The Wealth Brief - Edition 6

Investing

Insurance

Lending

Tax

Legal

Wealth Creation

Wealth Brief The Wealth Brief is brought to you by

Edition 6

Contact us Suite 1/36 Sunshine Beach road Noosa Heads, Queensland 4567 T: 1300 761 236 E: advice@insuranceChampions.com.au W: www.insurancechampions.com.au

We’re living in volatile times!

When financial markets enter a time of volatility, many investors obviously worry, but what are the real effects of a “volatile market”?

achieve returns well in excess of your target, while in other years the return may be lower, or even negative. If your targeted average is achieved over the longer term you will meet your objectives.

Joint tenancy – stop doing it

If you are a long-term investor, with a timeframe of five years or more, you cannot afford to overlook the benefits of growth investments such as shares or property. As an astute investor you will be aware of the fact that the value of these assets will vary over time - both up and down. However, if you have purchased a sound asset, whether it is shares or property, the price will invariably rise over time.

Are you planning to sell your business?

When you invest in growth assets it is important to accept that you should be targeting an average rate of return. Some years you may

So you want to be the Executor?

Financial Year Returns for major asset classes:

IN THIS ISSUE We’re living in volatile times!

Health insurance... keep it or bin it?

Loan guarantees... what you need to know Do you pass the Risk Management Test?

Thanks for your referrals Thank you again to everyone who has referred their family, friends and business associates. We really appreciate your support and confidence in us to give the referral.

We are always looking to improve in the delivery of our services to you. We want to make sure you are getting what you want from us and would appreciate your feedback.

If you have never thought about referring us to your friends and associates, please take a minute and consider if there is anyone you know who might be able to use and gain an advantage from our services.

You can call or email us with their details.

Thanks again.

Year End 30 June 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Average

Cash 7.8% 6.8% 5.1% 5.0% 5.6% 6.1% 4.7% 5.0% 5.3% 5.6% 5.8% 6.4% 5.8%

Aus. Fixed Interest 9.5% 16.8% 10.9% 3.3% 6.2% 7.4% 6.2% 9.8% 2.3% 7.8% 3.4% 4.0% 7.3%

It is also important to note that different asset classes will outperform in different years. This is illustrated by looking at the five major asset classes used by most investors over the 12 years to June 2007. Frequently the asset class which outperformed in one year showed a poor, or even negative, return the following year. This illustrates the importance of having a diversified investment portfolio covering all the major asset classes.

Listed Property Trusts 3.6% 28.5% 10.0% 4.3% 12.1% 14.1% 15.5% 12.1% 17.2% 18.1% 18.0% 25.9% 15.0%

Aus. Shares 15.8% 26.6% 1.6% 15.3% 13.7% 8.8% -4.5% -1.1% 22.4% 24.7% 24.2% 30.3% 14.8%

International Shares 6.7% 28.6% 42.2% 8.2% 23.8% -6.0% -23.5% -18.5% 19.4% 0.1% 19.9% 7.8% 9.1%

Source: Cash: UBS Warburg Bank Bill Index; Australian Fixed interest: UBS Warburg Composite Bond Accumulation Index; Property: S&P/ASX Listed Property Trusts Accumulation Index; Australian shares: S&P/ASX All Ords. Accumulation Index; International shares: MSCI World ex Aust. Net Total Return Index.

Always remember...

• Seek professional advice to choose appropriate investments for YOU. These should have been well researched for their financial soundness, whether they are individual investments or managed funds.

• Be sure to have a portfolio which is diversified across major asset classes and subclasses. The balance of the portfolio should be designed to achieve your long term objectives at an acceptable level of volatility.

• Don’t panic! It is human nature to be concerned when you see the value of your

assets fall. However, markets always recover and a sound investment will perform over the longer term. Selling during a downturn will not help you achieve your objectives.

• Don’t chase bubbles. When you see financial markets rising rapidly it is tempting to chase the latest “hot tip”. Invariably it is the hot tips which fall the furthest.

• Review your portfolio at least annually to ensure it is still appropriate to your objectives and Goals.

Health insurance... keep it or bin it?

The argument has been waged for many years - do I take out health insurance or do I invest the same amount each year and if I get sick, the money will be available (and it’s earning me interest!)?

As with any type of insurance the decision is a personal one. Many people go without car, home or life insurance, thinking that the money is better spent or invested elsewhere… they are willing to take that risk. But how many of us have actually sat down and weighed up the differences between taking out health insurance or not, particularly with the Government penalties on those not covered by a private health fund?

Let’s look at one scenario…

Paul is a 30-year-old family man who pays $2,000 per year for basic health cover. If he continued to pay the $2,000 (adjusted for inflation) until age 70, he would have contributed around $151,000. For this amount, he and his family are covered for hospital (with elective surgery) and ancillary medical costs, although still subject to the hospital excess, depending on the insurer.

If Paul and his wife decided to cancel their health fund insurance and invest the $2,000 per year, assuming the $2,000 is indexed at 3% pa and the investment returns 8% pa, by the time Paul had reached 70, their investment would be

worth around $750,000! They would have to pay all of the costs involved in having a doctor of their own choice, in a hospital of their choice plus any other associated specialist costs. Paul will also pay the 1% Medicare Levy Surcharge on his taxable income, which can run into many thousands of dollars (see below).

invest the difference you would be paying for full private health cover in your “own health fund”. Then when you get your tax refund, add that to your growing kitty.

You might not end up with as much as the above case study, but if you’re willing to work out the difference, you might still be well ahead.

$750,000 sounds much better in your pocket than giving away $151,000 for something that will never usually cost that much… but how many of us are prepared to put away that amount of money and never touch it, just in case? That’s the tough question.

The Lifetime Health Cover Loading

The Medicare Levy Surcharge If you are single and earn over $50,000pa, you will be charged an extra 1% Medicare Levy surcharge if you don’t have private health insurance. If you’re a high-income earner this could amount to a hefty sum, and wipe out any potential tax refund at the end of each year (or you may even have to pay extra tax).

But it still might be worth sitting down and doing your sums. Another option is to take out the most basic hospital cover and

While it seems an attractive option for the young, don’t forget you may not feel that way when you grow older and have a higher risk of large medical bills. Then you may be stung with “Lifetime Health Cover Loading” – a surcharge on health insurance for those who take out cover after age 31. This is a loading on the premium of 2% for every year you are over 30. So if you are 30 now and do not take out health insurance until you are 60 you will be subject to a 60% loading at that time (although chances are the base premium will be much higher by then).

Insurance should be seen as that – Insurance!, protecting you in the event of loss. We hope we won’t need it but it’s there in case we experience unforeseen circumstances and emergencies.

Joint tenancy – stop doing it QUESTION: My real-estate agent asked my wife if we wanted to purchase our family home as “tenants in common” or “joint tenants”. I didn’t know what she was talking about so it ended up as “joint tenants”. It is a residential property that we lease out. My accountant tells me that it should have been as “tenants in common”.

ANSWER: Your accountant is correct. This makes me wonder why you didn’t seek his advice before you purchased the property. Clients go off and buy shares and property without speaking to their accountant or adviser - silly. They then often buy the assets with the spouse as “joint tenants”. Again, silly. Some Real estate agents blindly stick the real estate into Joint Tenancy. Why do this?

Back before 1980 Death and Probate Duties existed. At that time it was popular for couples to hold assets as Joint Tenants. This meant that when one person died the survivor got the real estate irrespective of what the Will said. The Joint Tenancy property didn’t go into the Will. Therefore, the old Probate Duties were avoided on that real-estate.

Now with Capital Gains Tax you are best to die with as many assets as possible. Therefore, joint tenancy is old fashioned. It is downright dangerous to hold a commercially rented out family home with another as joint tenants. The CGT regime does not recognize joint tenancy.

Tenants in common is safer.

Brett Davies, Lawcentral.com.au

www.insurancechampions.com.au

Are you planning to sell your business?

The ambition of many Australians is to own and run their own business. Such businesses form the backbone of the Australian economy.

While owning your business may be very satisfying and profitable, there comes a time when you will wish to sell it. As you start to think about retirement, it is likely you will need the proceeds of the business sale to fund your retirement income. Or maybe it’s time to just take a well-earned break from work and have a few years off before starting over again.

A survey conducted by accounting professional body CPA Australia, found that only 38% of small business owners have succession plans, while 66% intend to use their business as their primary source of retirement income. With Australia’s ageing population, the number of business owners reaching retirement age will dramatically increase over coming years – with sellers likely to outnumber buyers.

Start planning now The early development of a succession plan is critical to maximising the return on the sale of your business. Some points in a Succession Plan include: • If you haven’t already, start developing the business so that it will run independently of you.

• Determine if the buyer is likely to be a family member, a staff member or a person still unknown.

• Think about the option of two or more parties purchase your business in a partnership?

• If you have someone in mind, don’t assume that person will want to take over. Talk first.

• Think about the option of subdividing the business to make for an easier sale.

• Be prepared to have an ongoing role in the business for a certain amount of time after the sale.

• Organising finance for the buyers may smooth the way to a sale. Investigate options as part of the sale, including part vendor finance.

You might also consider an ongoing role as a consultant to the business, with income and hours to suit both parties.

Above all, it is important to seek professional advice early in the planning stages. Your financial adviser can help you develop appropriate strategies to ensure your hard work pays long-term dividends.

So you want to be the Executor?

If you’re the eldest sibling in the family, or deemed to be the “most responsible”; if you’re seen to be a good friend by someone; or a fine upstanding citizen by others, chances are you will be asked to be Executor for someone’s will.

After your ego has given you a pat on the back and you’re feeling good and wanted, just pause for a moment and take stock of what it really means to assume this most important role.

You need to be aware that when the person dies, you will be required to spend a significant amount of time carrying out your responsibilities and these can be onerous.

The actual functions will vary from one situation to another and, to some extent, depend on the surviving family members.

However, the legally defined duties include: • Arranging the funeral; • Determining the Assets and Liabilities of the estate; • Applying to the court for probate, if required; • Determining what assets may need

to be sold to pay outstanding debts – this may be defined in the Will or by established legal definitions; • Arranging the sale of all assets which are not to be directly transferred to the beneficiaries – including the home, investments, business interests and personal chattels; • Lodging tax returns for the estate and the deceased; • Paying the debts; • Publishing a notice that you intend to distribute the remaining assets to the beneficiaries; • Distributing the remaining assets to the beneficiaries according to the terms of the Will.

For all this you may find yourself in the middle of family disputes and even subject to legal action from a dissatisfied beneficiary or creditor. If placed in this position, the Executor needs to be able to manage their responsibilities as impartially as possible.

The Executor can be held personally liable if a beneficiary suffers financial loss as a result of the Executor’s actions or inaction, and in some instances, be legally liable for any losses incurred.

If, after considering all of this, you don’t think you can honour the person’s request and fulfill the Executor’s role appropriately, the best thing to do is decline the offer.

If you’re feeling bad about not accepting, you could suggest your friend or relative engage a professional executor in the form of a Trustee Company or firm of solicitors.

This will also ensure the executor outlives the person making the will.

Loan guarantees... what you need to know There may be number of occasions during your lifetime when it would be beneficial to have someone guarantee a loan for you - to buy a car, house or invest in a business. But before you ask your family, friend or colleague, it’s a good idea to know what you are really asking of that person.

On the other side of the coin, if you are asked to guarantee someone else’s loan you need to be aware of your responsibilities.

The facts about taking on the role of guarantor In short, a guarantor is a person who agrees to be responsible for the payment of another person’s debt. A guarantee is a written promise by the guarantor that the person who is obtaining the credit will honour the terms and conditions of their loan contract.

If that isn’t enough to make you think twice, be aware that if the borrower is unable to meet the payments on the loan, by signing as guarantor you have effectively become the second borrower – which means you pay if they can’t!

You might trust the other person implicitly, they might even be your own child, but anyone can get sick or lose their job.

Without the means to repay the loan, it comes straight back to you. This might also include any accrued interest on outstanding payments. In most instances your guarantee

is unlimited, which means you could be called upon to sell your house and/or all your other possessions just to pay off the guaranteed loan.

• Any personal guarantees you have made to the business could be called upon.

What if a guarantor dies?

It would appear that the person taking out the loan has nothing to lose but it is important to consider the impact on the loan should the guarantor die. In particular, many business owners have been shocked to find that the death of a guarantor triggers an automatic default in most loan agreements.

Should this situation occur, the following three scenarios can become a reality: • You may be forced to refinance or repay a business loan.

For this reason, it is crucial that before any loans are guaranteed, all parties consider all of the factors which could seriously impact them financially, on both a personal and business level.

It is never pleasant to consider tragic events, but it is essential to secure yourself, and if you are in business, the future of your business and those who rely on you for financial support.

Appropriate insurance is the least costly and one of the most effective solutions.

Your adviser can discuss a range of options with you to ensure your business and personal assets are protected.

• The overdraft facilities of your business could be withdrawn.

Do you pass the Risk Management Test?

We all face risks in our financial life and hope that catastrophe will strike someone else. Sadly someone else may be you. This is why it is critical to review your insurances regularly and ensure they still meet your needs. Can you cope with the risk of inadequate cover? Have you got too much cover? If circumstances have changed, have you adjusted your cover?

You can be systematic in looking at the risks you face. Firstly, identify the risk, secondly analyse how significant the risk is and lastly decide how you will handle the risk. Your choices are:

To start with try this risk management test.

What would be the effect on the financial position of your family if you: Lost your house?

Lost your car?

Lost your investment property?

Lost your personal effects?

Lost your income?

Suffered a major trauma? (cancer, heart attack) Were unable to work through disability or sickness?

Died?

Tick one Some Not effect applicable

A lot

• To reduce the risk in some way (like insurance to replace lost income),

Make sure you consider issues such as:

• Build up sufficient financial reserves so you can manage a loss if it occurs, or

• The rising costs of re-building and replacing lost assets.

• Buy protection in the form of insurance.

• Debts secured against assets such as mortgages and investment loans.

Everyone is different and for that reason we recommend a periodic review with a risk management expert like your financial / risk adviser.

• Providing for people who are dependant on you. If you have fewer people dependant on you than in the past, you may have more insurance cover than you need.

If you ticked “A lot”, how would you handle this?

• Changes in marital status.

• Accumulated leave from your job (sick leave, long service leave and annual leave) • Your health and those of your dependants.

Disclaimer The information in this newsletter is of a general nature and is provided for illustrative purposes only. It is not intended to constitute advice of any kind. The information has been prepared without taking into account the objectives, financial situation, needs or circumstances of any particular person and should not be relied upon. You should not act on the information, rather it is designed for you to contemplate whether you should obtain professional advice if an issue may be of relevance, having regard to your objectives, financial situation, needs and circumstances.

Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478

©2008 Copyright Insurance Champions Designed by 7 Degrees Creative Pty Ltd, your creative services specialist. Website: www.7degreescreative.com