DYING is bad for your health, and can also do some unpleasant things to your family’s wealth. While the impact of an unexpected death for young families is obvious, older Australians can also suffer financially on several fronts when their partner dies.
Knowing the rules, and how to work around them, is the key to leaving as much money as possible for loved ones.
More than a dozen major countries have death taxes, but not Australia. However, if you die without a dependant, such as a spouse, much of the money paid out from your superannuation can be slugged with a 17 percent tax. “Most people call it a pseudo-death tax – there’s no other way to describe it really,” said Hewison private wealth managing director Andrew Hewison.
“If you have all your wealth in super with a large taxable component paid out to a non-dependant,
15 percent tax plus the Medicare levy is going to be deducted.”
Mr Hewison said this made super a tricky estate planning tool. However, there are strategies available to some over-60s to withdraw their super then put it back as a nontaxable contribution.
Almost 80 percent of retirees receive a full or part age pension, and with the single rate set at about two-thirds of the couple’s rate, the death of a spouse delivers an instant household income cut.
“The age pension for a single person is $907.60 a fortnight – it’s not a lot of money,” Mr Hewison said.
Another big impact comes from lower means test thresholds for singles compared with couples.
Planning for Prosperity senior adviser Bob Budreika said dying was bad financially for pensioners’ partners.
“The biggest problem is when the spouse dies, the assets test limit goes down,” he said.
Strategies to solve the pension assets test squeeze are limited but may include gifting money to relatives, spending on something such as an overseas holiday, or upgrading your home – the
only asset that’s exempt from Centrelink testing. None seem palatable to many retirees.
Mr Budreika said it was common for one member of a couple to be more actively managing the money, and if they died first there was often trouble for the survivor. “It’s a pretty dangerous position to be in,” he said. “Even though one person may be more passive, at least have a broad overview and understanding.”
Mr Hewison said people of all ages should understand where their family income came from, ensure their wills and wider estate plans were up to date, and seek professional advice where needed.
There’s a simple saying I often use: “You don’t know what you don’t know”. In a roundabout way what this phrase is saying is that making important decisions without getting all the facts can have very long lasting consequences. There are lots of examples where this rings true. I can think of my own situation where, on occasions, I would’ve saved time, effort and money had I opted to getting sound advice and support.
Financial Planning is a very different service to anything I know. Why? Because life goes on whether people engage with them or not. Seeing an adviser is purely optional. Unlike other professionals such as accountants, there’s a legal requirement to get your tax done each year. When we’re unwell we see a doctor or take our car to a mechanic for repairs. There’s an obvious need and reason to take action. It gets back to ‘you don’t know what you don’t know.’
I believe that many people are heading for a financial disaster of some sort but don’t know it. The disaster might not mean they’re wiped out but with sound advice and support they could’ve saved time, money and effort. Without labouring on this point, I’ll give a couple of examples.
Purchasing farm land in the most cost-effective way
One of the areas we specialise in is helping farming families purchase farm land in the most cost effective way. The most common method is to borrow from a bank and make repayments. A far more cost effective way is to use the tax advantages of superannuation. There are significant savings, often in the hundreds of thousands of dollars.
In our last article Daniel wrote about succession planning which is a fancy term for having a plan to transfer a business to the next generation. This is one of those things that most farmers know should be addressed but sometimes leave far too long. Business succession plans provide confidence, peace of mind, security and direction for all family members. It’s the best way to prevent legal issues and break up of families.
Direction and purpose
The most common reason for people engaging with us is because they want to establish a plan that gives them direction and purpose. It’s a broad statement but what they’re really saying is that they are so focused on what happens day to day to do it themselves. Establishing a meaningful plan is both motivating and rewarding.
The starting point with all the work we do is to have a good understanding of a person’s situation and discover those things that are most important to them. This is the basis to providing sound financial advice.
In my 20 plus years in the financial services industry I have noted that very few small family operated businesses have a truly effective succession plan in place that provides direction and security for all concerned. This important aspect is often avoided or dismissed as not being important or something that can always be addressed when the time is right. There is never a right time. For are a host of reasons people put off transitioning their business to the next generation. For some, it’s not knowing where to start or how to go about implementing a succession plan. For others it’s about being able to let go and know that the next generation is capable of running the business successfully. Whatever the reasons, the result of inaction is a disaster and has the ability to hamper the viability of the business by creating dissent amongst family members which can often lead to a break up of the business. This is especially so if an estate has not been carefully considered. The ultimate failure is where an estate is contested.
The starting point in developing a transitioning plan for a business is to learn and develop a good understanding of the family’s situation as well as the things that are important to each person. It’s important to have this out in the open as it forms the basis of a succession plan. After all, the aim of a succession plan is to consider all peoples’ objectives and then create a structured plan so that everyone knows where they stand and what each expects of each other. The ideal outcome of this exercise is that each family member achieves their objectives.
Because the mix of family and business can breed a cocktail of emotion, having someone independent of the situation can usually produce more effective results. This is where our knowledge and experience can add value because we are able to ‘ask the hard questions’ and open the lines of communication. Family members tend to be more open (and honest) if there is someone independent involved.
Estate plans don’t need to necessarily take effect when parents die. In fact, it can be very beneficial to provide for off farm family members while parents are alive. This is called giving with ‘a warm hand’ and I have witnessed tremendous satisfaction from both the giver and receiver.
Being fair to all beneficiaries is not always an easy task especially where a farming business is involved. Land is an asset that is often intended to be passed onto the next generation and this is where problems and misunderstandings begin between family members.
As an agreement is developed, a good practise is for the outcomes to be documented. Eventually this might also mean updating Wills and investment beneficiary nominations including insurance and superannuation accounts.
Bob Budreika is a specialist financial adviser and an Authorised Representative of Gold Financial Pty Ltd ABN 50 113 653 946, AFS Licensee 291389.
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Strategic Advice Solutions Pty Ltd (ABN 86 619 221 662) t/as Planning for Prosperity is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523