Masterclass SMSF – How Super Death Benefit Nominations work for complex estate plans

Masterclass SMSF – How Super Death Benefit Nominations work for complex estate plans

SMSF – How Super Death Benefit Nominations work for complex estate plans

Our previous post talked about the basics of super death benefit nominations, how tax applies and how they work in general. However better self-managed super (SMSF) trust deeds should allow more complex estate planning strategies that include death nominations to multiple beneficiaries or specific asset allocations especially with prior and mixed marriage situations.

As discussed in the previous post, most common SMSF deeds allow simple binding death benefit nominations (BDBN) as a default document that allows little more than nominating one or more individuals to receive a benefit. And a basic nomination is usually the ONLY option available for members of large public offer funds. But these don’t allow for a beneficiary pre-deceasing a member, or leaving specific assets to certain beneficiaries.

For more complex situations, as part of estate planning (remember super does NOT form part of your estate and is NOT controlled by your will directly) a greater range of possibilities should be sought. This would seek to cater for situations such as –

  • Benefits to multiple beneficiaries
  • Allocation of benefits to alternative beneficiaries where one or more pre-decease a member
  • Allocation of specified assets to specified beneficiaries

Some examples to illustrate the possibilities –

A.     Margaret holds collectable assets in her SMSF, and constructs a BDBN that directs specific assets to certain beneficiaries, and the remainder to another beneficiary, as follows –

  1. A Monet to son Peter
  2. A Ming Dynasty vase to daughter Heather
  3. Remainder to husband Phil with a condition that should he pre-decease her, or is no-longer her husband, all remaining benefits will pass to Peter and Heather in equal proportions

B.    Matt and Marsha, with Marsha’s son from prior marriage, Steve, who may not be a dependent of Matt’s at Matt’s death, so Matt prepares a BDBN as follows, that in event of his death, benefits pass as follows –

  1. First to Marsha
  2. Secondly to Steve, if Marsha pre-deceases Matt, with a condition that it is paid ONLY if Steve is a SIS Act dependent at the time
  3. Thirdly to Matt’s legal personal representative (LPR or estate) – here they can then pass to Steve under provisions of Matt’s will.

As each situation is different, speaking to an advisor is recommended.

If you require an advisor, call us to arrange a no-obligation discussion.

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and Youtop right hand side above.

If you have any questions, why not give us a call – it’s FREE also! No obligation.

0407 361 596, Paul.

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NEWS – Renewed debate on lifting Govt. Age Pension to 70, following Intergenerational Report (IGR)

Renewed debate on lifting Govt. Age Pension to 70, following Intergenerational Report (IGR)

Renewed debate on lifting Govt. Age Pension to 70, following Intergenerational Report (IGR)

How will the government have enough revenue in years to come if the continued trend of less workers (from 4.5 presently, to 2.7 by 2055 of workers per retiree over 65)? Is ASIT CEO correct that raising Age Pension eligibility to 67 is adequate, or is the FSC CEO’s call to consider facing reality, the best way forward?

Tim Stewart of Investor Daily details these views –
The release of the federal government’s Intergenerational Report (IGR) has reignited debate about the government’s proposal to lift the age pension eligibility to 70 by 2035. The report, released yesterday by Treasurer Joe Hockey, projected that the number of Australians aged 65 and over will double by 2055 from the number today. Male life expectancy is projected to increase from 91.5 today to 95.1 in 2055, while female life expectancy will increase from 93.6 today to 96.6 in 40 years’ time, according to the IGR.

The number of people aged 100 or older is projected to hit 40,000 by 2055 – compared to the 122 Australian centenarians alive today.

Commenting on the report, Financial Services Council chief executive Sally Loane said it was time to “face the reality” that Australians are living longer and will need to work longer to achieve a comfortable retirement.

“By 2055, there will be [only] 2.7 working Australians for every Australian over 65 compared with [the] 4.5 at present,” Ms Loane said.

“Seventy per cent of retirees currently receive a pension. This level of social welfare cannot be sustained.”

Ms Loane reiterated calls she made in her recent maiden speech as chief executive of the FSC for a rethink about the relationship between superannuation and the age pension.

“The expectation should be that super is a replacement for the pension, not a top-up, and the age pension needs to be considered as a safety net for those who cannot provide for their own retirement,” she said.

“Good policy decisions now will ensure that future generations are not paying for an overly generous pension system which we can no longer afford.”

But the Australian Institute of Superannuation Trustees’ (AIST’s) chief executive Tom Garcia opposed any increase to the age pension eligibility age, arguing that previous moves to increase the age to 67 were an adequate response to Australia’s changing demographics.

“Raising the retirement age is a very blunt tool that will hurt a lot of involuntary retirees who – for all sorts of legitimate reasons – cannot work longer,” Mr Garcia said.

“The IGR shows that there is no need to panic. Increasingly productivity, higher labour-force participation, a maturing superannuation system and a sustainable age pension system will all contribute to building a stronger Australia,” he said.

The existing envisaged increase in the eligibility age from 65 to 67 over time will see government expenditure on age and service pensions rise from 2.9 per cent of GDP to 3.6 per cent of GDP in 2055, AIST said.

“This is much lower than almost every other OECD economy,” the institute said.

What about comments by Ross Gittins at The Age

“The message we should take away from it, as with its three predecessors, is one no politician on either side is prepared to admit: as our demands on the government for more and better services continue to grow, we will have pay for them with higher taxes. Since our real incomes are projected to rise by almost 80 per cent, this won’t be so terrible.”

What are your thoughts? Make your comments below!

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MASTERCLASS Investing – Agriculture as an investment in your SMSF for yield?

MASTERCLASS Investing – Agriculture as an investment in your SMSF for yield?

Investing – Agriculture as an investment in your SMSF for yield?

(Selected extracts from Investor Update 2015-02 of the Australian Investors Association)

The Australian commercial property sector is well serviced with fund managers and investment funds designed to meet the needs of tenants and investors. In contrast the agricultural sector, though of comparable scale, has only one fund designed for this purpose: the Rural Funds Group (ASX: RFF)…

Australian agriculture utilises 405 million hectares of land, which is 53% of the country’s total land area. The industry is relatively fragmented with 120,000 businesses reporting that farming is their principle business. Rural Funds Management (RFM) has estimated that the total value of the land and improvements of these businesses is just over $200 billion3.

Added to this are substantial processing and infrastructure assets, typically owned by food processors and agricultural commodity marketers, whose total assets add tens of billions to the value of the agricultural property sector. RFM estimates the total value of investment grade assets in Australian agriculture is of the order of $150 billion, making it a larger sector than the office, retail or industrial property sectors detailed…

Despite the scale of the agricultural sector, it is estimated that only 4% of agricultural property in Australia is leased compared to around 40% for the US and many European countries. Why is Australia’s leasing rate so low, and why has there been no equivalent emergence of property fund managers facilitating property leasing?

The main reason is the relatively low lease rentals paid by broadacre4 farm enterprises. Broadacre farms can be leased at a rental yield of 5% of the capital value of the farm. This compares with an office building in the centre of our cities that would lease on a yield of 6-7%, and industrial warehouses on the fringe of our cities that lease for around 9%. On the surface then, leasing commercial property would appear more attractive.

However, higher lease rentals on commercial property may be due to the depreciation occurring on the structure or building that makes up the majority of a commercial property’s asset value. In contrast to commercial property, broadacre farms have much lower levels of depreciating infrastructure installed on them. In fact, modern cropping properties often have no fences, no buildings and just a few dirt access roads.

As a consequence the asset is an almost pure natural resource with no wasting infrastructure detracting from long term returns. While broadacre lease rentals may not be diminished by depreciation, the fact remains that the net yield generated by these assets is too low to compete with the investment yields historically generated by fund managers of commercial property. The Rural Funds Group (ASX: RFF) has addressed this dilemma by accumulating a mix of agricultural assets, that include the natural resources of land and water, but also substantial infrastructure capable of generating higher yields. As a consequence of this asset mix, RFF is able to distribute investment yields that exceed the majority of REITs.

RFF then is uniquely placed. Just as commercial property fund managers have provided a service that assists Australian business, while meeting the expectations of their investors, RFF has become Australia’s first agricultural REIT to serve Australian farm businesses and meet the expectation of its owner – the RFF unitholders.

David Bryant is the Managing Director Rural Funds Management.

(Note – SuperBenefit has no connection and is NOT giving advice or any recommendation for any specific investments on this website or other means – seek your own research and advice, or ask to be recommended to an advisor)

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and Youtop right hand side above.

If you have any questions, why not give us a call – it’s FREE also! No obligation. 0407 361 596, Paul.

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NEWS – Popularity of SMSF continues

NEWS – Popularity of SMSF continues

Popularity of SMSF continues

In 5 years to 2013 nearly 4 times money moved INTO SMSF than rolled out – showing continued strength in the sector.

According to Professional Planner 

Rollovers into self-managed super funds (SMSFs) are still showing a drain of funds from the APRA-regulated funds in gross and net terms, says Graeme Colley, Director of Technical and Professional Standards of the SMSF Professionals’ Association of Australia (SPAA).

Colley says the latest figures from the Australian Taxation Office (ATO) conclusively show that over the five years up to 30 June 2013, $75.6 billion was rolled into SMSFs and only $19.9 billion was rolled out of SMSFs.

“On average, and on an annual basis, $15.1 billion rolled into SMSFs and $4 billion rolled out of SMSFs. These numbers hardly suggest an SMSF sector in decline or even treading water. Indeed, what they comprehensively show is that SMSFs retain their strong appeal.”

Colley says the data does not distinguish between amounts rolled between SMSFs and amounts rolled to or from non-SMSFs.”

And reporting by Krystine Lumanta, at selfmanagedsuper 

Most amounts rolled in, 65 per cent, or rolled out, 60 per cent, involved SMSFs with assets of between $500,000 and $5 million,” he (Colley) said. The ATO figures also highlighted the importance of the benefit payments trend from SMSFs, confirming their role in providing retirement incomes and meeting the government policy objective of super providing income streams for Australians, he said.

“In the 2009 financial year, income streams amounted to 75.7 per cent of all benefit payments from SMSFs, of which transition-to-retirement income streams (TRIS) amounted to 9.1 per cent of total payments,” he said. “By the 2013 financial year, the proportion of income streams paid from SMSFs had increased to 93.2 per cent, of which 11.4 per cent were TRIS and just 6.8 per cent were lump sums, compared with 13.8 per cent of lump sums in the 2009 financial year.”

He added the 2013 financial year showed a deficit in the payment of benefits over all contributions made to SMSFs of just over $2.23 billion. “This was the first year in which employer, member and other contributions combined were less than the amount of benefit payments,” he said. “However, when net rollovers are added to contributions there remains an increase in net inflows to funds from both contributions and net rollovers of just over $10 billion.”

Interested to know what self-managed super (SMSF) is all about, and if it is for you? Come to a FREE seminar with bonuses NEXT month  Self Managed Super Fund Roadmap (all you need to know) for the next monthly event, see SMSF – FREE Seminar  or call us 0407 361 596.

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and You top right hand side above.

If you have any questions, why not give us a call – it’s FREE also!

No obligation. 0407 361 596, Paul.

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Masterclass SMSF – How Super Death Benefit Nominations work and whether they are binding

 

Masterclass SMSF – How Super Death Benefit Nominations work and whether they are binding

How Super Death Benefit Nominations work and whether they are binding

When an SMSF member has died, the surviving SMSF trustees must comply with the applicable super and tax laws for paying out death benefits. A death benefit payment is generally made by the SMSF to another person after of the death of a member of the fund.

For a dependant of the deceased, the death benefit can be paid as either a lump sum or income stream. Income streams (super pension) are usually either a new income stream that is paid to a dependant, or a reversionary income stream that is the continuation of an existing income stream and paid to a dependant.

For those not a dependant of the deceased the death benefit must be paid as a lump sum.

You can nominate the beneficiary for your super with your super fund (a death benefit nomination) instead of leaving the trustees to decide. If you have NOT nominated a beneficiary then the estate can access your super and distribute it (now as part of your estate), according to the instructions in your will. Note a will does not control your super directly – super is outside your estate, and is BEST controlled by death benefit nominations or agreements.

A death benefit nomination is a statement by a member of a super fund to the trustees of the super fund directing them on how to deal with their super account when they die. A death benefit nomination is supplied to the trustee of the SMSF by the member requesting the fund pay their benefits to a nominated beneficiary/ies. It is either:

    • Binding – it directs the trustees to pay the member’s death benefit to a legal personal representative or dependant;
    • Non-binding – it notifies the trustees of the member’s preferred beneficiaries, leaving the trustees to make the final decision.

Super law does not require an SMSF member to have a death benefit nomination to pay out death benefits. But, if an SMSF does have one, it will need to first follow the rules of the SMSF’s trust deed (the deed must allow them) and the rules of super law. For more refer to - SMSFD 2008/3: Binding death nominations.

Dependants

A dependant under superannuation laws is someone who had a dependent relationship with the deceased. This includes the spouse, any of the deceased’s children or anyone with whom the deceased had an interdependency relationship.

Under income tax laws, a dependant for super death benefit purposes is:

  • A surviving spouse or a de facto spouse;
  • An ex-spouse;
  • A child of the deceased who is under 18 years old;
  • Any person who was financially dependent on the deceased person just before they died;
  • Any person with whom the deceased has an interdependency relationship just before they died.

To be financially dependent on the person that died means they relied on them for necessary financial support. Children over 18 years old must be financially dependent on the deceased to be considered a dependant.

An interdependency relationship is generally a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.

From 1 July 2007, for income tax purposes any person is included in the definition of a death benefit dependant if they receive a super lump sum because the deceased died in the line of duty as a member of the defence force, the Australian Federal Police or the police force of a state or territory, or as a protective service officer.

Any person who does not fall into one of the categories listed above is a non-dependant for super death benefit purposes.

Calculating tax on super death benefits

There are usually 2 components of a super account:

  • Taxable which may consist of an element taxed in the fund or an element untaxed; and
  • Non-Taxable.

SMSF trustees must determine these elements (have accounts up to date and report these components, eg via Member Statement) before paying any super death benefits. If the total benefit is tax-free there is no requirement to report the amount. If part of the benefit payment is tax-free, the tax-free amount needs to be reported on the PAYG payment summary.

Lump sum payment to a dependant of the deceased

A super lump sum that is paid to a dependant of the deceased is not assessable income and is not exempt income where they are a death benefits dependant of the deceased for tax purposes. The SMSF does not withhold tax from that payment.

Lump sum payment to a non-dependant of the deceased

The taxable component of a super lump sum death benefit received by a non-dependant is assessable income. The element taxed in the SMSF will be taxed at the maximum rate of 15% (plus the Medicare levy). The element untaxed in the SMSF will be taxed at the maximum rate of 30% (plus the Medicare levy).

Lump sum super death benefits paid to non-dependants of Australian Defence Force and police personnel who have died in the line of duty will receive the same concessional tax treatment as a lump sum super benefit paid to a dependant

Lump sum payment to the trustee of a deceased estate

There is no requirement for an SMSF to withhold any tax from a lump sum death benefit paid directly to the trustee of a deceased estate. However, your SMSF must provide a payment summary to the trustee within 14 days of making the lump sum payment. The amount of the tax-free component and taxable component of the payment are included on the payment summary at the relevant labels.

Refer here for more - How tax applies to super and death benefits

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CASE STUDY – Building up Super as SMSF alongside a Property Portfolio – Peter wanted some advantages of SMSF

Building up Super as SMSF alongside a Property Portfolio – Peter wanted some advantages of SMSF

Building up Super as SMSF alongside a Property Portfolio – Peter wanted some advantages of SMSF

WHERE he was at – In the past, Peter had been a professional and worked in major corporations on large infrastructure projects, but always wanted the freedom of financial independence by working for himself and building up assets that returned an income, such as residential property. His property portfolio was doing OK, and he preferred being the property manager to handle repairs and maintenance, collection of rent, etc. But learning of the tax benefits both in accumulation and then the tax-free phase of pension mode, raised his awareness of the potential superannuation held. Being pro-active and a hands-on guy, a self-managed super fund (SMSF) made sense, and the opportunity to invest in property and other assets choices made it even more appealing!

What he WANTED to have – Peter was aiming to be self-funded in retirement – to not  even consider a Government pension as an option, as the likely-hood in Australia is looking grim with our lack of enough workers to support our ageing population at present. He knew he needed to have enough after loans re-paid, to live modest to comfortably – he didn’t need a lavish lifestyle.

What it will COST Since he didn’t have family or children, his cost of living was very low, and that had helped build his investments even after he left his professional career. He estimated $30,000 would be comfortable for his life.

What he would NEEDA self-confessed seminar junkie, he had been to many financial and business courses and workshops and knew the sums – at a conservative return of 5%, (one 20th of 100%) this meant requiring at least 20 times the comfortable income aimed-for – the min would be $600,000  in assets. This was well below his current property value of between $1-1.5 million. But to be sure, he did not want to rest on his laurels and planned to build 3-4 times the required asset value – to build a huge buffer in case something went wrong in one area/asset. It was wise. He had a meeting with his advisors and our financial planner to be clear he was thinking straight and if there was anything else he need to consider.

Having been to a property seminar with professionals to set up SMSF and new ideas that looked at alternative property investment such as options, he had the plan started. However what should have been straight forward was drawn out for the SMSF, and looking at other investment ideas such as continuing the share and Forex skills he had gained in other courses, was not encouraged or supported.

Having met Paul Humphreys at a business training weekend, and engaging him for doing his business accounts and books, exposed him to the SMSF work his firm also offered via SuperBenefit. Peter went to Paul’s seminars about SMSF and found some holes in the service and lack of support he was receiving, but also liked the methodology of the share selection process the broker produced, as well as the SuperBenefit approach to offering other professionals and their services in property, etc. There was a more supportive and dynamic environment that appealed.

What to do NOW Having attended our seminar on SMSF which explained the administration and compliance requirements relating to SMSF, I refreshed him about how SMSF was set up, his compliance responsibilities and what we would do – obtain the Trust Deed, AND, TFN and have a bank account papers set up ready for him to sign. He had a friend who would be co-trustee, but he would be the only member. He had been very pleased so-far with the support for his many questions, and that other investment ideas could be pursued in the future such as property. While he was flat-out with his current business, he just wanted to be able to know he had a team helping look after the super side and over-all plan for retirement.

Peter now had the components in place -

Strategy – To take control of his retirement plan, and contribute extra, as he could in time

Structure With SuperBenefit to handle the compliance of SMSF with peace of mind, and REAL service support

Support With resources and all compliance taken care of by SuperBenefit, and other professionals in our network, he could focus to learn more about investment in property & shares later on. He felt his team was coming together!

Note - This is a simplified summary of one client – we recommend asking for a FREE consultation and/or seeking further professional advice with our recommended advisors or your own.

Got questions? If you want experts who have years of helping others, without the hype – then call for a FREE strategy session today and also get your FREE Expert Guide – Self-Managed Super and Youtop right hand side above.

If you have any questions, why not give us a call – it’s FREE also!

No obligation. 0407 361 596, Paul.

 

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MASTERCLASS Investing – How is Fundamental Analysis an Aid to Successful Investing?

 

How is Fundamental Analysis an Aid to Successful Investing?

How is Fundamental Analysis an Aid to Successful Investing?

Fundamental analysis is used as an aid to successful investing and is a process of analysing the financial statements of a business (Balance Sheet, Profit & Loss, Cash-flow Statement), as well as creating ratios of some of the figures, to determine the financial health and assess the management of the business before making an investment by comparing the results with other businesses.

Fundamental analysis is the examination of the underlying forces that affect the well-being of the economy, industry groups, and companies. The goal is to forecast future price movements. It can also include looking at the industry level, by examination of supply and demand forces for the products offered. And it is good to also look at the national economy – economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines these 3 – economic, industry, and company analysis to derive a stock’s current fair value and forecast future value. If fair value is not equal to the current stock price, as it is in most cases, fundamental analysts will say that the stock is either over or under valued and the market price is expected ideally to move towards fair value.

Fundamental analysis attempts to determine the value of a company by analysing the financial data from the annual report and using other qualitative data about the company and the environment in which they operate. This value is often called ‘intrinsic value’.

Fundamental analysis assumes that over the long term, a stock price will reflect the company’s intrinsic value.

Definition – A sound fundamental definition comes from Investopedia.  They define fundamental analysis as:

A method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security’s value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management).

For further reading and an online video from Investopedia go to the fundamental analysis page. (from Australian Investors Association)

The Quantitative factors that are those capable of being measured or expressed in numerical terms, measures such as:

  • Revenue and growth of Revenue from year to year
  • Earning / Profit
  • Assets
  • Debts

These financial measures are commonly combined to produce fundamental or financial ratios that analysts can use to compare the company they are analysing to:

  • Prior trading period results
  • other companies in the same industry
  • the overall market

Well-known Ratios include:

  • Debt to Equity(DE)
  • Return on Capital (ROC)
  • Return on equity (ROE)
  • Dividend yield
  • Price to earnings ratio (PE)

The Qualitative factors are those that are not in numbers – more like assessments and opinions/evaluations. So they can be subjective, and may include:

  • Management performance and experience
  • Competitive advantage
  • Business model
  • Banding strength

Some of the Pros of fundamental analysis – can be objective (the quantitative parts), have a long-term focus, provide a guide/value

Some of the Cons include being subjective to our biases, the time involved to prepare/study, that market sentiment doesn’t always follow our own reasoning, our assumptions, data looks back so future can easily change the outcome.

To re-cap – Fundamental analysis is used as an aid to successful investing and is a process of analysing the financial statements of a business (Balance Sheet, Profit & Loss, Cash-flow Statement), as well as creating ratios of some of the figures, to determine the financial health and assess the management of the business before making an investment

Want to learn the core issues of share investing? Our workshopNavigate to Successful Share Investing gives a 2.5 hour practical session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and ratios to use, work on examples, and also includes how to get better investment outcomes. Other Bonuses as well. Check the next one see Share WORKSHOP or call 0407 361 596

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