Terminal illness and superannuation - Estate planning and testamentary trusts - Debts and Centrelink assessment

Terminal illness and superannuation

One of the most difficult periods in a person’s life is when they are diagnosed with a terminal illness. As personal issues become the main focus, it’s easy to lose sight of one’s financial situation. However, with prudent planning, the financial burden can be eased and assets can be maximised for surviving beneficiaries.

One of the key assets to consider upon terminal illness is superannuation. A member of a super fund with a terminal medical condition can generally access their superannuation benefits as a tax free lump sum. The lump sum may be required for immediate medical or personal reasons. Although it may be tempting to cash the entire super balance as a lump sum, it may be advantageous to leave a portion in the fund particularly where a spouse or children are beneficiaries.

Following death, a number of strategies can be used with the super fund. Certain beneficiaries of a lump sum are eligible for a boost to the super benefit, known as the anti-detriment payment. This payment represents a refund of the tax paid in the account. Furthermore, tax effective income streams can be paid to certain beneficiaries to meet ongoing needs.

It’s important to seek financial advice if you suffer a terminal illness as the best financial planning strategy depends on your personal situation and objectives.

 

Estate planning and testamentary trusts

A testamentary trust can be an effective estate planning tool, providing asset protection, flexibility and the tax effective distribution of wealth. A testamentary trust can be set up by an appropriate clause in the Will and is set up following death using estate assets. You can also use superannuation and insurance proceeds to fund the trust.

Testamentary trusts are normally discretionary trusts, offering flexibility. The trustee can vary the income distributions each year depending on the beneficiaries’ circumstances. This can generate tax savings, particularly if there are a significant number of children or grandchildren in the family. Minors who are beneficiaries of a testamentary trust pay tax on trust income at normal marginal tax rates. Given the low income tax offset, individual taxpayers can receive income up to $16,000 in the 2011/12 financial year without paying tax (excluding other tax offsets).

A testamentary trust could be used to provide greater control over the distribution of the estate assets. For example, a beneficiary may only become entitled to capital from the trust upon attaining a certain age.

There are some considerations with testamentary trusts. Firstly, the estate may be delayed until grant of probate is completed. This further delays the establishment of the trust. Secondly, the estate may be contested, so the trust may have reduced assets available for beneficiaries.

Testamentary trusts could be used to provide for your beneficiaries. Furthermore consider how your parents could use a testamentary trust to effectively transfer wealth to you and your beneficiaries. Financial and legal advice is important when considering your estate plan, including the need for a testamentary trust.

 

Debts and Centrelink assessment

If you receive (or are about to receive) a Centrelink payment you should understand the rules for assessment of debts. Generally, the value of an asset under the assets test is reduced by any outstanding charge or debt over that asset. For example, a margin loan of $70,000 on a $100,000 investment reduces the assets test value to $30,000.

A charge or debt cannot reduce an asset’s value where it is secured against an exempt asset, for example, the family home. So let’s say $300,000 is borrowed using the principal residence as security to purchase an investment property. The entire amount of the investment property is assessed under the assets test, with no reduction for the amount of debt. Where the lender permits, you may be able to use the investment property as security, rather than the principal residence. In this case, the $300,000 debt reduces the market value of the investment property and consequently Centrelink payments may increase.

Unsecured loans can only reduce an asset’s value if you can provide evidence that the loan was obtained specifically for the purchase of that asset. Unsecured loans obtained for general purposes or for purposes other than the purchase of the asset (eg. for an overseas holiday) do not reduce the value of a person’s assets.

 

RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This information does not consider your personal circumstances and is general advice only. You should not act on any information without obtaining professional financial advice specific to your circumstances.

Taking control of your estate during divorce

Breaking up is hard to do, as the song says – emotionally, spiritually and financially. If you’re going through a divorce, the last thing you probably feel like thinking about is the possibility of something happening to you.

However, if you’re going through or even contemplating a divorce, finding out what would have happened to your worldly possessions, if you had died or been disabled yesterday, should be looked at as a matter of priority.

Although you may be separated from your spouse, in perhaps body and or soul, in the eyes of the law you are still legally married until a judge signs the divorce papers.

This means if something were to happen to you and you died or became incapacitated, your estranged partner could still have control over your estate – not a thrilling prospect for most people.

For example, if you did not have a Will in place and you died during a divorce, your estranged spouse would automatically be entitled to control your estate, and depending on whether or not you have kids, would most likely be entitled to at least half, if not all, of your assets.

So if you’re going through a divorce or separation, it’s important to review and revise your Will as soon as possible.

It’s not just your Will you need to worry about, at this time.

It’s also considerations such as how to ensure debts are covered in the event of your death or incapacity while leaving enough for the ones you care about, making sure your have nominated beneficiaries for your insurance policies, superannuation and pensions, the tax implications and how any assets would be reallocated if a beneficiary were to die before you.”

After all, you’ve worked hard to build wealth so you want to make sure that your wishes would be handled in the way that you intended when you’re gone. Or at least they are more likely to be respected.

Of course, it’s not just your divorce that could have a huge impact on your family succession planning, but also any other changes in marital status for you or your beneficiaries.

For example, one day you may decide to remarry – and it is to someone who has also been married previously.

Or perhaps one of your children will separate, or decide to marry someone at risk of bankruptcy or with a gambling problem.

If this happens you’ll want a plan in place to ensure your final wishes are met.

These days with more and more people getting divorced, remarrying and starting blended families, estate planning is becoming increasingly complicated so financial advice is crucial.

A professional adviser can work closely with your solicitor to help you cut through the legal jargon and find out what is most important to you. That way you can rest assured if anything happens to you, your final wishes will still be met.

Without a good plan, particularly with the added complexity a divorce can bring, there can be very sad consequences: from family squabbles and legal wrangling to unanticipated tax losses.

For help to working through your estate planning issues following a divorce contact *Hugh RI Advice - RetireInvest on 03 9471 0080 today.

*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. This editorial does not consider your personal circumstances and is general advice only. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.

We are continuing to live longer

According to recent statistics released from the Australian Bureau of Statistics, there is a continuing trend for Australian men and women to live longer.

A baby boy born in 2007-2009 is expected to live, on average, 79.3 years. A baby girl born over the same period is expected to live, on average 83.9 years. Over the decade to 2009, this represents an increase for males of 2.7 years and for females 1.9 years. Females are still expected to live longer but males are catching up.

A similar trend appears in the residual life expectancy at age 65. Females age 65 in 2007-2009 are expected to live another 21.8 years to age 86.8 (an increase of 1.4 years) and males another 18.7 years to age 83.7 (an increase of 1.9 years).

Our increased life expectancies have been attributed to improvements in aged care management, medical advances resulting in a decline in the number of deaths from chronic health conditions (e.g. heart disease, cancer and strokes) and behavioural changes such as improvements in diet and lower rates of smoking.

Although it is good news that we are expected to live longer, it does have financial planning implications. If we are living longer in retirement, our retirement funds need to last longer. This issue is magnified just because you are a member of a couple as both of you are expected to live longer.

Whether you are saving for retirement, about to retire or already retired, a financial planner can assist you in meeting your retirement income needs. Professional financial advice could be the difference between supplementing your retirement income with the Age Pension and entirely relying on the Age Pension to meet all of your income needs.

Mortgage stress

In Australia, the proportion of household disposable income dedicated to interest payments (known as the debt servicing ratio) is quite high at 12%. In comparison, the previous high was 9% just prior to the 1990’s recession.

Given the high debt servicing ratio, the global financial crisis and the rising cost of living it is no surprise that an increasing number of Australian households are facing mortgage stress.
In the first half of this year, the big four banks reported an increase in the value of loans considered to be 90 days in arrears. Westpac reported an increase of 35% since September 2010.

If you have outstanding debt you may be at risk of mortgage stress. It is important you can identify the signs of mortgage stress early and act as soon as possible.

If you are worried or experiencing mortgage stress you should speak to your financial adviser. Your financial adviser can assist you in creating a budget or in some cases, help you access your superannuation savings to help alleviate mortgage stress.

Legal Aid NSW has produced a Mortgage Stress Handbook which can be accessed from the Legal Aid NSW website, www.legalaid.nsw.gov.au and search for ‘Mortgage Stress Handbook’.

Social Security pension payments increase

If you are receiving an income support payment from Centrelink or the Department of Veteran’s Affairs, your payment increases from Tuesday the 20th September. Pensions increase by up to $19.50 per fortnight for singles and $29.60 per fortnight for couples.
This pension increase reflects changes to the Pension and Beneficiary Living Cost Index of 2.7% for the 6 months to June 2011.

What is the Pension and Beneficiary Living Cost Index (PBLCI)?

The Pension and Beneficiary Living Cost Index (PBLCI) measures the change in disposable income of households whose received mainly from government pensions and benefits. This differs from the Consumer Price Index (CPI) which measures price inflation for the household sector as a whole. Since the PBLCI began in the June quarter of 2007 it has risen 16.2% compared to 13.2% for CPI. For the June quarter 2011, the most significant price rises were for food (+1.4%), transportation (+1.7%) and household contents and services (+1.2%).

Given the increased relative cost of living for pensioners combined with fluctuating sharemarkets, many pensioners are questioning the adequacy of their retirement plan. Some retirees have even returned to casual or part-time employment. If you are feeling the pinch of rising living costs, are worried about the longevity of your retirement savings or are currently retired but considering returning to casual or part-time employment, then you should be speaking to your financial adviser.

RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This information does not consider your personal circumstances and is general advice only. You should not act on any information without obtaining professional financial advice specific to your circumstances.