Intergenerational wealth transfer: the scene is shifting

By Damian Hearn, National Manager – Technical Services

Over the next 15 years, we will see the greatest intergenerational wealth shift ever experienced in Australia’s history1. More than $400 billion of housing stock alone will change hands as the parents of the baby boomers, and then the boomers themselves, leave their property to their children and grandchildren.

Underpinning its success is effective estate planning which can be complex, even with the assistance of taxation and legal professionals. Over recent years, advisers have been focusing on clients’ estate plans and it is important to be aware of the available solutions that exist within the market.

At IOOF we have a range of solutions that can assist for different client situations as highlighted in the following case studies.

Client 1: Retirees seeking to minimise superannuation death benefits tax

An investment bond can help a client plan ahead for how they will distribute their wealth when they pass away. It’s about having control over how their wishes are carried out. Most importantly, it’s about peace of mind.

With an investment bond, clients can pass on their wealth by nominating beneficiaries and unlike superannuation; they don’t have to be a death benefit dependant (such as a spouse or a child of any age). As it is regulated as a life insurance investment policy under the Life Insurance Act 1995, the beneficiaries will receive the proceeds free of personal tax liability.

An investment bond provides clients the opportunity to invest and accumulate assets in a tax advantaged investment. Clients can retain control while alive and have better control over their estate planning.  Unlike a managed fund, there is no capital gains tax or personal income tax liability issues upon death as illustrated in the following case study.


Case study

Bob recently passed away at age 70. He decided to leave his entire estate to his son, Travis aged 33, who is married with two children. Upon settling the estate, Bob’s estranged step-son, who he had not spoken to for over 20 years, contested the estate.

Bob had previously received professional advice about the ownership of his assets and his estate planning concerns from his adviser. Before his death, he withdrew the $500,000 balance of his account based pension and invested into an investment bond. Before his death, his net worth at the time was:

Home $400,000
Account based pension CLOSED
IOOF Wealthbuilder investment bond $500,000
Personal effects $15,000
Car $10,000
Total value of estate $925,000

When investing into an investment bond, Bob made himself the life insured and Travis the beneficiary. The amount invested in the investment bond will be paid free of personal tax liability to his son Travis as the nominated beneficiary.

This strategy avoided lump sum death benefit tax of $85,000 that would have applied to the proceeds of his account based pension if paid to Travis, who was not a death benefit dependent for tax purposes at the time of Bob’s death (ie $500,000 x 15 per cent plus Medicare Levy of two per cent which applies from 1 July 2014).


Strategy stress test:

As Bob’s adviser you might be questioning if this strategy is really worthwhile. Wouldn’t it be
simpler to place the funds within the client’s bank account? This will deliver the tax saving on the death benefit lump sum, however using the investment bond will ensure that the proceeds are not caught up with the administration of the estate. It is important to recognise that potential estate challenges posed by Bob’s estranged step-son could be minimised depending upon the state Bob is domiciled in.

For more information on how the IOOF WealthBuilder investment bond can assist with more innovative estate planning solutions click here.   

Client 2: Blended families seeking certainty and clarity

When clients marry for a second time they are often keen to ensure that their second spouse is well looked after in the event of their death. However, there is often a desire to balance this with leaving assets to children of the first marriage. This can be particularly so when clients remarry later in life, have no children from the second marriage and have accumulated significant assets in their superannuation fund.

Under the blended family strategy, a client arranges for their death benefit to be paid as a pension to their second spouse (the pension beneficiary) throughout the spouse’s life. Upon the death of the pension beneficiary, the remaining capital is returned to the original member’s estate. The member’s estate distributes the remaining capital to the member’s children or other superannuation death benefit dependants (the remainder beneficiaries). This basically provides the second spouse with a life interest in the deceased member’s superannuation.

The member determines how the pension benefit will be calculated and the spouse cannot commute the pension or rollover to another fund. If the pension beneficiary dies before the member, the arrangement is voided.

Self-managed superannuation funds (SMSFs) provide a multitude of unique opportunities for clients.  Assisting clients with estate planning and intergenerational wealth transfers is a major part of their appeal. The other type of self-managed super, a small APRA fund (SAF) is essentially an SMSF with a professional trustee. SAFs provide all of the legislative advantages provided to SMSF and in respect of the blended family solution they provide a distinct advantage – the professional trustee holds the cheque book, not the second spouse. 

The case study of Jack and Dianne illustrates how an Australian Executor Trustees (AET) small APRA fund can be used to protect their assets. Click here to access the case study and for more information on this unique solution, click here.

Professional partnership: Teaming up with an estate planning specialist

As part of the IOOF group, AET have been working in partnership with advisers and their clients to provide specialised advice on estate planning and trustee services. The services available complement an advisers existing financial planning offering to provide outcomes that are best suited to a client’s circumstances. Advisers continue to maintain the client relationship and investment management function, and the offering can also be ‘unbundled’ to suit a client’s circumstances. For information on how the AET estate planning specialists work in partnership with advisers, click here.

Conclusion

There is no doubt the scene is certainly shifting and intergenerational wealth transfer will become a major focus to retain client relationships and practice profitability into the future. Advisers should also be considering whether a family financial advice model would assist to deal with multiple generations. Later this year, as part of our quarterly technical sessions, we will be focusing on providing family financial advice and how this can be implemented within your practice.

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1 Bankwest Financial Indicator Series report 2010