THE 3 AARRRR S OF WEALTH PROTECTION AND ESTATE PLANNING. Matt Manning Technical Consultant

Transcription

1 THE 3 AARRRR S OF WEALTH PROTECTION AND ESTATE PLANNING Matt Manning Technical Consultant

2 Agenda 1. Super death benefits refresher 2. Super EP strategies 3. Non-super EP strategies

3 Death benefits refresher spouse SIS dependant? Tax dependant? Death benefit income stream option? Antidetriment if LSDB? Married Yes Yes Yes Yes De facto/ same sex spouse Yes Yes Yes Yes Former spouse No 1 Yes No Yes 2 1. Unless financially dependant on the deceased 2. Possibly via the estate

4 Death benefits refresher children Child under age 18 Child under 25 and financially dependant Disabled child of any age 2 SIS dependant? Tax dependant? Death benefit income stream option? Antidetriment if LSDB? Yes Yes Yes 1 Yes Yes Yes Yes 1 Yes Yes Yes Yes Yes Other child Yes No 3 No Yes 1. Must be commuted at age As per the definition in the Disability Services Act Unless financially dependant

5 Death benefits refresher other Financial Dependant Interdependent SIS dependant? Tax dependant? Death benefit income stream option? Antidetriment if LSDB? Yes Yes Yes No Yes Yes Yes No Estate Yes Yes/No 1 No Yes/No 2 1. Depends on the ultimate beneficiary 2. Depends on ultimate beneficiary and specific fund

6 Lump sum death benefit Dependants All tax-free including from untaxed sources Non tax dependants Tax-free component tax free Taxable component - Taxed element max 15%* - Untaxed element max 30%* Life cover can create untaxed element in taxed fund * Plus Medicare levy unless via estate

7 Death benefit pension Pension Tax free if deceased or dependant 60 or over If both less than 60 - Tax-free component tax free - Taxable component at MTR* less 15% tax offset * Plus Medicare levy

8 Insurance inside super $$$ Contributions Personal/ Deductible Salary sacrifice Super Guarantee NCC Spouse Super Fund Insurance Policy Life insured = Member Owner = Trustee Contribution = $1000 Deduction = ($1000) $$$ Premiums to insurer $$$ Claim proceeds from insurer Benefits to SIS dependants/lpr/member s account

9 Superannuation advantages insurance Pre-tax contributions Super Life & TPD any occ. insurance Save up to 87% on pre-tax cost of funding Life and TPD (any occ.) premiums Improve cash flow? Taxable income over Marginal tax rate incl. MCL Pre-tax cost outside super Pre tax cost in super Percentage saving $37, % $1,515 $1, % $80, % $1,626 $1, % $180, % $1,870 $1, %

10 DB including insurance to non-tax dependents Step 1 calculate taxable (taxed) = Death benefit x Service days Service days + Days to retirement Less tax-free amount Step 2 calculating taxable (untaxed) = Total benefit - taxable (taxed) tax-free component

11 Example of formula in practice

12 Anti-detriment Additional amount some funds pay on death of member where lump sum death benefit is paid to spouse or child Does not apply where paid to financial dependant or person is in interdependency relationship with deceased Does not apply when death benefit is taken as a pension Equals tax saving generated by a special tax deduction the fund is allowed to claim Essentially, notional compensation for contributions tax deducted May apply if lump sum death benefit is paid to estate, to the extent it benefits a spouse or child (check with fund) Benefit must be paid before deduction is claimed by the fund. SMSF s?

13 Anti-detriment calculation Anti-detriment amount formula = (0.15 X P) X A {R (0.15 X P)} Where: R = total service days between 30 June 1983 and date of death P = total days service between 30 June 1988 and date of death A = total amount of death benefit (before anti-detriment), less any insured amount and less any tax-free component Formula consistent with ATO ID 2010/5 and ATO ID 2007/219 Legislation of ITAA 1997 (superseded 279D of ITAA 1936) Other methods?

14 TPD lump sum After modification formula Over <55 Tax free Tax-free component tax free Tax-free component tax free Taxable component - 0% - 15%* Taxable 20%* * Plus Medicare levy, 2012/13 thresholds, maximum rates

15 TPD pension After modification formula? Pension Tax free if over 60 If under 60 - Tax-free component tax free - Taxable component at MTR* less 15% tax offset * Plus Medicare levy maximum rates

16 TPD modification formula Increase in tax-free = Benefit amount x Days to retirement Service days + Days to retirement When does this apply?

17 Example of formula in practice Tax impact on TPD Benefit $520,000 $500,000 $480,000 $460,000 $440,000 $420,000 $400,000 $380,000 $360, Age Insured amount Net insurance benefit

18 Agenda 1. Super death benefits refresher 2. Super EP strategies 3. Non-super EP strategies

19 Strategy 1 separate funds Mary Jennings (age 30) has worked for the last 10 years for ABC P/L She has accumulated $180,000 (100% taxable) in the ABC P/L employer super fund Has recently commenced a new job with XYZ P/L who offer and at no marginal cost to Mary $400,000 life and TPD any occupation policy (via super) Mary is single and has no SIS or tax dependents Comparison if Mary passes away/suffers TPD any occ. at age 35 with: XYZ fund: $300,000 investment balance, $400,000 insurance Or ABC fund: $200,000 investment balance XYZ fund: $100,000 investment balance, $400,000 insurance

20 Strategy 1 consolidation option death XYZ fund total death benefit $700,000 (including $400,000 life insurance) Element taxed $233,333 $700,000 x (15/45) Element untaxed $466,667 Start Date 15 years 30 years Age 35 Age 65 Total untaxed element = $466,667 Tax payable by non dependant via estate = $175,000

21 Strategy 1 no consolidation death ABC fund total death benefit $200,000 (no insurance) Element taxed $200,000 XYZ fund total death benefit $500,000 (including $400,000 life insurance) Element taxed $71,429 $500g x (5/35) Element untaxed $428,571 Total untaxed element = $428,571 Tax payable by non dependant via estate = $169,286 Saving of $5,714

22 Strategy 1 consolidation option TPD XYZ fund total benefit $700,000 (including $400,000 TPD any occ. insurance) Taxable $233,333 Tax-free $466,667 $700,000 x (30/45) Start Date 15 years 30 years Age 35 Age 65 Total tax-free = $466,667 Tax payable (if taken as LS) = $50,167

23 Strategy 1 no consolidation TPD ABC fund total benefit $200,000 (no insurance) Taxable $66,667 Tax-free $133,333 $500,000 x (30/45) XYZ fund total benefit $500,000 (including $400,000 TPD any occ. insurance) Taxable $71,429 Tax-free $428,571 $500,000 x (30/35) Total tax-free = $561,904 Tax payable (if taken as LS)= $29,690 Saving of $20,477

24 Strategy 1 observations Observation 1: Be careful when consolidating where insurance is involved Observation 2: Advantageous for insurance and investment balances to be separated where DB paid to a non-dependant (if only life cover, consider rolling in $1) Observation 3: The shorter the service period, the better the tax-free calculation for TPD (do not roll earlier service period to fund holding insurance) Observation 4: Other strategies with TPD

25 Strategy 2 TPD, subsequent options Brad Holman (single) suffers a TPD event at age 50 His assets consist of: Unencumbered main residence ($500,000) Super ($1,000,000) which will be 50% TF after modification formula He requires $60,000 p.a. for living expenses Assume 1 July 2012 start date, 6% return and no other income Comparison if Brad: 1. Withdraws 100% of super as lump sum, or 2. Commences an ABP with 100% of super, or 3. Commences an ABP with $192,500 and retains the remainder in accumulation phase

26 Strategy 2 cash flow Option 1 Option 2 Option 3 Initial investment $892,500 $1,000,000 $1,000,000 Interest $53,550 $0 $0 AP payment $60,453 $9,557 Commutations $29,776 DSP $20,667 Gross income $53,550 $60,453 $60,000 Income tax $9,557 $453 $0 Net income $43,993 $60,000 $60,000 Shortfall $16,007 $0 $0

27 Strategy 2 assets after 1 year Option 1 Option 2 Option 3 Outside super $876,493 $0 $0 Super A/C $0 $995,920 $848,683 Pension $0 $0 $162,357 Total $876,493 $995,920 $1,011,040

28 Strategy 3 insurance inside or outside Nicki Kara (married age 40) is a high income earner Now and in the foreseeable future, she will be on the top MTR and maxing out her concessional cap The premium on her life/tpd any occ. policy is $10,000 p.a. 1. Should Nicki hold her life/tpd any occ. cover inside or outside super? 2. If inside, how should she fund?

29 Strategy 3 excess CC s to fund premium Outside 46.5% MTR Gross income required $18,692 Inside 46.5% MTR Gross contribution/income required $15, % Contributions $2,383 Excess concessional cont. 31.5% $5,005 Premium deduction $1,500 Premium payment $10,000 Premium payment $10,000 Gross benefit $2,804 Net benefit (i.e. Gross income saved less MTR) $1,500

30 Strategy 3 $15,888 SMSF $2,383 + $5,005 - $1,500 = $5,888 $10,000 Insurer ($18,692 $15,888) x (1-.465) = $1,500 benefit Interaction with surcharge and other considerations

31 Half time discussion

32 Strategy 4 Claytons DB pension Betty (age 55) is entitled to a superannuation death benefit from her late husbands superannuation fund (Fritz aged 56). The total benefit is $300,000, all taxable component. Betty permanently retired from the workforce 10 years ago Would you recommend Betty receive the death benefit as a lump sum or an income stream? Why?

33 Strategy 4 Claytons DB pension Why not get the best of both worlds? Betty could benefit as a lump sum, re-invest the proceeds as a NCC and commence an account based pension Why would you recommend this compared to simply taking the death benefit as an allocated pension initially? Vs. taking DB as ABP initially, advantages: Death benefit tax free (same) Anti-detriment payable Re-contribute proceeds can be use to commence 100% TF normal ABP Earnings within pension also tax free Estate planning (subsequent death) Remember contribution standards and contributions caps!

34 Strategy 5 binding nominations Ian Vaughn is in the process of completing a binding nomination for his public offer super fund As his wife has predeceased him, in the event he passes away, he wishes for his death benefit to be paid to Peter (son age 40 who is married with children attending primary school) What are the potential advantages/disadvantage if via the binding death nomination, Ian: Nominates Peter Or Nominates his estate/lpr

35 Strategy 5 DB via the estate At least 16.5% Other potential considerations?

36 Strategy 6 re-contribution strategy Michael Cuddyer (age 60) has recently retired with superannuation balance of $450,000 (100% taxable component - ESD 21/06/1988) In the event Michael passes away his potential beneficiaries are His wife Claudia (age 60), and His son Casey (age 35) What are the potential advantages/disadvantages of Michael: 1. Performing a re-contribution strategy, prior to commencing an ABP, or 2. Commencing an ABP without performing this strategy

37 Strategy 6 potential anti-detriment Accumulation plan (no life cover) Assume he dies on 5 February 2018 Assume balance at this time is $450,000 (all taxable component if no re-contribution) ESD: 21 June 1988 Potential beneficiaries: Claudia (spouse), Casey (son, age 35) Components of calculation Death benefit before anti detriment payment is $450,000 No tax-free component or insurance proceeds Days from 30 June 1983 to date of death is 7,900 (R) Days from 30 June 1988 to date of death is 7,890 (P) = (0.15 x 10,812) X ($450, ) (10,822 (0.15 X 10,812) = $79,325 anti detriment payment

38 Strategy 6 potential result To re-contribute or not to re-contribute: that is the question Proceeds received by: No recontribution With recontribution Difference Claudia $529,325 $450,000 $79,325 Casey $441,987* $450,000 $8,013 * $450,000 + $79,325 = $529,325 less 16.5% tax = $441,987 N.B. Believe it or not the anti-detriment refund of tax, is taxed when paid to NTD!!!

39 Anti-detriment and re-contribution Consideration must be given as to who is likely to receive the death benefit and in what form. Why is this important? SMSF s? Re-contribution if spouse receiving DB pension seems likely If DB LS seems likely Lump sum death benefit recipient Spouse or minor child Adult child Other non-tax dependent (e.g. brother, friend e.t.c.) Re-contribution strategy (Marginal) (Definitely!!!)

40 Agenda 1. Super death benefits refresher 2. Super EP strategies 3. Non-super EP strategies

41 Strategy 7 TT income splitting Simple example $3m, 6% return, surviving spouse and 3 children, no other income Spouse only Spouse and 3 children Gross income $240,000 $240,000 Tax $85,147 $47,388 Saving $37,759

42 Strategy 7 TT protection Jeremy Harvey is considering his EP options In the event of Jeremy s death his wishes for the following family members to benefit: Wife Petra (age 45) Son Mark (age 22), spendthrift Daughter Jessica (age 20), recently married, involved in start-up business (existing $20,000 TY) Daughter Pauline (age 14) Options?

43 Strategy 7 TT protection Asset protection benefits of TT Wife Petra (future relationship/subsequent breakdown) Mark (wasting) Jessica (divorce and creditors) Pauline (? N.B. excepted minor income) Potentially, also income splitting benefits

44 Which asset to which beneficiary Obvious comparative advantage in tax dependant receiving super Consider tax position of beneficiaries, CGT and income Non-DGR tax exempt entities as a beneficiary e.g. local sporting club Main residence considerations Insurance/investment bonds Foreign beneficiaries? Informal arrangements and Social Security

45 Strategy 8 inheriting a foreign asset Georgina St Pierre is an Australia tax resident. She will shortly inherit a one quarter interest in the estate of her grandfather who is a tax resident of Canada Her grandfather s estate consists of the following assets located in Canada: Investment property 1 (purchased 1980) A main residence (purchased 1992) Investment property 2 (purchased 1990) Listed securities (purchased 1995) From an Australian taxation perspective, how may Georgina receive her portion of the estate in a tax effective manner? (For the purpose of the exercise, assume all 4 assets have equal value, and Georgina may have some say in which one she receives)

46 The end

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