Leaving Behind Wealth For Adult Children
Written by: Jayden Scott | Advisory Team
Wealth is something we can’t take with us when we pass, but we can plan for what happens to it in such a circumstance. For many of our clients, leaving a legacy behind for their adult children is quite important to them, and they want to know how they can do so effectively. This is where proper estate planning is crucial to ensure that our clients can achieve their goals.
When we think of a financial adviser, it’s all too often that we think of short-term to mid-term goals, retirement planning, investing, superannuation, all the things we get to see in our lifetime. But when we think about estate planning, our minds take us towards thinking about which lawyer we should turn to, when in reality, a financial adviser also plays an important role in ensuring a clear, clean, and tax-efficient distribution of your assets.
Estate planning involves the management and distribution of your assets after you die; in what we hope to be a smooth, conflict-free, and tax-efficient manner. By engaging with both a lawyer and a financial adviser, you can increase the chance of your assets being distributed as per your wishes.
How A Financial Adviser Fits Into Estate Planning
Your financial adviser is there for you in all facets of wealth management, including when you’re looking at organising, leaving it to your children, or other beneficiaries of your estate plan. It’s certainly not the most exciting conversation to have with your financial adviser, but a necessary one to secure your family’s future and to create lasting, generational wealth.
Let’s break down what your financial adviser is there for in this process:
- A holistic look at your financial situation and goals;
- Looking at the tax efficiencies of your estate plan;
- Aligning your financial goals with your Will and vice versa;
- Death Benefit Nominations inside superannuation (because superannuation doesn’t automatically form part of your estate);
- Protecting your estate with insurance; and
- Providing continued advice, support, and adjustments as required.
Another investment structure that can go unnoticed is the use of investment bonds not only for investing tax effectively while you are still alive, but also as an estate planning tool to secure the wealth transfer between generations.
Investment Bonds + Your Financial Goals
Investment bonds are a tax structure that you can invest in while you are still alive, but they can also play a crucial role in your estate planning. This is because investment bonds are separate from your Will, which provides a secure advantage, as a valid beneficiary nomination for an investment bond cannot be challenged. Your financial adviser can help you set up the right kind of investment bonds depending on your financial goals and situation. This provides the beneficiary with a stable income from the investment, which is paid directly to them.
These have many uses for intergenerational wealth. For example, you could choose to set up an investment bond to secure wealth for children from a past marriage, allowing blended families to better manage how their wealth is distributed between their own children and their stepchildren. This can also help prevent or solve conflicts over the transfer of your wealth and what your intention truly was. It sets out a clear intention of who is to be the nominated beneficiary and provides you with certainty and peace of mind as your investment can’t be challenged, regardless of whether your will is challenged or not. In some cases, it can also be a more discreet way of doing so, as it remains separate from your Will and cannot be accessed by anyone wishing to contest your Will.
For example, if you have $200,000 that you would like to leave a specific child when you pass, but are concerned that someone, such as a stepchild or an estranged child, would contest the Will to gain access to some of that money, you could consider using an investment bond. But, you’re also aware that the child you are nominating can be financially irresponsible or may not be an appropriate age to receive a large amount of money. In this case, you could set up your investment bond with a few conditions to prevent the inheritance from being spent inappropriately, such as:
- At what age the beneficiary can begin receiving payments;
- And what limits there are to the amount they’re paid per annum.
This flexibility ensures your hard-earned wealth is being distributed exactly as you see fit.
Superannuation Death Benefit Nominations
A large part of any retirement strategy is going to be your superannuation, as it is often one of your largest assets that you will ever own. It is also a common reality that many people pass away before spending all their superannuation.
A common misconception we find is that people assume that their superannuation is automatically going to be included in their Will and distributed according to their Will. However, superannuation is not automatically included in your Will, meaning if you don’t account for it, it might not be distributed how you wish. This is why it is important to ensure you have a valid beneficiary nominated for your superannuation to ensure that your superannuation, along with any insurance benefits within your super fund, is distributed in line with your wishes.
If you’re nominating an adult child or children as a beneficiary/beneficiaries, you can make either a binding or non-binding nomination. A binding nomination is, as it sounds, binding on the trustee of the superannuation fund, meaning that if your nomination is valid, the superannuation fund will automatically pay out your superannuation to your nominated beneficiary. If your nomination is non-binding, this means that the superannuation fund will consider your beneficiary nomination, but they will also use their discretion to see if there are any other potential beneficiaries that should, in their opinion, receive some or all of your superannuation. Therefore, it is very important to be mindful of this, and if you want your beneficiary nomination to have that extra layer of protection, potentially having a binding beneficiary nomination could be more appropriate. It’s important to note that not everyone in your life is eligible to be a binding beneficiary nomination. This is where a financial adviser can assist can discuss your options with you and provide guidance.
Superannuation Death Benefits Tax
Another common misconception is that if you nominate adult children to receive your superannuation after you pass, they will receive these funds tax-free. In most cases, this is not the case, and in fact your adult children receiving your superannuation death benefit will pay up to 17% tax, including the Medicare Levy (2%) on the taxable component of your superannuation balance. This tax can often equate to tens of thousands of dollars in tax that is withheld by the superannuation fund before your adult child receives your superannuation. This is where the value of receiving financial advice can be invaluable, as a financial adviser can provide you with a plan to reduce the potential death benefits tax payable by adult children when they inherit the superannuation you leave behind. This is done by effectively reducing the taxable component of your superannuation and increasing the tax-free component of your superannuation over time by implementing what is known as a cash-out and recontribution strategy. It is important to get advice when implementing this strategy as there are many superannuation rules that you must be aware of, and making a mistake could cost you thousands of tax, or worse.
Here’s an example:
If your adult children are receiving a benefit of $500,000, $400,000 of which is the taxable component, that $400,000 will be taxed at a flat rate of 15% + 2% for the medicare levy
Taxable Component = 400,000 | Tax Payable = 400,000 x 0.17 (or 17% of 400,000).
After tax is withheld, your adult children would receive: 500,000 – 68,000 = 432,000.
Concerned about your superannuation balance going into retirement? You’re not alone; however, the amount you actually need for retirement might surprise you! Check out this blog we previously put together: How Much Superannuation Do I Need For Retirement?
Considering what your Estate Planning is going to look like + haven’t begun your Retirement Strategy? Check out this blog we previously put together: How To Start An Inflation-Proof Retirement Strategy
Canny Advisory, Your Financial Advice + Estate Planning
Here at Canny Advisory, a comfortable lifestyle and retirement for you are at the forefront of our minds when it comes to financial planning. We want to ensure that you live the life you want to without the stress of financial burden. However, we are also mindful of the reality that you likely leave wealth behind for the next generation. We make sure that we plan for this too, as good estate planning could save the next generation thousands of dollars in tax, potential disputes during a time when they’re mourning, and it could also save your generational wealth from being spent carelessly on something like the pokies or a new luxury.
Get in touch today to speak with one of our financial planners and kickstart your financial journey!
