Using investment growth bonds as part of your estate planning
Is superannuation the only option
Superannuation has been one of the most effective ways to build wealth for retirement for a very long time, but it’s not the only option available. There are other choices that may also be attractive, particularly when it comes to distributing that wealth after you’re gone.
The government has made that very clear by recently redefining super’s purpose – to provide an income in retirement that substitutes or supplements the Age Pension – and reduces the attractiveness of some previous benefits such as minimising tax or estate planning strategies.
A range of new legislation, including an end to contributions tax refunds on super death benefits and lower contribution caps that limit retirement savings, have underlined the point.
Good estate planning brings people peace of mind by ensuring that their assets are passed on to family and other beneficiaries in the most effective way.
These new and stricter rules for super create a challenge for estate planning purposes, but it’s not the only one older Australians are facing.
Where there’s a will, there’s an easier way
Many people pass away without a will, leaving their assets to be disbursed according to state laws, or leaving their estates to potentially be contested by families because their bequeathing wishes have not been documented.
In the absence of a will, super is distributed by the fund’s trustee, which can create problems. Almost one in four complaints made to the Superannuation Complaints Tribunal in 2015-16 were about death benefit distributions. A common complaint came from adult children, whose objections related to their deceased parent’s de facto partner receiving some or all of the death benefit proceeds.
It’s perhaps not surprising that super is so regularly contested given that, after the family home, it is the largest component of household wealth.
With family structures becoming more complex, it can also be challenging to determine who qualifies as a dependent (who was financially dependent on the deceased at the time of death). Whilst leaving a super lump sum to a non-dependent is unusual because it can trigger personal tax liabilities, it does happen.
There is another way.
A flexible and tax-effective approach
Assets held in investment growth bonds bypass many of these issues.
With these bonds, in most states (exception in NSW), you can nominate beneficiaries to receive the proceeds directly, bypassing the estate and any potential legal challenges, as well as a lengthy and costly administrative process. This is a key difference between investment growth bonds and other types of investments such as unit trusts, shares or term deposits, which form part of the estate.
This provides clear benefits if an estate is contested but it also provides certainty for the estimated 45 per cent of people who don’t have a will, because the investment growth bond assets are paid directly to beneficiaries.
Unlike super, beneficiaries also don’t have to be dependents to receive the investment growth bond proceeds tax-free. This adds another layer of flexibility. For example, it clears a path to leave tax-free money directly to extended family, unrelated individuals or to charities. Because investment growth bonds are not part of an investor’s estate, the discretion of these bequests is also preserved.
The earnings of assets supporting an investment growth bond are generally taxed at up to 30 per cent and, if an investor contributes up to 125 per cent of their initial investment annually over the 10-year period, they don’t have to pay personal capital gains tax (CGT) on withdrawal. However, these requirements lapse upon death – beneficiaries receive their entitlements tax free regardless of how long the investment has been held.
Whilst super forms a crucial component of a comfortable retirement, estate planning requires a far broader range of strategies to ensure that wealth is dispersed in line with a person’s wishes.
Investment growth bonds are one option that can add certainty and flexibility to the estate planning process. Making considered choices early on can help preserve your hard-earned wealth later, so that it ends up in the right hands.
Author: George Lytus CBA