Inheritance Archives - Steward Wealth

Be aware of SMSF Trustee responsibilities you should be reviewing now

by Anthony Picone | Oct 11, 2021 | Financial Planning

Have you reviewed your superfund’s investment strategy and binding death nominations?

Choosing to establish and manage a self-managed super fund (SMSF) comes with trustee responsibilities which are important to not neglect. It may be as simple as not having an appropriate investment strategy or actually forgetting to legally document a non-lapsing binding death nomination or to consider a reversionary beneficiary when commencing an income stream with your super.

SMSF investment strategy

As a trustee of a superfund, you need to have an investment strategy. It’s more than simply providing a range of different asset classes your fund is allowed to invest in. The ATO, as the regulator of your SMSF, requires the trustee to consider:

The fund’s investment objectives and how the investments link to these objectives.
How the strategy provides benefits to the members at retirement.
Diversification of the investments.
Risks from the lack of diversification.
Liquidity of the fund including cashflow requirements – particularly in the future when an income stream will commence.
The ability for the fund to pay liabilities.
Whether the trustees have considered insurance, and if not, why?

If you make changes to what is already documented in your strategy, then you must make the appropriate amendments and sign off the changes. Changes such as high fluctuations in markets causing your asset allocation to change dramatically, or investing in an asset outside what is included in your strategy.

The ATO has had concerns on the quality of information in fund investment strategies, and we are seeing auditors pay closer attention to what is included and if they actually reflect the investments made and held during the year.

We have seen the ATO more closely scrutinize the investments held with letters sent to ask trustees to justify their investments, particularly if there is a lack of diversification.

Estate planning considerations in an SMSF

An area we find there is a lack of attention from trustees is in estate planning. Superannuation doesn’t actually form part of the estate and needs to be dealt with specifically.

As the trustee, you are responsible to ensure this has been considered with the appropriate actions taken to reflect the wishes of each member.

While you are in the accumulation phase, each member can plan who they want their superannuation benefit (and any insurance owned by the superfund) paid out to by instructing the trustee through a binding death nomination. A ‘non-lapsing’ binding death nomination is an extension in that it doesn’t have an expiry date.

A ‘reversionary’ beneficiary is who you nominate at the time you commence your income stream. Upon death, the income stream automatically continues to be paid to the chosen beneficiary (such as your spouse) upon your death.

If you haven’t made a reversionary nomination, your benefit will be paid out as a lump sum. This can be an issue if your spouse is unable to make a contribution back into the super fund.

Making the decision to have a Self Managed Super Fund comes with trustee responsibilities. It’s important, as the trustee of your fund, you are fully aware of these to ensure your fund remains compliant. The ATO continues to review funds to make sure they are being run improperly. Making sure your fund has a comprehensive investment strategy, which is updated to consider the investments you are holding or expect to hold, is one area which the ATO has drawn their attention to. Also, the sooner you review your binding death nominations, the better. Make sure you actually have these and they continue to properly reflect your wishes. If commencing an income stream, consider whether you should have a reversionary beneficiary. Getting it right before it starts can save you headaches later on.

Want to learn more? Speak to a specialist about your SMSF today.

The gift that keeps on giving

by James Weir | Dec 5, 2018 | Financial Planning, Investments, Wealth Management

If you’re tossing up what to give your kids who are a little more grown up for Christmas this year, there’s a gift that will keep on giving for years and years to come; in fact, you can rest assured they’ll be thanking you for it after they’ve retired. Make a contribution to their super fund.

One of the most powerful forces in finance is compounding – earning interest on your interest. And the longer you allow something to compound the bigger it gets. One of the attractions of giving your child a contribution to their super fund for Christmas is that they can’t touch it until they retire, so it’ll have decades to grow, and grow.

To illustrate the power of compounding, and the benefit of starting early, consider this classic example, represented in chart 1. Let’s say we find an extraordinary 18-year-old who decides to build up her nest egg by investing $2,000 a year for the next ten years at a return of 7% p.a. By the time she reaches 65, that $20,000 she invested has grown to be worth just shy of $387,000, as shown by the blue in the chart.

Now let’s say her friend finds out about the plan after year ten and says, hey that’s a great idea, but you know what, I’m going to put away $2,000 every year until I’m 65 in that same 7% investment. By the time he hits 65 the $72,000 he’s invested over those 36 years has grown to be worth only $369,000. And as the orange part of the chart shows, he never catches up to our early starter. That’s the power of compounding.

Chart 1: Despite investing more the late starter never catches the early bird due to compounding

If your child has a superfund already set up, which could be from as young as 15 with a part time job at a supermarket or something, you could make a contribution that starts working today and will pay off hugely in their future. (Another big tip, do them a favour and make sure there aren’t any fees for things like life insurance being deducted, which will just devour any returns.)

For example, if you were to contribute $1,000 to your 20 year old child’s super fund and it earns 7% per annum, by the time they reach 65 it will be worth $23,123; at 8% per annum it would be worth $36,164. You can work in multiples of that amount, so if you deposit $100 at 7% it’ll be worth $2,312 and if you deposit $10,000 it’ll be $231,235. It would be a great way to kickstart their retirement savings.

You should also, of course, make sure your child hasn’t hit their contribution caps.

For anyone looking to give something they can be sure won’t go out of fashion or never be looked at a second time, boosting your kid’s superfund really is the gift that will keep on giving.

Death Duties and Super?

by Anthony Picone | Nov 5, 2018 | Financial Planning, Tax, Wealth Management

A recent article from Noel Whittaker titled ‘This is Australia’s version of a death tax’ prompted a few questions from some of our elderly clients.

It’s not really a ‘death tax’ as such, but it reminds people about how your superfund may actually pay tax upon your death.

We wrote a more comprehensive article on this very subject earlier in the year titled “What happens to my super when I die?” which you can access here.

To keep it simple, your super doesn’t incur tax on death if it’s passed onto a ‘dependent’, which is defined in this instance as a

spouse
child under the age of 18
any person over 18 years and financially dependent or in an interdependent relationship.

If the beneficiary doesn’t qualify as a ‘dependent’, a tax of up to 15% (plus the Medicare Levy) may apply to the ‘taxable’ component of your super balance. Your super generally consists of both a ‘taxable’ and a ‘tax free’ component, even if you’re in the pension phase.

There are strategies you can consider to reduce the ‘taxable’ component but given everyone’s situation is just that little bit different, it’s important you speak with your adviser, or alternatively call us, and we can work out the most appropriate and tax effective course of action.

Interesting enough, if you are over 65 years of age (or over 60 years and permanently retired from the workforce), you can simply make lump sum withdrawals from your super fund tax free. So, if you know your death is imminent, withdrawing your balance from super can be a way to avoid ‘Australia’s version of a death tax’. But be certain, because if it’s a false alarm, it may be that you can’t get your money back into the super environment, and you’re likely to be paying tax all over again.

As I previously mentioned, if you would like greater detail on superannuation death benefits, simply click here.

Things to think about before gifting your kids money

by James Weir | Aug 2, 2018 | Financial Planning, Investments, Wealth Management

It’s natural that a parent would like to be able to help their kids out financially, especially if it’s to get a foot on the property ladder when even that first step can seem so out of reach these days. But you need to think carefully before you hand over a couple of hundred thousand dollars because if things go pear shaped a big chunk of that money could disappear.

Let’s imagine you give your child $100,000 to put towards buying a $1 million house, then not long after your child meets a partner and they move in together. If they end up marrying or the relationship becomes de facto, which according to the Family Law Court is after at least two years, but the relationship falls apart, your child’s ex can make a claim for a financial settlement. It’s possible your kid’s ex could get half the house, including half the money you gave your own child.

And if it’s your son and there’s a child involved the financial settlement can be a long way from 50/50. Within a few years of a very generous gesture, a big chunk of the money could well have gone.

It is apparently possible that a Family Court Judge will make an allowance where the relationship didn’t last very long and they conclude the spouse doesn’t really deserve to share in the money the parents gave. But that is far from certain.

There are two things you can do. First, rather than gift the money to your child, lend it to them. The value of the loan will be excluded from financial settlement proceedings. You want to make sure the deal is characterised as a loan from the outset and the smartest way to do that is going to the trouble of getting formal loan documentation drawn up by a lawyer so if there’s a dispute the courts will be left in no doubt what the arrangement is.

You can even lodge a mortgage against the property, with specific clauses requiring that any partner must enter an agreement with respect to the money.

The second approach is to have your child’s new partner sign what’s referred to under family law as a “Binding Financial Agreement”, pretty much the equivalent of what is popularly referred to as a ‘prenup’. Your child’s partner would have to acknowledge the money you’ve given and agree that it’s not to form part of any financial settlement in the event of divorce or separation. This is much easier if the money is used for something readily identifiable, like a house deposit, but it can get more complex if it’s intermingled with other money.

Again, the wording of such an agreement has to be quite specific and certain protocols have to be met, like having the signatures witnessed by a lawyer or Justice of the Peace, so it’s pretty much a necessity to use a lawyer.

It’s worth bearing in mind that it’s not just a relationship breakdown where the money you gave can end up in someone else’s hands, if your child goes bankrupt their creditors can end up with it too. Here again, having the money tied up in a formalised loan should protect it.

There are two other considerations: if you’re receiving a government pension, under the so-called ‘$10,000 rule’, Centrelink will look at gifts and transfers exceeding $10,000 per year, or $30,000 over five years, when calculating whether you qualify under the assets test. This includes paying school fees.

Secondly, if your child is taking out a loan to buy the property a lender is likely to want to know if the deposit is being part-funded by someone other than the borrower, and it would be a really bad idea to fudge things in an effort to make it easier for your kid to get the loan.

Helping your child out financially should be a heart-warming experience, taking a few precautions can help stop it turning into a gut-wrenching one.

A tax effective alternative to superannuation

by James Weir | Jun 20, 2018 | Financial Planning, Tax, Wealth Management

One of the reasons superannuation is so popular is the associated tax benefits, but last year the government imposed new limits how much money you can get in to super.

Investment bonds are another tax effective investment strategy that’s been around for years and is becoming popular again as an investment vehicle for tax payers on the highest marginal rate, or indeed anyone paying more than 30% tax. Investment bonds are flexible and easy to establish and manage, but you do need to be aware of a couple of ‘quirks’.

For a start, the opening amount you put into the bond can be whatever you like; unlike superannuation where you are limited in how much you can put in. What you actually invest in will be determined by the provider of the bond, but the range is pretty broad and includes things like managed funds, fixed income, property and cash.

After your initial contribution you don’t have to put any more into the bond if you don’t want to, but you can choose to increase your investment by a maximum of 125% of whatever you put in the year before. So each year the amount invested can grow. Chart 1 shows how much you could invest if you start off with $10,000.

Chart 1: you can start an investment bond with as much or little as you like and and add 125% of your previous year’s contribution every year

A tax effective alternative to superannuation table1

Over the life of the bond all the earnings are reinvested, again, much like your super fund. That way you get to benefit from the magic of compounding.

For the life of the bond, which is a maximum of 10 years, the earnings from the investments are taxed inside the bond at 30%, though that rate can be reduced by franking credits. In other words, you don’t have to pay anything out of your pocket while the bond is going, provided (and here’s one of the tricky bits), you let the bond run its full term.

If you do let it go the full 10 years, at the end, you receive all the earnings from the bond and won’t have to pay any further tax on them, plus of course you get back what you invested. That means you’ll have paid 30% tax on the earnings instead of 45%. Importantly, the 10 years starts from the time you make the initial investment, not any subsequent investments. So if you follow the schedule in the table above, the $74,506 invested in year 10 is only tied up for 12 months.

If, for some reason, you have no choice but to break the bond inside the 10 years, you’re allowed to do so, but you’ll have to pay some tax; the amount depends on when you break it.

If you stop within the first eight years, you receive all the earnings but you’ll have to pay the difference between the 30% tax that’s been paid inside the bond while it was in force and your marginal tax rate. In other words, there’s no real tax benefit.

If you stop during year nine, one-third of the earnings are tax-free but you’ll pay your marginal rate on the rest. If you stop during year 10, two-thirds are tax-free.

There are other attractive aspects to investment bonds, like you can nominate beneficiaries of the bond without having to make it part of your will. Also, every investment bond has a built in life insurance policy, and the death benefits can go to any nominee tax-free – regardless of how long the bond’s been going for. Finally, unlike superannuation, the rules around investment bonds have been stable since 1995.

There is one downside to bear in mind: because investment bonds are effectively taxed like a company CGT is paid in full when the bond is redeemed, regardless of how long it’s been held. That compares to the 50% CGT discount when you hold an asset in your own name and sell it after 12 months, or in super, where you pay 10% CGT after 12 months.

Investment bonds are making a comeback as a useful tax planning tool for high income earners and can be a great way to save for a specific objective, like a house deposit, education costs or a boost for grandkids.

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