lenders with borrowing capacity are always usually in the top five. Okay. But that it varies. And it varies because they’ll have different calculations on what their living expenses would be for, say, an average family of two kids. And their assessment rate might be, might be different. So for the people out there that don’t know, if you’re going to get a loan with a rate of six and a half percent, for argument’s sake The bank will, will put a buffer of, say, two to 3% on top of that six 9%. So unless you can prove of your income, they can afford a 9.5% rate, your loan won’t be approved.

Okay. They had I don’t know if it was two years ago. Yeah. Probably two years ago, they brought in this buffer rule for people with, um, fixed rates that were expiring. And they wanted to refinance them. And they said for those clients that have a clean credit history, no missed repayments, we’re willing to take you on, okay? And they’ll calculate you on a 1 percent buffer. Over and above the variable. So, and that was a big difference in borrowing capacity. Yeah. Massive

Raffi – But that’s important because if not, you’ve potentially got a property market collapse. If all the people are off fixed rates, could not get their loans….

Zareh – Yeah well. You’re right, but the thing is, it wasn’t like they were going back to a 2%. It just meant that it was almost like a band aid fix because the clients, say the client’s in a loan, say they’re seven years into a term or eight years into a term, their fixed rate’s expiring, their fixed rate is 2 percent expiring. I’m going to give them a rate of say 6%,  but affordability is an issue. So I’m resetting the term back to 30 years. Yes. So it’s like a band aid fix. But at the end of the day.

Raffi – And that’s the beauty of, I think, having the broking business within a financial planning firm. I mean, you’re both, right? You wear both hats, but we’ve got other brokers in here that aren’t planners, and planners that aren’t brokers, working collectively together.

Because I feel that you’re right, like you said earlier, if I want to buy a property, I’m a client, I want to buy a property,  Okay, rates important to me, but, but if I’m sort of, if it’s not that easy for me to get the finance, then I’m going to take whatever I’m given, right?

But at least from, from our perspective, we can come at it from a financial planning lens as well. Look at their cashflow, look at the budgets, look at structuring, all that kind of stuff.

Zareh – Entities, like we said before, all that stuff’s important. And on top of that, you get a loan. What’s, what’s important as well, protecting your wealth.  So what comes after getting a loan? Getting the insurance done as well. It all ties in really nicely.

Raffi – Yeah, definitely. Now, I think  these are really important things for people to think about. Unfortunately, as I said,  Once you’ve got your loan or whatever it is it’s not, it’s not addressed that you know, estate planning, all that kind of thing is not addressed as much as it really should be.

I just want to wrap up there. This is going to be the first of many discussions I have with Z. We’ve got one that we’re planning around superannuation, obviously it’s quite topical, self managed super funds.

Zareh – Maybe we’ll do that one with cigars and whiskey.

Raffi – Yeah, that should be with cigars and whiskey on a relaxed sort of afternoon.

And we should talk in that one around also going the next step around talking about when it’s appropriate and when it’s not appropriate to be buying a property within your super. Not that we’re against it. We’re not against it in any way, shape or form. But I think sources for courses.

Zareh – A lot of people come to me with $50,000 – $60,000 balances and I go, hang on.

Raffi – Exactly. What are you, what are you going to achieve? But anyway, that’s a discussion for another day. I think our brains will be fried if we start on that one and we’ll never end. So thank you very much for, for, for listening, for

As always, this is not to be taken as advice and is definitely general in nature.

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