Estate planning made simple
How investment bonds can boost your retirement savings
In the past year, there have been several regulatory changes that may affect your estate planning strategies, and more are likely. Protecting your wealth against these changes is crucial to ensure your assets are managed and distributed how you want them to be.
There’s nothing certain in life except death and taxes, so the adage goes. However, another certainty is change – particularly when it comes to the financial services regulatory landscape.
The importance of estate planning
Estate planning should be considered early in your financial planning process. As illustrated below, the phases of the financial planning and estate planning processes overlap. For example, wealth creation plays a significant role in your retirement plans to ensure you have enough for a comfortable retirement and to counter inflation risks.
A lack of estate planning can have a significant impact on the value of your estate and on your beneficiaries. Some of these consequences include the following:
· Your estate could be distributed to unintended beneficiaries.
· High legal fees could be incurred in order to source and collate assets.
· Any disputes can result in lengthy delays in accessing estate proceeds.
· Wealth may be eroded as a result of tax implications, reducing the value of your estate.
Such consequences can result from having no estate plan, or when estate protection and planning is considered too late, that is after investment decisions have been made.
It’s important to note that estate planning is not a ‘set and forget’ activity, rather it’s one that should form part of your regular reviews with your adviser. Change is a constant and future changes will likely affect your estate plan so you need to be able to adapt.
Changes to same-sex marriage laws requires new focus on Wills
Changes to the Marriage Act in 2017 allow same-sex couples to marry; it also recognises those marriages legally enacted overseas. In all Australian states and territories, marriage renders any previous Will invalid, and in all but Queensland, also nullifies powers of attorney.
If a new Will is not written once the couple has married and one partner dies, this partner will be deemed to have died intestate. This may result in that person’s assets being distributed to unintended beneficiaries, rather than in line with his or her intentions.
Prior to the change in the Marriage Act, many same-sex couples in long-term relationships had drawn up legal and financial agreements to cover all eventualities. Such agreements should also be reviewed to ensure their validity and that the estate planning needs of the couple are met.
Investment bonds and estate planning
An investment bond is an insurance policy, with a life insured and a beneficiary. However, it operates like a tax-paid managed fund. As with a managed fund, you can choose from a broad range of underlying investment portfolios. These typically range from growth-oriented assets, such as equities, to defensive assets such as fixed interest. They can also include other asset classes and combinations of assets.
Listed below are some of the benefits investment bonds provide.
An investment bond is a tax-effective structure, which has an important role to play in an estate plan. With most other investment structures, when a beneficiary takes an inheritance in their name, tax is generally payable on income generated from the inheritance at their personal marginal tax rate.
With investment bonds, 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%, although franking credits and tax deductions can reduce this effective tax rate. This makes them an attractive investment option for high-income earners.
A key feature of investment bonds is that if the investment is held for 10 years, the investor pays no personal tax. However, if the investment is redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in figure one.
Tax payable on returns from investment bonds
|Withdrawal occurs||Taxable portion (of growth redrawn)|
|Within the first 8 years||100%|
|In year 9||Two-thirds|
|In year 10||One-third|
|After 10 years||Nil|
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.
Investment bonds provide investors with the freedom to nominate anyone as a beneficiary in the event of their death. Investment bonds fall outside of an estate, so are not distributed according to the Will, nor are they affected if the owner dies intestate.
Tax-free to nominated beneficiaries
Investment bonds are paid tax-free to the nominated beneficiaries. Depending on the age and life stage of the beneficiaries, the funds can then be:
- reinvested in a new investment bond;
- used to make additional super contributions up to the recipient’s relevant contributions cap.
Investment bonds versus other investments
An investment bond may provide greater simplicity and control over death benefits than other investment products such as unit trusts, shares or term deposits.
Upon 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 usually cannot be undertaken until probate or letters of administration are obtained, which means the entire process can 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 by the beneficiary when assets, which are received in-specie from the estate are subsequently sold.
In contrast, the death benefits from an investment bond can be directed to a nominated beneficiary. Investment proceeds are paid tax free to dependant and non-dependant beneficiaries, regardless of how long the investment has been held.
Building wealth in an investment bond may reduce the risk of disputes over estates and enable the benefits to be paid more quickly. The advantages of an investment bond in an estate protection and planning strategy are summarised in Figure two.
Estate planning – a comparison between investment options
|Managed funds, shares and term deposits||Investment Bonds|
|Who is the beneficiary?||Forms part of the estate.||Paid directly to the nominated beneficiary, or the estate if no nomination.|
|What are the tax implications?||The estate will pay tax on realised gains if the asset is sold. Alternatively the asset can be passed onto the beneficiary with the accumulated tax liability.||Paid tax-free to dependant or non-dependant beneficiary, or to the estate.|
|What happens if the estate is challenged?||Distributions are tied up until issues are resolved. The instructions in the will may be varied||Not affected if paid to nominated beneficiary.|
|What if the owner dies intestate?||Distributed in accordance with state laws.||Benefit is still paid to nominated beneficiary if elected.|
|When can distributions be paid?||Need to first obtain probate or letters of administration and then resolve any disputes. Timeframe can be lengthy.||Payment made after providing appropriate documentation to life company.|
Help with providing for blended families
Investment bonds are suitable for blended families that have separate estate planning needs. The investment structure gives parents certainty that their nominated beneficiaries will receive their bequest without a challenge from other family members.
If you’re concerned with estate planning, investment bonds are structured to allow you to create certainty with respect to your wishes about passing on wealth. You can nominate beneficiaries who then receive benefits directly and are free of personal income tax liability. Investment bonds enable you to combine wealth building and estate planning to ensure you get the right assets, into the right hands, at the right time, irrespective of regulatory changes.
Estate planning case study: A blended family
Lisa (67) and Andrew (72) are married. For both it is their second marriage, and each has children from their first marriage: Lisa has three and Andrew has two.
Lisa’s main estate planning issue is to leave her non-super assets, which were accumulated during her first marriage, to her three children. She considers investing her non-super assets into an investment bond, with her three children as beneficiaries.
Lisa remains the owner and life insured, and because investment bonds provide the flexibility to withdraw funds at any time, she continues to have access to the funds if necessary.
If Lisa is alive when the investment bond matures, she can reinvest the proceeds for a further 10 years, knowing that upon her death, the funds are paid tax free to the beneficiaries, that is, her three children.
While unit trusts, shares or term deposits are traditional options for wealth accumulation, they form part of the estate upon death, and distribution can be complex and open to dispute from other parties, such as Andrew’s children. Investment bonds however, provide greater simplicity and control over death benefits.
Disclaimer: The examples provided are illustrative only. Suitability of a Centuria LifeGoals investment will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in preparing this case study. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) for any Centuria LifeGoals investment and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. This page is not an offer to invest in any of Centuria LifeGoals Investment Options. An investment in any of Centuria LifeGoals Investment Options is subject to risk as detailed in the PDS. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.