As the population ages, new relationships between seniors are becoming common. As a result, I'm regularly asked what steps to take to prevent your assets going to the wrong person.
There is no easy answer, and a further complication is that estate planning rules vary from state to state. However, if there is any chance of problems on the horizon, take expert legal advice sooner rather than later.
Good advice now can save a fortune in costs down the track.
In any event, it's useful to know some basic estate planning principles. I'm sure you know the importance of having an up-to-date and valid will, but certain assets fall outside the will. These include money in superannuation, insurance bonds, and assets held as joint tenants.
Let's start with assets in joint names, such as property, will usually go to the surviving partner irrespective of the terms of the will. One way around this is to hold any properties as tenants in common - you are then free to bequeath your share to a person of your choice. Though of course this is best implemented at purchase.
Next, you need to understand that your superannuation is not necessarily disposed of by your will - it is the trustee of your super fund who usually determines who gets the money. So consider a binding death benefit nomination, which specifies your chosen beneficiaries. Do take advice, as done wrong they can lead to unnecessary tax bills, and can still be challenged.
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One super solution is to withdraw your money tax-free before you die, and deposit it in your bank account. This can also be done by an attorney, under an enduring power, if the fund member lacks capacity. This prevents possible challenges, and eliminates the possibility of the 17 per cent death tax (levied on the taxable component of your fund left to a non-dependent).
If this is your plan, you'll still need good advice about what to do with the money. Options include making an absolute gift to someone of your choice, or investing the money in insurance bonds, which also sit outside the will and can be left to a nominated beneficiary.
Think about Harry, aged 85, a wealthy retiree now happily re-married after a nasty divorce, who wants to leave bequests to his children from both marriages. He is aware that there is acrimony between some family members, and it is important to him that his assets be split as he wishes, not eroded by family legal battles.
He invests $250,000 in his own name in each of five separate investment bonds, naming each of the five children as the beneficiary of one bond upon his death. Because an investment bond is technically a life policy, the distribution of the proceeds cannot be challenged. Harry can sleep soundly, knowing he has solved the potential problem in advance.
Another option is an Inter Vivos Trust. This is a vehicle created by a living person for the benefit of another person. Also known as a living trust, this trust has a duration that is determined at the trust's creation and can entail the distribution of assets to the beneficiary during or after the deceased's lifetime.
A related possibility is to leave the money via one or more testamentary trusts. When the will-maker dies, the assets go to a testamentary trust (or trusts) and are not held by any of the beneficiaries personally. This keeps the assets separate in the event of divorce or bankruptcy, and has taxation advantages if everything goes well.
As beneficiaries of the testamentary trust, there is no restriction on using the trust's money for the benefit of grandchildren, including expenses such as school fees and uniforms.
That means the first $19,200 of such non-tax-deductible items could be paid from pre-tax dollars from the trust, instead of from after-tax dollars. Furthermore, when the children die, the grandchildren can continue to be beneficiaries of the trust.
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Noel answers your money questions
I am 48 and my wife is 42. I have $485,000 and my super fund and that fund also has a $950,000 life insurance policy. If I die prematurely is it possible for my wife to have my superannuation balance, plus the life insurance proceeds, kept inside super and hopefully draw an income from it?
I would hate to see it forcibly withdrawn and then placed in the bank where it would earn minimal interest.
The other option would be to use the proceeds to pay off our investment loan, but we are not keen on that as the superfund is returning 8 per cent and the interest on the loan is just 2 per cent.
This is why we think the best option would be to leave the money inside super and draw when needed. Is this possible?
What you say should be possible, but you should check with your fund to see what options they have available. If you want your balance to remain in superannuation the law allows for a death benefit pension to be commenced up to the transfer balance cap (currently a maximum of $1,700,000) of the surviving spouse.
That option will require annual withdrawals of at least the minimum, and the amounts withdrawn will be eligible for tax concessions. In general terms the taxable component will be treated as taxable income but she would get the benefit of a 15 per cent tax offset which would reduce the effective rate.
Tax would cease once the surviving spouse reaches age 60 and does not apply if the spouse who dies is over 60.
The fund rules will usually allow for the benefit to be taken partly as a lump sum and partly as a pension. This allows for a lump sum to discharge liabilities and a pension to provide a regular income. To reiterate, check with your fund but a tax effective income stream should be an option.
I am 60, and my wife is 61. I don't work -she works 18 hours a week. I have $350,000 in super and she has $950,000. We have no debts and live in a low maintenance home.
We are trying to sell a rental property for $475,000. We live comfortably on her income of $70,000 a year, and she can expect a substantial inheritance at some stage in the future. Her employer will not let her salary sacrifice to super. We are hoping to have most of our financial assets in Superannuation upon our mutual retirement.
Would it be advisable for me to take an allocated pension for part of my super, leaving some in accumulation? I'm hoping to reduce the tax paid on my superannuation, within the fund, while still being able to make contributions into the accumulation component in the future.
Would my wife be able to make a tax-deductible spouse contribution into her super?
Access to funds in an "emergency" would also be comforting. We are aware of current annual Super contribution caps and bring forward rules.
The difference in the effective rate after-tax between the accumulation mode and the pension mode is around 0.8 per cent per annum. Therefore, you would save a little by moving a major part of your money to pension mode.
A good strategy might be to withdraw $330,000 as a tax-free lump sum, re-contribute it as a non-concessional contribution using the bring forward rules, and then at an appropriate time convert a major part of your fund to pension mode.
This re-contribution strategy would enable most of the taxable component to be converted to non-taxable. Just make sure you involve your adviser every step of the way. Your wife can make tax-deductible concessional contributions up to a total of $27,500 a year which includes the employer contribution.
My father and I jointly purchased an investment property in 1984 prior to the commencement of Capital Gains Tax. My father passed away in 2004 and the property came fully to me through his will.
I still own the property but I am wondering if, when I sell, whether the 50 per cent that I inherited from my father would be subject to Capital Gains Tax, perhaps from 2004?
You would be deemed to have acquired the property tax free at market value at the date of your father's death. This will become the base cost the CGT purposes.
What is the maximum allowed in your superannuation account to still receive a part pension at 67. I'm 61 years of age, single with $670,000 currently in my super account thanks to an inheritance eight years ago. I'm considering early retirement, but if I wait until 67, would I still be entitled to a part pension?
Under the current regulations a single homeowner can have up to $593,000 of assessable assets before the pension cuts out. For a non-homeowner the figure is $809,500.
These figures do increase each year, but your superannuation should be increasing at a much faster rate than the pension figures. You should be talking to a good adviser now to ensure your portfolio asset mix matches your goals and risk profile.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org