Suitable for blended families that have separate estate planning needs within several families
An often overlooked investment can give parents in blended families certainty that their nominated beneficiaries will receive their bequest without challenges from disgruntled family members.
An insurance on bond is a non-estate asset outside the control of the deceased’s will and not subject to the usual delays associated with probate.
The imputation bond owner can nominate beneficiaries within the account which may be different to their current family arrangement. And where a parent is leaving money to a child from another relationship, they can, as bond owner, also make withdrawals at any time for any purpose for that child.
Case Study: Steve puts aside money for daughter from first marriage
When Steve re-married his second wife Sarah he was concerned with making sure his ten-year old daughter Kate from his first marriage got a good start in life.
Daughter Kate is living with his former partner while Steve and Sarah have two young children. The couple use mutual wills to provide for each other and for their children from both marriages. But Steve is not sure if this arrangement will reflect his concerns about providing for Kate. His first marriage was a turbulent time and Steve’s relationship with his former partner, Alice, is not an easy one.
As he wasn’t sure of the best option, he visited his financial planner Tom for some advice. So-called ‘blended’ families bring with them financial challenges that are not apparent in traditional families. Indeed Steve’s situation is not unique. One in five Australian couples who marry will have a partner who has been married before.
While Steve has a Will, it could be challenged. However the rise of blended families and second marriages, as well as old-fashioned sibling rivalry, still results in challenges to estates that can produce outcomes which do not reflect the wishes of those who have bequeathed the funds.
Steve could have a testamentary trust created under his Will, but even this arrangement has its shortcomings. As Tom pointed out a testamentary trust not only finding willing and honest trustees who are competent, knowledgeable about investments, tax matters and compliance, but can be impracticable for smaller dollar bequests. It also requires annual administration and tax reporting costs and can be inflexible and costly to unwind.
A frequently overlooked estate planning option is an imputation bond. Also known as insurance bonds or friendly society bonds, they are a low-cost flexible structure that can achieve highly effective estate planning solutions.
An imputation bond is a tax-paid investment, in much the same vein as superannuation, but without the hassles of the contribution caps and preservation restrictions that apply to super.
Additionally, investment bonds pay tax on the investor’s behalf at a rate that is capped at the corporate rate, currently 30 per cent. This rate is often significantly less due to the use of allowable tax credits and benefits, such as franking credits.
Importantly, unlike superannuation where benefits are preserved, investors can still make withdrawals at any time for any purpose. That feature is attractive for Steve as it provides the flexibility to draw against it for Kate’s education and maintenance.
Finally, once investors have owned the bond for ten years, they can withdraw all or part of the proceeds free from any further tax assessment.
For Steve, the most attractive feature of the imputation bond for estate planning purposes is in the area of beneficiary nomination. He can nominate beneficiaries within the account – in this case only Kate – to receive the proceeds tax-free upon his death, irrespective of how long the investment has been in place. Significantly, the insurance bond is considered to sit outside the control of the deceased’s will, being a non-estate asset, and is not subject to the usual delays associated with probate.
Finally, the distribution of proceeds to beneficiaries nominated is very difficult – if not impossible – to successfully challenge.
Kate needs only produce a copy of her father’s death certificate to gain access to the funds within the bond.
But death is not the only way for Kate to access the funds. As the original bond owner, if Steve transfers the bond to her for nil consideration, he pays no personal tax or capital gains tax. This transfer happens with full preservation of the bond’s tax-advantaged status, such as maintaining the original 10-year start date.
While using an investment bond is not necessarily the solution for all of a client’s estate planning needs, it can effectively transfer wealth between generations to reflect the client’s desired outcomes.
Richard Atkinson
Head of IFA Product and Relationships
Austock Life Limited
p 03 8601 2095
m 0417 541 897
RAtkinson@austock.com
www.austock.com