Mr Taxman
Change the way you feel about taxes.
Get informed and discover what the taxman doesn't want you to know.
Sharing it with Australia, Mr Taxman is a regular Woman’s Day columist and TV finance commentator
  • click to visit Mr Taxman on Twitter
  • click to visit Mr Taxman on FaceBook
  • rss

How to protect your family's wealth

May 19, 2016

Most investors would tell you that building wealth is a thrill-ride, but planning for its survival doesn't quite elicit the same excitement.

Unfortunately this means wealth protection can become an afterthought, when it should instead be revisited every time a new asset is acquired or life event occurs. You only have to look at uber-wealthy musicians who die without a will to realise the turmoil surprise tragedies can create.

If quizzed, few people would say they want their assets to end up in limbo – or worse, with someone from whom they are estranged. However, that's the reality if wealth protection mechanisms, including trusts, insurance, financial agreements and binding death nominations, aren't in place or set up the right way.

Without a crystal ball, there's no telling which assets or relationships will flourish, but certainty can be delivered in the form of planning. As an added bonus, some of these structures, such as family trusts, can also help build wealth.

Over the next few pages we'll show you some of the best ways to keep your money where it's intended, whether that be in your hands, with your spouse, or your children.

PLACE YOUR TRUST IN A TRUST

Family trusts were once seen as the best way to safeguard wealth, but Tax Office crackdowns and the emergence of self-managed super funds pushed them out of the limelight. However, tax and wealth planning experts say they are the vehicle of choice for wealthy families wanting to facilitate inter-generational wealth transfer.

The trust can be either set up with an individual trustee or a company as the trustee. Adrian Raftery, a senior tax lecturer at Deakin University, says the company structure is best for asset protection because it means that personal assets can be shielded from future claims against the trust.

You also have flexibility and control over where the assets go in the case of divorce, remarriage and death. Your family trust can outlive you and continue to provide protection for your assets should you wish.

The other major benefit of family trusts is efficient tax planning. Parents with children between 18 and 23 or investors in their 30s or 40s with retired parents fall into the sweet spot for family trusts because they can apportion part of their investment gains to their lower-earning counterparts to save on tax, according to Jonathan Philpot of HLB Mann Judd.

For example, say you are earning $180,000 and are in the top tax bracket, your partner is earning $80,000 and you have a $1 million investment portfolio yielding 5 per cent. Your collective investment income for this tax year would be $50,000 and you would have to pay $21,500 in tax on your investments ($11,750 for you in the top tax bracket and $8750 for your partner in the one below).

SPLIT BENEFIT

But if you had a family trust and children in their late teens, who are below the tax-free threshold, you could split your investment income between them and save $18,000, says Philpot (each kid would pay $1292, with the Medicare levy and low income rebate). Now, when those kids enter the prime of their working lives and their parents are semi-retired or retired, that's when wealth preservation strategies come into play. They can then start to shift some of the trust income into a self-managed super fund.

"Say they retire at 60, you've got until 65 that you can still make super contributions," says Philpot. "From 60 to 65, say the family trust has a million-dollar balance; you could move $250,000 each year from the family trust into the super fund. Whatever capital gains you are realising in the family trust you're able to offset that with super deductions in your own name."

Peter Bembrick, a tax partner at HLB Mann Judd, says he has clients who use that strategy with an SMSF. The main moneymaker is a man in his 30s on a salary of $110,000 who wants to distribute wealth to his parents' SMSF.

If you've got a family of high earners (note that minors attract a higher tax rate too), then you could appoint a corporate beneficiary and allocate the investment earnings to them at the corporate tax rate of 30 per cent, says Raftery.

Be warned though, if you set up a bucket company (or beneficiary), you must transfer money to that company's bank account rather than holding it in your personal name. It can also be costly in terms of registration costs and company accounting fees.

Like any wealth planning strategy, though, family trusts are not one-size-fits-all. It's only beneficial if you have substantial assets or can build them. What that means varies, but Philpot says a rule of thumb is to end up with about $200,000 over five years because it costs about $2000 to set up and another $2000 a year in running costs.

Who else aren't they for? Anyone who plans to invest using a high level of leverage, says Raftery. That's because losses are quarantined in the trust and cannot be used to offset gains.

Both Raftery and Philpot believe family trusts are now off the ATO's radar because the costs of changing the system would outweigh the benefits.

PLAN FOR THE UNEXPECTED

While damage-proofing your assets, it's also important to consider an unpleasant but necessary topic – separation.

No one enters a relationship expecting separation or divorce, but unfortunately divorce becomes a reality for about one in three marriages, according to the Australian Bureau of Statistics. One in five of those divorcees then gets remarried.

As well as creating a raft of complications in personal lives, divorces and remarriages tend to cast a shadow over the family finances, family law solicitor Marilyn Hauptmann of Swaab Attorneys says.

While there are never any guarantees what the family court will do, there are a few strategies you can employ before, during and at the end of the relationship to give yourself some certainty. The first one is a pre-nuptial agreement or binding financial agreement, which Hauptmann says is the best chance you have of leaving a marriage with close to what you brought into it.

"If you're in a second relationship or marriage, if you're older and established and one party has a lot more than the other, before starting the relationship I would certainly advise the wealthier party to have a financial agreement drawn up," Hauptmann says.

However, not all financial agreements are equal and your share in the case of separation may depend on how it's drafted.

"It's got to be in writing, signed by both parties and both parties must have separate lawyers who have to sign a statement [to say] they have given their clients advice. It's very important for the lawyer to provide the statement in writing," she says.

"In my financial agreements if the parties don't have children yet or only one child, I put something in to provide for what happens if a child or another child is born."

Of course, it may not be you that's separating – it may be your kids.

If you want to help your child and their spouse buy their first home, make sure you have a registered mortgage or loan agreement, Hauptmann says.

When it comes to inheritance, your best chance of your child not losing half in a divorce is by not mingling it with other assets, she says.

If you can prove to the court through documentation that it was kept separate and was never intended to be part of the marital assets, the court may take that into account.

However, as a generalisation, the longer the marriage, the less weight the court places on third-party contributions, she says.

INSURE YOUR FAMILY’S FUTURE

It's also critical to ask what would happen to your family and your assets if you became ill and were not able to work, or worse, if you died. Would your investments be able to do the work alone or would you need some assistance?

Life insurance has got a bad rap lately and families would be forgiven for asking why it's worth having in the wake of the CommInsure scandal, which saw claims delayed and unpaid.

It is therefore more important than ever that families cast a critical eye over the products on the market and review their cover frequently.

The major types you'll come across are life insurance, total and permanent disablement, trauma and income protection. The premium you pay varies, depending on your health history, your age and the level of cover you want.

How much cover you need is a subjective question, says Russell Cain, CEO of Life Insurance Direct.

For instance, most people elect income protection insurance for an event that would keep them out of the workforce for 30 days. However, if you can afford to be out of the workforce for longer, you could pay a lower premium and select a 60-day waiting period.

When it comes to purchasing insurance, one of the easiest ways is through your super fund, which means you don't have to draw on your disposable income to pay for it and it's easier to maintain because you don't need to worry about changing banking details over the life of the policy.

You must, however, keep on top of definition changes that super funds will inform you about in the mail, Mr Cain says. A small definition change could affect your ability to claim.

Patrick Canion, an adviser at ipac Western Australia, says it's critical at a time where life insurance is under a cloud that you make sure you ask the right questions.

"Check definitions and check that premiums are competitive," he says. "If they aren't, find out what's required to upgrade the policy to the latest definition or move insurer. But never cancel your old policy before your new one is in force."

If you dropped your policy with a view to move to another insurer, you could find that they won't cover you for the level you want and you'd be without insurance.

PROTECT YOUR ESTATE

The final aspect of wealth protection that should be top of the list, but is often an afterthought is estate planning. Don't be like the anecdote told by lawyers about wealthy couples who leave no box unchecked with their SMSF, but forgot to write a will.

It doesn't happen often, but it does happen, says Anna Hacker, head of estate planning at Equity Trustees. As obvious as it may sound, it's critical to have a valid will and revisit it every couple of years – and that doesn't mean from a will kit you buy in a newsagency, she says.

Other mistakes include technical errors, like not getting paperwork witnessed or writing the wrong date on binding death nominations. While there have been cases of wills written on walls accepted, the rules are much stricter for binding death nominations.

The main area of confusion that unravels the best intentions of wealth-builders is whether they actually need a binding death nomination, a legal document that states which of your dependants is to receive your benefits in the event of your death.

In an age when blended families are on the rise, there are arguments both for and against binding death nominations as a mechanism to shelter wealth.

Without a binding death nomination, you face the risk that your money could end up in the wrong hands if your estate is challenged and divided in a way you wouldn't have planned. With the nomination, you can ensure your benefits go exactly where they are intended.

However, if you are divorced and have a binding death nomination that names children under 18 as your beneficiaries, you could still face a situation where your wealth ends up in the hands of your ex-spouse, says Hacker. In this situation, you may be better off putting it into the estate.

With complicated family units on the rise, it's becoming more common for people to use super splitting strategies, which sometimes involves having multiple family trusts or SMSFs, says Hacker.

BUILD WEALTH WITH YOUR SPOUSE

Beyond the obvious benefits of companionship and pooled incomes, marriage and de facto partnerships can help you grow your wealth quickly.

If you want your investments to compound quicker while saving tax, one strategy could be investing in your spouse's name. Say you're a high income earner and paying a top marginal tax rate and your partner falls into a lower tax bracket, you may be able to invest in his or her name and your income would be taxable at that rate. 

You may also be able to transfer an employee share scheme into their name. 

As a quid pro quo for investing in your lower-earning spouse's name, you could top up their super with a spousal contribution. If they are working part-time or are a stay-at-home parent, additional contributions to their super could attract a tax offset of up to $500, provided their taxable income is less than $37,000.

Contributions above $3500 won't attract an offset, but are still certainly worthwhile in terms of helping your spouse build up their balance if they have taken time out of the workforce. Indeed, if your super fund allows it, spouse-splitting – where you put part of your before-tax contributions into your spouse's nest egg – could be a great strategy if they are on a low income. They get the benefit of more quickly building their super balance and if you salary sacrifice to get there, you get the tax benefit too.

TAX-EFFECTIVE INVESTING

A starting point for building wealth is understanding how to use the tax system to your advantage. Despite recent changes super is currently the most tax-effective method of investing in Australia, but given the fact your wealth is quarantined until you retire, it's worth having a couple of other options at your disposal.

Investment bonds, like super, are a long-term vehicle where earnings are taxed at the corporate tax rate of 30 per cent and reinvested in the bond, which offers a significant tax saving on your investment income if you're in the top or second-highest tax bracket. If you keep topping up the bond, but your annual investment doesn't exceed 125 per cent, after 10 years your earnings are tax-free. 

If you want to give your kids a start, Austock Life's ChildBuilder bond can help build endowments in a tax-friendly environment. 

You may also want to consider listed investment companies, such as Argo Investments and Australian Foundation Investment Company. They hold the top Aussie companies and pay fully franked dividends, which means you get a credit for the tax the company has paid.

Original article published in here in The Financial Review on 19 May 2016

 

Comments

Post a New Comment

Media Availability

Are you interested in booking Mr Taxman for a speaking engagement or requesting his viewpoints for an article?

comments-rhsLatest Comments

  • " Hello! I am a citizen of italy and have been living in usa I want to sincerely appreciate clayton who helped me with an already Programmed hacked ATM CARD and i was so poor without funds that i..."

    By: carina paolo at Jul 16, 2018 7:36PM

    Post: The Full Cost of Motoring in Australia

  • "DO YOU NEED %100 LOAN FINANCE FREE? CHEVRON FINANCE FIRM is a branch of CHEVRON COMPANY that offer loans to individual and public sector that are in need of financial Assistance in a low..."

    By: Chevron at Jul 16, 2018 7:03PM

    Post: The Full Cost of Motoring in Australia

  • "If you are looking for a positive lending experience I would recommend Le_Meridian Funding Service. It is surprisingly easy to receive a debt help. You will be treated with respect and..."

    By: connie morgan at Jul 16, 2018 10:03AM

    Post: The secret to getting your loan approved

  • "Hi I currently just did my tax return and most of my tax went towards my HELP debt. I have fringe benefits and my work takes out money each fortnight to go towards my HELP debt. I just want to know..."

    By: Jamie at Jul 16, 2018 9:07AM

    Post: Two important dates for those with HECS/HELP debts

  • "Hello, Are you in need of loan ? you can get your problems solved when you get here. I'm Mrs. Camila from USA, last week on Monday i was seeking loan to pay my bills, so I got into the..."

    By: Mr John Hassan at Jul 16, 2018 1:59AM

    Post: The secret to getting your loan approved