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Estate planning in the post 1 July 2017

Investors spend a lifetime saving and building wealth; however, without an effective estate plan, the death of a spouse or parent can trigger a range of unintended consequences, writes Neil Rogan.

An estate plan defines how an investor wants their assets to be managed during their lifetime and how they want them disbursed after death.

Mr Rogan, the general manager of investment bonds at Centuria, explains how the recent changes to super can impact estate planning, and how investment bonds can be used to fill this role.

Four ways super changes impact estate planning

  1. The transfer balance cap
    Under the new regime, only $1.6 million can be transferred into retirement phase accounts. This limits both the amount an individual can have in their superannuation retirement pension account and the amount an individual can receive from a deceased spouse’s pension account. In other words, the deceased’s pension will now count towards the surviving spouse’s transfer balance cap.
  2. Changes to contribution caps
    1 July heralded changes that make it harder for investors to build retirement savings through pre-tax and post-tax contributions to super.
  3. Lower income threshold for 30 per cent contributions tax
    Australians earning $250,000 or more will pay 30 per cent, double the usual 15 per cent, on super contributions.
  4. No tax-exemption for transition to retirement pensions
    Super fund earnings supporting a transition to retirement pension are no longer tax-exempt.

These changes impact investors’ ability to contribute lump sums into super. Finding a wealth creation vehicle that also provides estate protection and planning has become increasingly important.

Five ways investment bonds benefit estate planning

An investment bond is an insurance policy, with a life insured and a beneficiary, but works like a tax-paid managed fund. Importantly for estate planning, an investment bond is a tax effective structure. Like superannuation, tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30 per cent, although franking credits and tax deductions can reduce this.

A key feature of investment bonds is that if the investment is held for 10 years, no personal tax is paid by the investor.

When it comes to estate planning, investment bonds provide five clear benefits to investors:

  1. Certainty
    Investment bonds provide certainty around passing on wealth; an investor can nominate beneficiaries, who then receive benefits directly rather than via the estate.
  2. No caps
    While the contribution cap limits superannuation contributions, there’s no limit on the amount to establish an investment bond. Investors can make subsequent investments up to maximum of 125 per cent of the previous year’s contribution without restarting the 10-year period.
  3. Easily transferrable
    Ownership can be easily transferred and the original start date is retained for tax purposes.
  4. Beneficiaries
    Investors have the freedom to nominate anyone as a beneficiary in the event of their death. Investment bonds fall outside the estate, so are not distributed according to the will, nor are they affected if the owner dies intestate.
  5. Paid tax-free
    Investment bonds are paid tax-free to the nominated beneficiary/ies.

After a lifetime building wealth, don’t waste it by failing to plan. Despite the changes to super, tax effective wealth creation strategies exist to enable a comfortable retirement and provide viable estate planning solutions.

Neil Rogan is the general manager of investment bonds at Centuria Investment Bonds.

Estate planning in the post 1 July 2017
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