Is it possible to effectively combine wealth building with Estate Planning?

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Introduction

Following the article ‘Alternatives to company structures in tax effective investing’ a number of financial advisers are interested to know when you would recommend a bond structure in a client’s portfolio. And at what particular life stage would you recommend an investment bond strategy?

Most clients typically spend a lifetime saving and building wealth for their retirement. However, if estate planning is not taken into account when considering wealth-building options, it could result in some severe unforeseen consequences.

Generally, building wealth, retirement and estate planning are planned for in isolation. The reality is that these matters do not operate in isolation of each other and overlaps must inevitably occur. For example, in retirement, wealth building must be considered to manage ongoing longevity and inflation risks.

Clients can spend a lifetime building wealth and in some cases failing to put an effective estate planning solution in place, and can leave loved ones facing dire consequences in the event of death. This results in:

  • Distribution to the wrong beneficiaries
  • High legal fees
  • Lengthy delays in accessing estate proceeds
  • Erosion of wealth due to taxation implications

Financial Planning

Estate Planning – a core component of financial planning best practice includes wealth accumulation, retirement spending and estate planning therefore an integrated approach is needed. The diagram below illustrates integrating estate planning into the financial planning process.

 

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Finding a solution

Identifying the most appropriate wealth-building products that can also be utilised for an effective estate planning solution and asset protection is key to finding a solution. In seeking the answer, we first consider the typical alternative below.

Unit trusts, shares and term deposits are examples of typical investment structures used for wealth creation. However, in the event of death, most investment products form part of the estate and may be caught up in any actions taken against the estate. It is also left to the executor to make decisions about the distribution in accordance with the terms of the will.

These actions can’t be executed until probate or letters of administration are obtained. The whole process could take months or even years if the estate is complicated or being disputed. Once distributions are made, tax may be payable by either the estate (if assets are sold) or the beneficiary when assets received from the estate are subsequently sold.

Statistics suggest that about 45% of people who die each year in Australia do not have a valid will (intestate).

Many don’t get around to writing a will. People experience a change in circumstances (such as divorce or marriage), which may invalidate a will. Errors in executing a will can also cause it to be invalid.

If someone dies intestate, assets that fall into the estate will be distributed according to the relevant state laws.

Often, investment structures may be effective in building wealth, but do not offer protection from an estate planning perspective. What is ideally required is an investment product where the death benefits can be directed to a nominated beneficiary, and where investment proceeds can be transferred with no additional tax liabilities to dependent and non-dependent beneficiaries, regardless of how long the investment has been held.

Investment Bonds

Investment bonds may provide greater simplicity and control over death benefits than other investment products. From an estate planning perspective, the benefit of an investment bond is that death benefits can readily be directed to a nominated beneficiary. Those investment proceeds are transferred tax-paid to dependent and also non-dependent beneficiaries. In this regard, the bonds are held under life insurance legislation and are taxed internally at the rate of 30%.

Building wealth in an investment bond may therefore very effectively reduce the risk of disputes over estates, provide more control to the investor, and may ultimately enable the benefits to be paid more quickly and more tax-effectively.

With an investment bond, if a beneficiary is nominated, the proceeds fall outside the estate and will be paid directly to the beneficiary or entity regardless of whether a valid will exists or not.

Let’s take a look at a comparison of direct shares vs investment bonds:

 

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The benefits of using an investment bond gives greater control, limits dispute and is more tax efficient while also saving time, legal fees and personal stress.

Why you would recommend an investment bond for Estate Planning purposes?

While is it clear that investment bonds offer significant estate planning advantages, the question remains – are there any other advantages to investment bonds? Indeed, investment bonds offer a number of advantages that compare favorably to alternative products as summarized below:

Flexible investment options

Investment bonds allow clients to access many asset classes and provide a market-linked investment vehicle to help meet investment goals.

No limit on the investment amount

There is no limit on the amount that can be invested to establish an investment bond. Investors can also make subsequent investments up to maximum of 125% of the previous year’s contribution without restarting the ten-year period. Investors can choose to start new investment bonds for higher amounts to be invested.

Flexibility

Investment bonds give investors the flexibility to access funds at any time, which can act as a hedge against the restricted access for superannuation and other investment structures. As your circumstances change you can nominate beneficiaries to ensure the right funds go to the right people at the right time.

Capital gains and tax simplicity

Investment bonds provide simplicity as earnings are automatically reinvested in the bond. This means reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering personal capital gains tax.

Payments on death

In the event of the death of the life assured, proceeds from a bond will be transferred tax paid to a beneficiary on death. In effect, tax at 30% has been paid on earnings and taxable capital gains within the bond structure and the bond owner (the beneficiary) receives the entire proceeds without additional tax liability. These features make investment bonds particularly tax effective for investors on higher marginal tax rates.

Transfer of ownership

The ownership of the investment bond can be easily assigned or transferred at any time. The original start date is retained for tax purposes. This may not be achieved within a company structure without creating tax liabilities.

Bankruptcy protection

Investment bonds may offer protection from creditors in the case of bankruptcy

Conclusion

Sound financial planning covers three broad phases – wealth building, retirement spending and estate planning. These phases do not operate independent of each other – they overlap.

Finding the right wealth-building solution to fund retirement needs that can also be an effective solution for estate planning with asset protection being key.

Unit trusts, shares or term deposits are potential options for wealth building, however, most investment products form part of the estate and distribution of the proceeds on death can be a complex process

An investment bond structure provides greater simplicity and control over death benefits. Death benefits can be directed to a nominated beneficiary and proceeds are transferred tax-paid.

Building wealth in an investment bond may reduce the risk of disputes over estates and enable benefits to be paid more quickly.

An Investment Bond gives you the benefit of combining your wealth building and estate planning with flexibility, certainty and simplicity – Ensuring that the right assets are in the right hands at the right time.

 

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This paper contains general information and is intended as an informational guide for financial advisers. In preparing this paper, no individual’s circumstances have been taken into consideration and therefore may not be applicable to an adviser or their client’s particular circumstances. Before making any investment decision, you and your clients should obtain and read a copy of the PDS of any financial product before making a decision to invest.  Centuria Life Ltd (ABN 79 087 649 054 / AFS Licence 230867) (“Centuria”) is the issuer of this paper and the Centuria TaxAstute series.

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