IP Admin & Mgmt in our twilight years

[Ian (WA)]

Sorry Olly, but I took the liberty of stealing this topic as inspiration from the link in your last post on the Amish thread.

I wish to open some discussion with a view to engaging ageing members of our forum community for your thoughts. Me, I'm 52 this year (separated from ex three years ago and have two sons 15 & 17) and am currently in discussion with my accountant and a financial planner who works out of the same office regarding future management of my affairs and a phased exit strategy.

We are looking at things such as my retiring from my PAYG Oil & Gas industry job inside the next 8 years, my ability or inability to manage & administer multiple resi properties in years to come, likewise mgmt of 1 x commercial medical office suite in my SMSF, admin of existing family HDT & company and we are looking into initial framework for a testamentary trust / bloodline trust (before we go to solicitor for formal drafting) just so I can cause my sons grief long after I've become a worm droppings.

The fears I have are:

How do I manage the extensive administration of my holdings in later years (some properties are with prpty mgrs, others I currently self manage)? In actual fact I?m also asking myself this question looking at the short to medium term as I am considering travelling and possibly working overseas for extended periods. Do I put everything in the hands of my accountant, or a hire a book keeper & enlist more property mgrs?

Even with most properties currently in the hands of property managers, there remains a myriad of email & hard copy docs & administration continually finding its way to my desk; it is relentless! I have tried to go email for as much as I can, but I still get smashed with hard copy delivered by Aust Post.

How do I ensure all bills and other matters are seen to (paid on time) if I shoot off overseas for work, or if I go on extended holidays both approaching and during PAYG retirement, or if I fall off my perch early in the next few years before my sons are mature enough to grasp financial matters in general, let alone my significant investments?

I have no idea how my sons will turn out in 10, 15, 20 years time in terms of whether or not they would have any interest in managing bequeathed assets or funds, more importantly I wonder if they would even be capable (i.e. responsible enough). Currently my boys are showing zilch from which I can gain comfort. They're not feral or ragbags (yet), but they're simply very immature teenage boys who couldn't give a fat rats clacker about anything at all, other than themselves of course. Neither of them is scholastic and both are giving no indication of where they may end up (career wise).

Although most of my commentary is focusing on these matters while I am still alive??how do I best ensure administration is maintained after I'm gone if my sons are taking some time to mature enough such that they can manage affairs (if they so choose)?

As much as I could say, "liquidate the lot in pension phase, and draw an ongoing annuity for myself then whatever is left when I cark it is left to the kids to sort out"; I would prefer to put a bit more structure to it to ensure the significant assets/benefits are preserved for as long as possible. And none of that answers my questions relating to the huge & ongoing administration of my holdings between now and any such liquidation (or whatever transition vehicle is chosen).

So I have gone off on a wee tangent from the link, but I'm quite sure there will be some of you out there who are, or will be, looking into these matters yourselves in due course. I would greatly appreciate your feedback and methods you have already adopted ,or may adopt in the future.

Before I go I'd like to clarify that I have read the numerous threads re leaving assets to kids, wills & testamentary trusts etc?unfortunately none of the threads I came across looked into administering & managing IPs into our twilight years.

Thanks for your time.

Ian.

 

[Ian (WA)]

Sorry I have no idea why my posts end up with weird punctuation i.e. ? marks even when I am not asking a question. I am using a mac but have no idea on text or formatting irregularities when posting on the forum.

 

[wylie]

Do you have any siblings that you trust to oversee things should something happen to you before your sons are old enough to manage the portfolio?

At 52, you need to have things in place should something happen to you before they prove what sort of young men they will become, and I guess for the next ten years (until you turn 62 and they turn 27 and 25) you could leave all you have in some sort of testamentary trust (or similar) to be managed by two different people - accountant and solicitor?

I would guess you need two people to stop one from fleecing the boys (however unlikely that is).

Once they are well into their 20s you (or whoever looks after the estate if you are not here) could either have instructions to cash it all in, pay half each, or manage the portfolio and pay them from it.

It is tricky. My husband has a sister who will never be able to manage her inheritance (when her mother passes away). She has a mental illness and will never be well, and I'm not sure what his mother has done in her will. In our case, my parents' wills were meant to have two of us look after our black sheep brother, but he challenged it and we handed him a pile of cash rather than drag it through court, and risk losing (unlikely, but who knows?). So honestly, my opinion is that wills are not worth the paper they are written on (in some circumstances anyway), if a perfectly good will can be challenged/overturned on a whim.

I'd be contacting TerryW from the forum and getting his advice.

I guess the other thing to think about is that if your sons don't want to manage the portfolio, but are otherwise sensible enough to deal with a windfall, would you be happy to have it managed for them until they reach 25 or 30? That means they have to work to prove they are not just sitting around waiting for the cash. Until they are of a certain age, they would need to provide for themselves. My parents made provision for their grandchildren at age 25 to inherit a certain amount, but they each had to sign away that inheritance due to the challenge. Instead black sheep's son gets all they were to get, plus all he was to get. Stinks!

Also, what will you do if you are 62 and realise one or both of your sons will fritter away what you've built up for so long?

Would you still want to have them inherit it? If not, what would you do with it?

So many things to think about...

 

[Ian (WA)]

Hi Wylie, thanks for taking the time to reply in detail. I had read some of your earlier posts (2012 I think??) on this type of thing and I recall your account of your family situation.

I guess there are two clear facets to my thoughts:

1). How do I reduce my administration & management burden even now while I am relatively lucid and in command of faculties? As well as how it is managed after I'm gone.

2). Who administers my holdings for my sons until they reach 'X' years of age or some yet to be determined benchmark? As you say, maybe my solicitor & accountant in conjunction with string of property mgrs around the country. I will have to nominate enduring power of attorney etc soon enough, so scrutineering of people for various roles will be taking place.

I have a younger brother (11yrs younger than me); we are distant (haven't spoken for a few years but that never seems to matter), but I am sure he would assist if ever required. I doubt though that he would happily manage all my holdings for an extended number of years on my behalf until such time as the boys reach whatever benchmark is set.

I also have the ex wife who could step up (but with a huge caveat from my Will & TT which would not allow her to liquidate any assets unless agreed in the Will & TT). I say step up, because all these years she never took one ounce of interest in any of the investing and her view is from her M&D which says have no debt and pay off everything; she would blurt this out once every 6 months that we should sell off houses whenever she had the s...s with me

Even in marital separation matters, there were issues in correspondence between solicitors due to her inability and unwillingness to understand properties, CGT, yields etc. So she would be a last resort; having said that she is a wonderful mum to our sons and I do believe she wouldn't simply sell everything off to line her own pockets; though she might try to sell so that she could believe the boys would have no debt over their heads (that worries me somewhat).

If either or both the boys show signs early enough and turn out to be unreasonable fruitcakes with a penchant to throwing money away and I am still alive at the time, then I will definitely just have to lock in an age criteria and keep everything in the testamentary trust until they are 38 - 45 (they'll be well & truly up the creek without a paddle if they haven't started to get their futures sorted by then anyway).

I will PM Terry W in due course....I have a sheet-load of his old posts saved away for reference.

Yes, many things to think about.

Cheers,

Ian.

 

[Macca]

We posters here are the kind of people who plan for our future, defer gratification, sock it away for our old age and generally make life easier for those who simply spend everything and go on the pension.

We do it because we don't want to go on the pension, so we save and provide for OUR old age.

In ten years time it will be time for You to start accepting the fact that Your old age is approaching, it will be time for You to spend the money You have saved on Yourself, that is why you saved it

After you have gone the boys get what is left and no matter how hard or complicated you make it to get the money they will spend it if they want to

Our kids are now in their forties, some are "spenders" some are "savers", by the time we die those who save won't need it and those who spend will still spend it, so we are ticking off the bucket list with the money WE saved for OUR old age and they can split up our home proceeds after we are gone.

Interesting side point, the spenders are the ones encouraging us to travel, they see money as a means to enjoy life and want us to spend "our" money as we earned it.

As old age approaches it may be time to enjoy yourself while still able

 

[D.T.]

Since I'm the youngest person in the thread so far

I think its worthwhile, over the course of ones investing journey, to gradually gravitate / cycle towards better quality and/or lower maintenance assets.

Sure, I'm buying slums now, which causes some eyebrow raises among others i tell. Hopefully one day these can be developed into brand new properties and future funds diverted into commercial property and the share market. There'll then be more money coming in for less involvement required. In turn, this allows me to fulfill the purpose of starting this whole caper to start with - to free up time and answer to less people.

 

[stumpie]

hi Ian

i'm in the same boat but a little younger than yourself. i'm following this thread closely would be very interested to hear what you do as well as what others have done.

on another side note i'm in the middle of reading the book 'The Warren Buffet Way' where in public he signed a few documents and handed them out. these docs are the wills and inherently the money he gave to his children, the bulk of it 99% or $30 billion he gave to the Gates foundation. Paul Ramsay did a similar thing. not saying for you or any one to give money away? but i guess when we are gone and 6 feet under, its not going to worry or hurt us what our children do with the inheritance. we try and give them a head start we hope they use it wisely and perhaps we could give back to the community like others have which may use the money to improve the world we live in.

 

[Ian (WA)]

'Morning All,

Thanks for the terrific replies so far, much appreciated! Some really good points of view & variations on perspective from all.

I'm particularly interested in commentary along the lines of switching from administratively onerous IPs to other passive income producing vehicles e.g. shares / bonds or the like. I have canvassed with my accountant & FP moving IPs or indeed liquidating some of them to re-invest through SMSF and the obvious CGT monster rears its very ugly head each time.

So I have asked the FP (she is property savvy, but more importantly has a strong understanding of Taxation considerations) to look at what sort of mechanisms we have available to execute any such transition as efficiently and financially friendly as possible.

We have spoken about what often is everyones main focus approaching this stage of life - "Ensuring Sufficient Income In Retirement", but I don't believe we (the three of us) have paid enough attention to what IPs will transition & how are we going to do it? I think we need to pay a lot of attention to this now some 10 yrs out from retiring to make sure I'm not backed into a huge CGT corner if possible. This is something I wish in hindsight I was more aware of when I started investing 20 yrs ago.

A common theme on this forum is "Investment Ownership Structures" which is fine in isolation and is generally weighted towards investing in our heady working years and the accumulation phase if you like, but I now firmly believe any such mantras should include, "Ensure you pay equal or more attention and educate yourself & your accountant in IP Transition & Exit Strategies Leading To Retirement - and Understanding Those Taxation Consequences".

I said in the previous paragraph, "educate yourself & your accountant", because as sensational as mine has been over the years, neither she or I have ever sat down and mapped out the detailed taxation risks or consequences as I head towards retirement. We have both had periodic chats where the topic has been briefly mentioned, but we have never "flow charted" our way to my retirement (all the while trying to keep the ATO out of the picture or in a tiny little box in the bottom corner of the flow chart)

Yep, I think this is a really pertinent conversation we are having here and I would like to see a few more people talk of their situations / solutions; would love to see some accountants & FPs on the forum throw their views in too. Perhaps I need to move the thread into another section of the forum (Accounting & Tax?) to generate further response. Will leave it in Coffee Lounge for now and request it be moved in due course.

Cheers!

Ian.

 

[The Fence]

Ian, we are slowly winding down our IP's (Im also 52) and concentrating on PPOR development (on small acres).

Next cycle after this one, remaining IP's will be converted to direct shares, a much easier thing to control and from anywhere in the world.

But that's just us and by the sounds of it you have much much more in the way of property than we do. So, yesy you have more to plan out but I like the idea of converting to equities for simplification.

 

[Ian (WA)]

Thanks TF,

Interesting you mention, "Next cycle after this one.." I've been playing that very same line with my accountant in determining which IPs are sitting where right now and where will they be at in terms of growth cycles in 8 - 10 yrs; so this is a really relevant point and needs to be crystal balled by investors if they are looking at any such liquidation strategies.

The other side of being mindful of property cycles is if one is to look at moving into direct shares or the like, is their an opportunity cost exposure if we hold our IPs for a bit too long while particular shares are on an ascent? Perhaps pulling the trigger on a premature property sale could actually prove to be beneficial in the long run?

You know, whether we have 1 x IP or 20 IPs, the same tax implications come into play and they are relevant for all of us.

I have always been of the buy & hold mould, but at some point we need to back out or diversify as you are rightly pointing out; I would love to find a good book on this sort of thing (properties & investments approaching retirement) if there is one available; I have seen plenty on Super & SMSFs etc, but nothing which looks at what I am talking about here.

Much to consider

Ian.

 

[stumpie]

Ian

i think you have opened a can of worms in your last post re: what other vehicles is available after RIPs (resi IPs).

some proponents are of the opinion that RIPs is an awesome vehicle to start the acquisition phase to increase the asset base then they transition to CIPs (commercial IPs) or have both and then there are those who finally make the move to LICs fully or partly where the combined returns are good but without the headaches of paying rates, taxes, PM fees, repairs & maint etc

So the end game could be a hybrid of LOR (living off rent from RIPs & CIPs), LOE (living off equity - this approach is only recommended for top ups and to supplement LOR for instance), LOD (living off dividends from your LICs) & LOS (living off Super) when you decide to retire.

 

[truong]

Hi Ian, I'm a bit like you but a bit older and already retired (I started part retirement some 10 years ago). We have property, shares, SMSF, trusts, companies. What I've done:

- Sell some of the IPs and buy shares instead - much less of a burden.

- Keep IPs that are newer (for low maintenance), in better suburbs (for less headache) and have better cashflow. This is to remain diversified.

- Have PMs take care of everything including council rates, water, insurance, body corporate, etc... and only bother me when there is a tenancy change or significant repairs (above X dollars). All correspondence by email with copies of bills. Some PMs charge me extra to do this.

- As for the trusts, companies, SMSF, I still have to pay the bills and keep records myself, but there isn't much to do and not everything is urgent. My accountant does all the heavy lifting: BAS, PAYG, financial reporting and tax returns etc.

The above is probably nothing new to you but it has cut down my involvement a lot. Previously I had to spend time every week on the IPs as mail was coming in at a very fast pace. Nowadays I only take a cursory look at the PMs' emails, then every few months when it suits me I do a more in-depth check.

We've had a testamentary trust for years but our kids are now grown up and we'll be looking at transitioning them into the family trusts. The mechanics of that is still to be worked out but the aim is to have the kids in full control when we're old enough.

We have a relaxed view about money i.e. we see it as a gift from heavens to be used and enjoyed during our temporary stay on Earth. Per se, it is not ours. So we do not concern ourselves with how the assets are used after we're gone, just trying to keep things flexible enough for the kids to do whatever they please afterwards. Whether they grow it or lose it, it will be a good lesson for them about the purpose of life.

There are also NRAS properties that we've put aside for charities. We're keeping them until they run out of government money.

 

[china]

'

I'm particularly interested in commentary along the lines of switching from administratively onerous IPs to other passive income producing vehicles e.g. shares / bonds or the like. I have canvassed with my accountant & FP moving IPs or indeed liquidating some of them to re-invest through SMSF and the obvious CGT monster rears its very ugly head each time.
.

You should take note of what Warren Buffet is going to do with his wealth in terms of catering for his family once he has gone. He has assumed that they have no competence nor interest in financial matters.

http://www.marketwatch.com/story/warren-buffett-to-heirs-put-my-estate-in-index-funds-2014-03-13

I think his strategy within the context of a trust and age limitations on withdrawal of the capital should see his descendants and their descendants through nicely. You will note that there is no mention of any form of property investments in Buffet's end game strategy and beyond.

 

[Ian (WA)]

Thanks Stumpie, Truong & China, some excellent contributions there.

I'm hearing everything that everyone is saying and it's definitely reinforcing where I believe I need to be heading (with accountant & FP in tow).

I'm finding myself surprisingly open to moving out of bricks & mortar (never thought I would ever say that) and into investments I can't physically touch.

The big question still remains:

"How do I make this transition(s) without getting crucified by CGT?"

I understand very well that I have made profits and therefore I have to pay tax; cool no problems there. But I would like to explore what machinations may exist to help alleviate that CGT pain, or at least make the pill easier to swallow.

*Whatever is left for my sons will be sorted in due course (via testamentary trust and whatever else we determine to be appropriate), first cab off the rank though is to work out how we are going to cross over to the dark side (investing outside of IPs) as painlessly as possible.

**I take note of Stumpies comments that I could retain a hybrid mix which still involves IPs, although I would do this in such a way that I have as little admin involvement as possible.

Thanks again for everyones input!!

Cheers!

Ian.

 

[truong]

"How do I make this transition(s) without getting crucified by CGT?"

I understand very well that I have made profits and therefore I have to pay tax; cool no problems there. But I would like to explore what machinations may exist to help alleviate that CGT pain, or at least make the pill easier to swallow.

A few things that I've done (not saying you should do the same!):

- pace out the selling over several years

- manufacture several years of lower income at the end of your career as you transition into retirement, and time your selling then

- maximise the ability to distribute profits to your sons via your HDT.

Don't do it alone, get advice from your FP.

 

[keithj]

I'm finding myself surprisingly open to moving out of bricks & mortar (never thought I would ever say that) and into investments I can't physically touch.

That's the route I've taken.

The big question still remains:

"How do I make this transition(s) without getting crucified by CGT?"

I understand very well that I have made profits and therefore I have to pay tax; cool no problems there. But I would like to explore what machinations may exist to help alleviate that CGT pain, or at least make the pill easier to swallow.

As others have said - sell one per year. Try to make it coincide with the end of an upturn and lower personal/other income.

What worked for me psychologically, was spreadsheeting the higher passive income stream from higher yielding assets after CGT is paid on the IP CG.

 

[Ian (WA)]

Thanks Keith and again Truong,

It's funny how we often can't see the wood for the trees Truong, I only had this conversation with accountant last month, but we didn't go hard at it at the time.

I had spoken on & off with accountant wrt lowering income during a transition phase, but given my current employment and personal investments sees me on the highest tax bracket and will do pretty well up to the last couple of years until I pull the pin on my PAYG job, I imagine I will still be offloading IPs a few years down the track depending on how quickly I wish to extract myself from the admin burden.

I understand if I enter into a formal TTR (after I turn 55) with my PAYG employer, I will only be permitted to work this way for two years before having to quit. So I was looking at holding off a PAYG TTR until I turn 57 or 58.

I don't see any major hiccup in liquidating IPs in early years of pension phase and my assessable income at that point will still be significant, but nowhere near current levels.

All in all, I have given myself a few years to implement strategy, but will need to sit with accountant & FP again very soon to make sure we head down the right path.

Just talking about all this has me salivating at the idea moving into different asset classes now....bugger!!

Love the psychology in the spreadsheet Keith....nice move that.

Thanks again for the sagely input.

Cheers!

Ian.

 

[alexlee]

There are some testamentary trust strategies that might work (but they require you to die first).

e.g. your assets are put into a testamentary trust, at a time when you have many small grandchildren. The testamentary trust could sell the properties, and the income can be distributed to the grandchildren, but they're taxed as adults, so tax is much lower. The distributions will likely have to actually be paid out, which might be fine if you planned on giving the family some money immediately anyway.

Since you're relatively young, there is no hurry to do this immediately. As others have said, sell bit by bit to transition. The key is to have considered this and have a plan in place. Usually, people start too late.

 

[Macca]

I am older than you so I am not fully aware of your options but we sold down our IPs gradually after retiring from full time work, then put some of the proceed into our SMSF which lowered out tax bill each year.

I used to trade stocks as a way of maximising returns as well as keeping my mind active but over the years came to the realisation that it is Very hard to consistently beat the index unless you spend a Lot of time at it.

It may be worth reading up on "beating the index" it is do able in a short time frame but much harder and way more stressful to repeat year after year. There is a built in bias that replaces falling stocks with rising stocks, go to S & P website and read how indices are created for a fuller view.

All of this will be effected by your intentions in retirement, are you going to stay at home and golf or are you going to travel a Lot ? If a lot of travel is on the agenda then you need something that does not require you to be active each day/week attending to it.

Huge decisions that will effect your peace of mind as you grow older, consequently a middle road or mix is probably the least likely to cause regret. We just did what we thought was right for us and so far so good

 

[Ian (WA)]

Hi Alex,

Thanks for your reply. Agreed the TT will only apply after I've passed away, however there are some assets I wish (at this stage anyway) to retain some control over until my sons are well underway with their lives and the TT appears to be the best vehicle to manage this.

Other assets will be sold down as I head to retirement and be replaced by other investments.

First priority for me is at 52, separated and with my teenage sons nearing the end of high school, I must (albeit very late) put some solid framework in place for my TTR and beyond, as well as establish definitive Estate Planning.

The overriding thoughts at the moment are that over all these years I have been so acquisition & growth centric that I haven't expended energy on the retirement strategy; and I'd say quite comfortably that 80% of the investors on this forum might be in a similar boat. They may have a Will, but have they actually planned (taxation & financially) how they will manoeuvre assets (if they need to) and deal with penalty taxes in establishing alternative income streams in their latter years?

I have no doubt that whatever I put in place now might be subject to change depending on what curve balls are thrown in the future, but as you say consideration must be given and a plan must be in place; and the sooner the better.

I see much generic commentary on the forum along the lines of, "I'll sell down to fund my retirement"; this doesn't allow for any consideration of the huge amounts of CGT we face if selling and I'd suggest there will be many people in for a very rude shock when they realise their nest eggs aren't as big as they thought they were. ***I am cognisant that not everyone will sell their IPs and may be happy living off rents until dying and leaving income producing properties to their offspring etc.

I've found very few threads on the forum which talk of explicit & proven transitioning strategies and in particular methods of minimising the pain of CGT.

I've searched externally around retirement planning topics and the bulk of the info I have come across talks of Super, SMSFs, annuities etc., but info on transitioning options is scarce or isn't particularly detailed in dealing with people who hold a number of properties and how they manage them during this phase.

Alex, can I ask you as a Moderator to please move this thread into the 'Accounting & Tax' area please? I'd like to see if some of our Accounting, Legal & FP members might have some further input.

Thanks very much.

Ian.