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Succession Planning And Your Property Portfolio

True succession planning extends way beyond the construct of your will and your trust deed, writes Mark Withers.

By: Mark Withers

3 December 2023

In New Zealand, where our economy is dominated by farming, succession planning for the family farm is a big issue and one that is never straight forward to plan or navigate, especially for large families.

Farms are right at the top of the list of legacy assets that families are generally passionate about holding onto inter-generationally. Baches are probably second.

But have you stopped to consider what your succession plan is for your property portfolio?

At its most fundamental, the question is really whether it’s fair or appropriate to leave your family with the actual property assets or is it better to leave them with liquid investments like cash or shares that are readily divisible.

There is no right or wrong answer here, but there are many tentacles to this that are worth considering. True succession planning extends way beyond the construct of your will and your trust deed.

Long-Term Benefits

At its core it involves some deep thinking on questions of whether your family has the skills, strength and fortitude to continue to hold a property portfolio inter-generationally and, if they do, how will that bundle of assets be managed fairly for the long-term benefit of the family?

Many investors have pursued the growth of their property portfolio with a tunnel vision that involves expansion whenever debt/equity rations enable another acquisition. But this strategy is often reliant on the personal income you have, or your business generates. If the family ultimately do not have the benefit of this income or a business to underpin the investing, does the portfolio itself have the passive income to meet debt obligations?

If you are interest-only, what happens when the bank finally demands principal repayments that have to be funded out of after-tax profits? Do you even know what your bank’s attitude to your debt would be if suddenly you were removed from the equation?

Think carefully about the demands for lump sums of capital your children may have. Are they going to be happy sharing the relatively modest income the portfolio actually produces after tax or are they going to be best served by seeing assets sold and the capital sum distributed so they can make their own decisions going forward.

Which of your children has the skills, ability and willingness to manage the portfolio? How will they be paid for the work? Can they count on the support of their siblings?

High Wealth

It may surprise many of you to learn that high wealth families employ the services of clinical psychologists to help analyse and determine how the family dynamic can be managed to facilitate succession planning.

Structuring is vitally important. Trusts and companies obviously play a vital role as these entities can survive death of an individual, but the governance of these structures becomes critical. Does there need to be independent directors and trustees engaged to support family members to run these businesses? Has a clear memorandum of wishes been laid down to give independent trustees guidance on what your wishes are.

If there are issues of fairness to address within the family these are best discussed formally and openly. These talks could lead to the creation of a deed of family arrangement to try to ensure the family are involved in the planning of what comes next.

In the farming context, ownership of the land may be separated from ownership of the farming enterprise, eg the land may be held in trust and be leased to a company where family members that are actually farming the property can take a dividend from the operation where the non-farming family members can benefit from the lease income the farm generates.

These sorts of arrangements are also possible for property portfolios.

Huge Topic

Planning a deed of family arrangement is a journey. It may take a decade to construct, and it may itself need to evolve over time as the family expands, spouses join the family and circumstances alter. It’s a conversation that needs to continue.

If ultimately the conclusion is that dying with too much land is nothing but a curse for the family, make the call early so you have the opportunity to make an orderly divestment to cash.

And, of course, consider then how you will manage the wealth that is held in cash rather than property, who will advise you on this, and build these relationships early.

It’s a huge topic and one that in my view needs to be planned properly with involvement of the family. It starts with a conversation that follows the recognition that you are not going to live forever.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. PKF Withers Tsang & Co Phone 09 376 8860, www.pfkwt.co.nz


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