Mark Robinson Law Newsletter December Twenty12
Mark Robinson Law Newsletter December 2012 Welcome to our very first Newsletter! These will appear quarterly and our intention is that they will be useful, covering practical issues likely to be of direct relevance to your client base.
Mark Robinson Dip. Law(BAB) Grad. Dip. Mgt. (UNSW) RG 146 Accredited Principal
About us We are an independent boutique law practice based on the Sunshine Coast specialising in estate and inheritance planning and covering the Sunshine Coast, Brisbane and environs and Mount Isa. Our service distinctives are:
We are passionate about devising ‘Inheritance Strategies’ We respect your position as the client’s key professional adviser We work harmoniously with the client’s other professional advisers We have a strong background in financial services (RG 146 accreditation in superannuation & risk) and specialise in superannuation & insurance inheritance strategies We tell you what we are doing for the client and provide copies of all documents produced We are mobile-client home or your office We offer a ‘no obligation’ initial client meeting We work on fixed fees & offer an instalment payment plan We strengthen your client relationships & assist you to cross-sell other services We provide technical estate planning support & advice to our referring Advisers We do not advertise and all of our work is referred by other professionals
Couples with young children a neglected market segment? Amongst your clients there will be a mix of ‘accumulator clients’ and ‘mature age/retiree clients’ many of whom will either have children or grandchildren. These families with young children may not be existing clients but their largely unrecognised needs for financial protection make them potential clients. The importance of these needs and the low level of client understanding was brought home to me by the unexpected death of a young Sunshine Coast mother of four from a deadly strain of the Flu that was widely reported in the media in mid-2012 and the outpouring of public sympathy for the family’s plight resulted in a public appeal to help the family thru a terrible financial crisis.
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December 2012 News
The lessons to be learned are that good planning can avert such financial catastrophes but client awareness and education is essential to encourage them to recognise the risk and seek advice. Apart from directly targeting the younger client base, an awareness campaign pitched to the retiree/older clients who inevitably have children of their own may be productive. This approach has the merit of building on existing relationships. With Christmas fast approaching, it is important to start business planning for the 2013 year and if you have regular communication with your clients, what better than to offer them a ‘New Year’s Resolution’ for 2013? You can use the following suggested article in client communications in any way that is useful to your business.
New Year’s Resolution New Year Resolutions usually have a lot to do with our body shape, weight loss, our relationships and our jobs. Our/My message is not directed at any of these aspects of our lives but is heavily influenced by the difficult year we have just put behind us .........economically and financially. In good times, we tend to neglect some important essentials...like ensuring our families are protected financially if death or accident intervenes unexpectedly. In contrast, difficult times help us get back to basics. Our/My message this New Year is particularly directed to families with young children. Unexpected death or accident can devastate a family. The unexpected death of a young Sunshine Coast mother of four from a deadly strain of the Flu was widely reported in the media in mid2012 resulting in a public appeal to help the family thru a terrible financial crisis. Good planning alleviates such distress and ensures the family can remain financially secure & independent despite the unexpected loss of a key family member. By following our/my tips you can save your family much heartache if the unexpected happens.
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Tips to help protect your family from the unexpected 1. You MUST have your mortgage and other debt covered by relevant insurance; 2. The primary earner MUST have additional life insurance to replace the income that would be lost if they died; o If you have cash flow problems, think of taking out insurance through your superannuation…. the premiums are often cheaper and are deducted from your super account balance; o Income protection cover may be required particularly if self-employed; 3. The primary child carer MUST have some additional insurance covering the replacement cost of their services thus enabling the primary earner to continue to work; 4. You MUST each have a Will and Enduring Power of Attorney; 5. You MUST each have an appropriate superannuation beneficiary nomination form in place. These arrangements are the minimum that couples with young children need to have in place. If you have adult children with their own families, we suggest you give them a copy of this article or contact us for a more detailed Fact Sheet or better still encourage them to make a’ no-obligation’ appointment with us to review their financial protection needs. Our Advisers can assess a family’s insurance requirements and will work closely with the lawyer preparing your Will (or we can refer you to a lawyer who works regularly with our clients in this area) to ensure that all aspects of your family’s unique needs are covered off.
Do reversionary pensions have relevance following MYEFO? The Commonwealth Government has announced in its October 2012 Mid-Year Economic and Fiscal Outlook (‘MYEFO’) that it will amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund. From 1 July 2012, the ‘pension exemption’ will continue following a member’s death. Does this mean that Reversionary pensions are now defunct? We think the better view is that Reversionary pensions remain a valuable tool for many reasons including potential protection from a possible ‘merging’ of superannuation interests on death due to the effect of the proportioning rule. In TR 2011/D3 the ATO stated that: ‘A [pension] ceases as soon as the member in receipt of the [pension] dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund’s deed, or the rules of the [pension], to receive [a pension] on the death of the member.’ Implications of TR 2011/D3 — mixing of interests In an SMSF environment, a member is generally required to have one or more separate pensions in order to have more than one superannuation interest. For example, a Member might have two pensions in their SMSF that do not automatically revert upon the Member’s death. One of these pensions may be comprised entirely of the taxable component and the other comprised entirely of the tax free component. Under the approach in TR 2011/D3, the default position is that these pensions cease upon the member’s death. In this case there is a view that two interests would merge and there would then be one interest comprised half of the taxable component and half of the tax free component and it is possible that the advantages of many death benefit tax planning strategies put in place during the client’s lifetime may not be effective on death. Liability limited under a scheme approved under professional standards legislation.
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It remains to be seen if the ATO’s view that, in the absence of a dependent beneficiary having an automatic entitlement to continue to receive an income stream on the death of a pensioner, all superannuation interests collapse back into just one interest on the Member’s death is sustained by a review of pension interests being undertaken by the NTLG. STOP PRESS - MYEFO We understand that the proposed amendments to the Tax Act (to continue the pension tax exemption to date of death) will also ensure that the underlying tax components WILL retain their status until the benefit is paid out. This suggests that fears over the merging of superannuation interests may be unfounded but a review of multiple pensions, as suggested on page 5, would still be prudent. Reversionary Pensions and BDBN’s Our Concerns From reviewing many client estate planning arrangements, we can say that this is an area where the standard needs to be lifted and we are concerned that many Advisers may be at risk from client reliance upon the Adviser to give advice on the configuration of DBN’s, whether they should be binding and their relationship to pension reversionary interests. Here are some comments we hear frequently: “My super pension is reversionary so I don’t need a binding death benefit nomination” • We respectfully disagree. • A reversion may fail because the reversionary pensioner has themself died or there may be a defect with the paperwork or the trust deed may provide that payment of the reversionary pension is in fact discretionary and the Trustee of the SMSF may decide, after the Member’s death, not to revert the deceased’s pension. • There is a strong case to have a carefully worded ‘cascading’ binding death benefit nomination in place that operates if the relevant
December 2012 News
pension interest does not revert to the desired beneficiary for any reason including: o although the desired reversionary beneficiary may survive the Member, the reversion fails for some technical reason in which case the BDBN will operate to transfer the superannuation interest to the desired beneficiary; o the reversion fails because the desired reversionary beneficiary has not survived the Member in which case the BDBN will operate to transfer the superannuation interest to the first Member’s estate. • The Trust Deed should always be checked to see if it accords any priority to a BDBN over a reversion and vice versa. “I am OK I already have a binding death benefit nomination in place” • Maybe OK and maybe not OK! • Some SMSF Trust Deeds are picky about the process to be followed in putting a valid BDBN in place and, if not followed correctly, a BDBN may not be valid. • If the Member has a reversionary pension in place, the wording of any BDBN MUST be consistent with and complement the reversionary interest and not hinder it in any way. • Unless prohibited by the Trust Deed, we recommend all BDBN’s be ‘cascading’ i.e. include a primary recipient and a secondary recipient. • The Trust Deed should always be checked to see if it accords any priority to a BDBN over a reversion and vice versa. Reducing Adviser Risk - Suggested Action We believe that DBN’s and reversionary pensions and death benefits tax are fertile areas for future litigation and the risk to Advisers can be minimised by having sound processes in place as well as sensible boundaries that manage the Adviser’s professional risk. We suggest that a rigorous administration process be put Liability limited under a scheme approved under professional standards legislation.
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in place in relation to your SMSF clients to ensure that their BDBN’s and Reversionary Pensions are valid, tax effective and do not conflict with each other. For convenience an administration process could be prioritised as follows:1. 2.
New SMSF clients-highest priority We suggest as part of your initial SMSF set-up service, all new SMSF clients have advice from an appropriately credentialled estate planning lawyer on the most advantageous configuration of death benefit nominations and reversionary pensions, so that you do not bear the legal risk of preparing such documents and that they are consistent with the client’s overall estate strategy and not merely an ‘add on’. Existing SMSF clients- with multiple pension interests-high priority We suggest all existing SMSF clients be scanned to identify those with multiple pension interests and a process established to have their existing DBN’s and reversionary interests reviewed in collaboration with an appropriately credentialled estate planning lawyer.
This is particularly important where there are substantial differences between the taxable and tax free components of a client’s pensions.
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Existing SMSF clients We suggest as part of your annual SMSF service, all existing SMSF clients be reviewed (perhaps timed with the annual fund review?) in collaboration with an appropriately credentialled estate planning lawyer for a review of existing death benefit nominations and reversionary pensions and the provision of remedial advice as required, so that the Adviser does not bear the legal risk of existing documents that may be:a. invalid; b. tax ineffective; c. inconsistent with the current Trust Deed; d. expired; and/or e. conflict with any reversionary pension
Need Some Estate Planning Client Scripts? Most Advisers have some familiarity with general estate planning concepts including testamentary trusts but may feel they lack the technical knowledge to explore a client’s estate needs more deeply. We have prepared some detailed estate planning scripts that may be helpful in stimulating client interest and in identifying areas of need for advice. Initially, we have prepared client scripts for the following high priority areas of advice: I. Couples with Young Children (the unrecognized need for financial protection) II. SMSF’s (what can go wrong if a Member dies) III. Family Trusts (who inherits the family trust?) IV. Retirees (How do I protect my children’s inheritance from creditors & predators?) Liability limited under a scheme approved under professional standards legislation.
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Couples with Young Children (the unrecognized need for financial protection) The biggest issue for families with young children is to ensure that all debt is covered, income replaced and child care funded if a key family member dies. Clients must have appropriate insurance arrangements in place that cover: 1. Mortgage; 2. Other debt; 3. Income that would be lost on death; and 4. Cost of providing child care if one parent died. Putting the insurance in place is only 50% of the task. To maximise the protection that these insurances provide, we recommend that clients have Wills that incorporate testamentary trusts. Testamentary trusts allow the generation of (mostly) tax free replacement income from an insurance payout. The benefit of this strategy is that if a client dies, their life insurance payout can be used for any one or more of the following purposes:-
December 2012 News 1. pay down debt; and/or 2. replace a deceased spouse’s income by investing the life insurance payout through a testamentary trust created in their Will, the benefits of which are: a. the income can be shared tax effectively between a surviving spouse and minor children; b. minor children are currently able to receive up to $18,200 per annum + low income rebate tax free from a testamentary trust; and c. the insurance capital has protection if a surviving spouse remarries. Having a Will, with a testamentary trust, maximises the benefits of life insurance and puts more money in the hands of the client’s dependents. Child pension options should also be examined and included if appropriate.
Self-Managed Superannuation Funds (what can go wrong if a Member dies) Clients with SMSF’s are largely unaware of the potential estate issues which include: 1. Appointment Of Replacement Trustee a) If the fund has personal trustees, what does the SMSF Deed say about who becomes the replacement trustee for the deceased member? i. Is it the executor? ii. If so, choice of executor is important particularly if both spouses are deceased and there is more than one child. b) If the trustee is a corporate trustee, what does the SMSF company constitution say about appointing a new Director to replace the deceased member? c) What does the SMSF Deed say about voting by the Trustees on the payment of a death benefit? (One person one vote or voting by account balance or other?) 2. Payment Of Death Benefits Some of the issues that will arise in the payment of a deceased member’s death benefits include:Liability limited under a scheme approved under professional standards legislation.
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a) b) c) d) e) f) g) h) i)
Is it appropriate to create a reversionary interest when a member is first setting up a pension? What does the trust deed provide in relation to the payment of a deceased member’s death benefits including the interaction between a reversionary interest (if one is created) and a death benefit nomination (“DBN”) ? What form, if any, of DBN does the trust deed permit? What is the most appropriate form of DBN given the client’s circumstances? If a binding death benefit nomination (“BDBN”) is appropriate, is it a 3 year binding or a non-lapsing binding? (watch time limits!) Does the SMSF Deed require any particular processes to be followed in lodging a beneficiary nomination? Have these processes been followed in putting the DBN in place? (eg. ACIS Deeds require certain information to be provided to the member before the BDBN is valid) Has there been a Deed upgrade since the last nomination was signed? (a BDBN made under a previous Deed may no longer be valid under a replacements Deed) Is the nomination a ‘cascading’ one i.e. if both spouses are deceased does the nomination continue to operate and force the super payout to the estate of the last spouse to die thus preventing the super being siphoned off by one of the beneficiaries. (A BDBN can be like a mini Will and operate in several contingencies such as where there is a surviving spouse but also remain valid if both spouses are deceased and only adult children remain…..this avoid fights and competition
for the super by forcing it into the estatethis is also tax effective as you save the Medicare levy of 1.5% on any death benefits tax…pay 15% in the estate or 16.5% if received personally by an adult child)
Family Trusts (who inherits my family trust?) The Key Point with a Discretionary Family Trust is that if the controller of the trust dies the assets of the trust still remain owned by the trust.
3. Potential Control Issues a) Are there any of the Members’ children or non-family in the SMSF? (potential control issues) b) Does the client have more than one child? c) If so, does the client’s Will contain an adjustment clause that ensures that if the BDBN fails, any superannuation received directly from the fund by an adult child beneficiary is OFFSET against their share of the estate (the Katz –v- Grossman issue)? 4. Taxation Issues a) The Taxable and Tax Exempt components of the client’s superannuation interests must be examined to see if death benefits tax would be payable at any stage and if so, whether the potential tax liability could be minimised by strategies put in place during the member’s lifetime by their Adviser. b) Are there illiquid assets (i.e. ‘bricks and mortar assets) in the SMSF? c) Has consideration been given to how a death benefit would be paid from an illiquid asset and whether a sale of a super fund asset might be necessary and the likely CGT consequences? (It is important that if there are illiquid assets in the fund, some thought be given to cash flow and CGT management) d) Has any thought been given to an anti detriment strategy to increase the size of the client’s death benefit payout? Liability limited under a scheme approved under professional standards legislation.
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What changes is NOT the ownership of the assets but the identity of the person controlling the Trust. The lawyer doing the client’s estate planning must ensure that the following aspects are covered off: 1. Is the trustee a natural person or a corporate trustee? 2. Who is the Appointor/Guardian/Nominator/ Principal? 3. What does the Deed say about: a. The replacement of a deceased trustee; and b. who can exercise the Appointor power after the death of the current Appointor? 4. If the power of appointment defaults to the Executor, then careful choice of Executor is required as the Executor will now be in a position to allocate ALL of the trust to himself/ herself to the exclusion of other beneficiaries. 5. If the client has the ability to transfer the Appointor power to another person via their Will, an appropriate person should be selected as replacement Appointor and the relevant clause included in the Will-exercise care with step-children and former spouses. 6. If it is intended that all of the client’s children share in the Trust, the trust deed should be examined to ensure that all of the children are actually included as beneficiaries in the trust deed. 7. The financial statements must be examined to ascertain if there are any beneficiary loan accounts and/or unpaid present entitlements and an approach formulated, in conjunction with the Adviser, for dealing with these in the Will.
December 2012 News
Retirees (How do I protect my children’s inheritance from creditors & predators?) Inheritance Planning for Retirees should reflect the fact that the retiree’s children are themselves independent adults with their own needs and family commitments which must be taken into account by the parent when the parent is doing their estate planning. It is useful to speak of the client’s Will as….. more than a means to get money from ‘A’ to ‘B’. It is more powerful to speak of the Will as a document linking the beneficiaries to professional advice and offering them a legal structure (‘a testamentary trust’) for protecting, investing and growing their inheritance in a safe and tax effective environment rather than wasting it. Good advice is money well spent! The key issues one hears from Retirees include: 1. How to minimise the risks to inherited wealth in the hands of the children, including; a. Divorce b. Business risk c. Children are good at spending but not saving d. Grandchildren may miss out e. Children have poor or no money management skills f. Second marriages; AND 2. How to maximise the opportunities flowing from a soundly managed inheritance: a. growing the initial inheritance through sound investment; b. generating tax free income for grandchildren’s expenses; c. freeing grandchildren from a crippling HECS debt; and d. preserving and growing wealth for the children’s own retirement. Innovative estate planning for your Retiree clients opens the way to develop relationships with their beneficiaries and positions the Adviser to retain FUM and FUA thereby retaining/enhancing the value of the Adviser business as clients age and die. Liability limited under a scheme approved under professional standards legislation.
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Enhance your in-house PD days and client update days Need some support for your in-house PD days? Want to add estate planning spice to your Client Update Days? Want an estate planning article for your Client Information Bulletin? We can speak on an interesting and diverse range of estate planning topics and have a background of presentations at FPA, SPAA, Kaplan and Dealer Group National Conferences. Just ask us!
from MARK ROBINSON’S DESK December 2012
Mark Robinson Law Newsletter December Twenty12
Mark Robinson Law Practice m 0418 264 240
e mark@markrobinsonlaw.com.au w www.markrobinsonlaw.com.au PO Box 1267 Noosaville BC Q 4566 ABN 91 976 682 768