As the population ages, new relationships between seniors become common. So I’m regularly asked what to do to prevent your assets from going to the wrong person.
There is no easy answer, and another complication is that rules for estate planning vary from state to state. However, if problems arise, it is better to seek professional legal advice sooner rather than later.
Good advice can now save a fortune in costs.
In any case, it is useful to understand some basic principles of estate planning. I’m sure you know the importance of a current and valid will, but certain assets fall outside of the will. This includes funds in annuities, insurance bonds, and assets that are held as co-tenants.
Let’s start with assets in common names, such as B. Real estate, which usually goes to the surviving partner regardless of the terms of the will. One way to get around this is to hold properties together as a tenant – you are then free to bequeath your stake to a person of your choice. Although, of course, this is best implemented when purchasing.
The next thing you need to understand is that your retirement savings are not necessarily disposed of by your will – it is the trustee of your super fund who usually determines who gets the money. So consider making a binding death benefit claim that specifies the beneficiaries you choose. Take advice because if done wrong it can lead to unnecessary tax bills and still be challenged.
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A great solution is to withdraw your money tax-free before your death and deposit it into your bank account. This can also be done by an authorized lawyer if the fund member is incapable of doing business. This prevents possible challenges and removes the possibility of 17 percent death tax (which is levied on the taxable portion of your fund that is left to a dependent person).
If this is your plan, you still need good advice on what to do with the money. Options include an absolute gift to someone of your choice or the investment of the money in insurance bonds, which are also outside of the will and can be given to a named beneficiary.
Think Harry, aged 85, a wealthy retiree who is now happily remarried after a nasty divorce and wants to leave a legacy to his children from both marriages. He is aware that there are quarrels between some family members and it is important to him that his assets are divided up at will and not undermined by family disputes.
He invests $ 250,000 in his own name in each of five separate investment bonds and names each of the five children as beneficiaries of a bond when he dies. Since an investment bond is technically a life insurance policy, the distribution of the proceeds cannot be contested. Harry can sleep soundly knowing that he has resolved the potential problem in advance.
Another option is an Inter Vivos Trust. This is a vehicle created by a living person for the benefit of another person. This trust is also known as a living trust and has a term that is determined when the trust is formed and that may include the distribution of assets to the beneficiary during or after the lifetime of the deceased.
One related option is to leave the money through one or more testamentary trusts. If the willmaker dies, the property goes to a testamentary trust (or trusts) and is not held personally by any of the beneficiaries. This keeps the assets separate in the event of a divorce or bankruptcy and has tax advantages in good circumstances.
As the beneficiaries of the testamentary trust, there are no restrictions on using the trust’s money for the benefit of grandchildren, including expenses such as school fees and uniforms.
That is, the first $ 19,200 of such non-tax-deductible items could be paid in pre-tax dollars from the trust rather than post-tax dollars. Even after the death of the children, the grandchildren can continue to be beneficiaries of the trust.
Noel answers your money questions
I’m 48 and my wife is 42. I have $ 485,000 and my super fund and that fund also has a life insurance policy of $ 950,000. If I die prematurely, will it be possible for my wife to keep my pension credit plus the life insurance proceeds super and hopefully draw an income from it?
I would hate it if it were forcibly withdrawn and then put in the bank where it would earn minimal interest.
The other option would be to use the proceeds to repay our investment loan, which we are not interested in because the super fund returns 8 percent and the interest on the loan is only 2 percent.
For this reason, we think the best option is to keep the money in there super and withdraw it when necessary. Is that possible?
What you say should be possible, but you should check with your fund to see what options it has. If you want your credit to remain in superannuation, the law allows you to start a death benefit up to the upper limit of the transfer balance (currently a maximum of $ 1,700,000) for the surviving spouse.
This option requires annual withdrawals of at least the minimum amount, and the amounts withdrawn are tax-privileged. Generally, the taxable component is treated as taxable income, but it would benefit from a 15 percent tax offset which would lower the effective rate.
Taxation would cease to apply once the surviving spouse turns 60.
As a rule, the health insurance scheme stipulates that the benefit is drawn partly as a lump sum and partly as a pension. This enables a lump sum to settle liabilities and a pension to ensure a regular income. To reiterate, check with your fund, but a tax-deductible source of income should be an option.
I’m 60 and my wife 61. I don’t work – she works 18 hours a week. I have $ 350,000 in Super and she has $ 950,000. We have no debts and live in an easy-care house.
We’re trying to sell a rental property for $ 475,000. We comfortably live on her income of $ 70,000 a year, and she can expect a sizable inheritance at some point in the future. Your employer won’t sacrifice your salary too super. We hope that by the time we each retire, we will have most of our financial assets in superannuation.
Would it be wise to take an Allocated Pension on a portion of my Super and accumulate a portion of it? I hope to be able to reduce the taxes paid on my pension within the fund while still being able to contribute to the accumulation component in the future.
Could my wife pay a tax-deductible spouse’s contribution into her Super?
Access to funds in an “emergency” would also be reassuring. We know the current annual super premium limits and put forward rules.
The difference in the effective rate after tax between the accumulation mode and the pension mode is around 0.8 percent per year. Hence, you would save a little bit by moving much of your money into retirement mode.
A good strategy might be to withdraw $ 330,000 as a lump-sum tax-free amount, re-deposit it as a non-discounted contribution according to the filing rules, and then convert a large part of your fund to annuity mode at an appropriate time.
This rescheduling strategy would make it possible to convert most of the taxable component into a non-taxable component. Just make sure you involve your advisor every step of the way. Your wife can deduct up to $ 27,500 annually for tax purposes, including employer contributions.
Before the capital gains tax was introduced, my father and I bought an investment property together in 1984. In 2004 my father passed away and the property came to me in full by his will.
I still own the property, but I wonder if the 50 percent I inherited from my father would be subject to capital gains tax from 2004 onwards?
They are deemed to have been acquired tax-free at market value at the time of your father’s death. This becomes the base cost for CGT purposes.
What is the maximum in your retirement account to still receive a partial pension at 67? I’m 61 years old, single and currently have $ 670,000 in my super account thanks to an inheritance eight years ago. I am considering early retirement, but if I wait until 67, will I still be entitled to a partial pension?
Under current regulations, a single homeowner can have up to $ 593,000 in investable assets before retirement is forfeited. For a non-homeowner, the number is $ 809,500.
While these numbers are increasing every year, your retirement pension should be increasing much faster than the pension numbers. You should speak to a good advisor now to ensure that your portfolio-asset mix matches your goals and risk profile.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: [email protected]