A good estate plan will help make sure your wishes are carried out when you die. It can also help if you become unable to make your own decisions.
Australia is on the brink of the nation’s biggest ever intergenerational wealth transfer. Yet estate or inheritance planning is rarely discussed by families. With baby boomers shifting into retirement, it’s important to start the conversation now about your legacy and the people it may impact.
Legislation has come into effect allowing a maximum of six members in an SMSF. What does this mean for your SMSF, and will this make it easier when it comes time to pass your super on to the next generation?
Inheritance is an emotional subject on every level. The people leaving an inheritance generally do it with pride and love. The people receiving an inheritance often receive it with gratitude – and sorrow. But while emotional, it’s also a financial transfer that comes with a whole range of legal, financial planning and admin issues attached.
No one likes to think about the distress it will cause their loved ones or what kind of burden they’ll be left with. That’s why death is often considered a taboo topic of conversation, along with money and politics.
Australians are generous when it comes to opening their wallet for a good cause. But you may have reached a point in life where you want to make a more substantial contribution with control over how your money is spent. You may also wish to get your children involved to instil shared values.
While it hasn’t received much publicity, increasing numbers of Australians are using charitable trusts to give in a more planned and tax-effective way.
The turning point came in 2001 when the Howard Government introduced the Private Ancillary Fund (PAF) with the aim of encouraging more individual and corporate philanthropy. PAFs are charitable trusts that can be used by an individual or family for strategic long-term giving.
Since then, the number of PAFs and the amount of money contained in them has grown steadily. In early 2018, JB Were reported that there were 1600 PAFs, housing $10 billion and distributing $500 million a year.i
Claiming a tax benefit
According to Philanthropy Australia, in the 2015-2016 financial year 14.9 million Australians collectively donated $12.5 billion to charities and not-for-profits (NFPs).ii The median donation was $200 and 4.51 million taxpayers claimed for a ‘deductible gift’ on their tax return, highlighting that you don’t have to be wealthy to live generously.
Though donations to appropriately accredited charities and not-for-profits are tax-deductible, the figures indicate two-thirds of taxpayers don’t bother to claim. It’s well worth keeping track of receipts so you can claim when you think that, for example, a single donation of $5000 to a charity or NFP in a financial year will reduce your taxable income by $5000.
A core principle of tax-deductible philanthropy is that the giver shouldn’t stand to receive any material benefit. For example, if you buy tickets in a raffle run by a charity you can’t claim a tax deduction on the cost of the tickets. In order to receive a tax deduction for your donation, the recipient must also be registered as a deductible gift recipient (DGR).
There are many ways to be charitable but the impact on your tax bill will vary depending on how you go about it.
A more sophisticated approach
These days, people who want to take philanthropy to the next level with an ongoing, tax-effective approach have a variety of trusts to choose from.
PAFs are the best-known of the new breed of trusts. The money placed in a PAF is tax-deductible and assets in the fund aren’t subject to income or capital gains tax (but do qualify for franking credits).
Let’s say a dentist sets up a PAF and gifts half his $500,000 annual income into the fund where it’s invested in a diversified portfolio. The dentist’s taxable income now drops to $250,000. What’s more, no tax is paid on the returns made on the $250,000 that has been invested in the PAF. The dentist has to distribute a minimum of five per cent of their PAF’s net asset value annually, or a minimum of $11,000. After meeting that requirement, the dentist has a relatively free hand about which charities to support and how much they receive.
The Public Ancillary Fund (PuAF)
PuAFs work the same way as PAFs but operate on a larger scale. For example, 10 dentists may set up a PuAF to finance the building of dental hospitals in Africa. As well as gifting part of their incomes, the 10 dentists can (in fact, are obliged to) invite the general public to make tax-deductible donations to their PuAF.
Testamentary Trust (or Will Trust)
These are used by individuals wanting to leave money in their will to a specified charitable purpose. The two advantages of this type of trust are that the trustee(s) can distribute the income generated by the trust in a way that minimises the tax burden of beneficiaries, and the assets in the trust can’t be accessed by parties such as creditors and the divorcing partners of a beneficiary.
Like many parts of the economy, the charity sector has been ‘disrupted’ in recent years, with a stronger focus on donor engagement.
Organisations such as Effective Philanthropy and Effective Altruism have emerged to analyse how the charity dollar can be best spent. While crowdfunding platforms such as GoFundMe have emerged to facilitate, for example, the funding of individual medical procedures.
As a result, many philanthropists have gone from simply writing cheques to directing – or at least monitoring – how their money is spent.
Your contribution is most likely to be well spent if you donate it to an organisation that defines its mission clearly, has measurable goals, can demonstrate concrete achievements and is transparent about its finances (e.g. has annual reports available on its website).
Few people give to get a tax deduction but by supporting good causes in a tax-effective manner you can achieve a bigger bang for your philanthropic buck. If you would like to know more about tax-effective giving, give us a call.
|Some examples of philanthropists making their mark|
|National Philanthropic Fund
|$200 million to the arts and Indigenous education by 2024|
|Paul Ramsay||Paul Ramsay Foundation
|$3 billion to improve health and education outcomes for Australians|
|Andrew Forrest & his wife Nicola||Minderoo Foundation
|$645 million to drive social change encompassing education, research and Indigenous affairs|
|‘Pokies King’ Len Ainsworth||‘Giving Pledge’
|$500 million to support primarily medical and health-related charities|
Are you interested in creating a PAF to support your charity contributions, reach out to the Sherlock Wealth team to discuss your unique situation here
There are only certain people who can inherit your super when you die. There are also two different types of nominations you can make. Here’s what you need to know before making your super beneficiary nomination.
Super is different from other assets, such as your house, because the trustee of your super fund ultimately decides who gets your super and any associated life insurance, if it’s held within the super fund when you die.
Super doesn’t automatically go to your estate, so it’s not automatically included in your Will. That’s why you need to tell your super fund who you nominate. And, depending on the type of nomination, they’ll either consider your nomination or be bound to pay it as you’ve nominated.
Who can you nominate?
Super fund trustees can only pay your super to ‘eligible dependants’ or to the ‘legal personal representative’(LPR) of your estate.
Eligible dependents are restricted to these people:
A spouse includes a legally married spouse or a de-facto spouse, both same-sex and opposite-sex.
A spouse can be a person you’re legally married to but are now estranged or separated from. So, if you haven’t formally ended a marriage, your husband or wife is still considered your dependant under super law. And, while you can’t be legally married to two people, it’s still possible to have two spouses – a legally married spouse and a de facto spouse.
A child includes an adopted child or a stepchild. Even though a stepchild is included in the definition of a child, if you end the relationship with the natural parent or the natural parent dies, the child is no longer considered your stepchild. However, they may still be considered a financial dependant or in an interdependency relationship with you and could therefore continue to be a beneficiary of your super.
Generally, a person who is fully or partially financially dependant on you can be nominated as your super beneficiary. This is as long as the level of support you provide them is ‘necessary and relied upon’, so that if they didn’t receive it, they would be severely disadvantaged rather than merely being unable to afford a higher standard of living.
Two people have an interdependency relationship if they live together and have a close personal relationship. One, or each of them, must also provide a level of financial support to the other and at least one or each of them needs to provide domestic and personal care to the other.
Two people may still have an interdependency relationship if they do not live together but have a close personal relationship. For example, if they’re separated due to disability or illness or due to a temporary absence, such as overseas employment.
Who is not a dependant?
A person is not a dependant if they are your parents, siblings or other friends and relatives who don’t live with you and who are not financially dependent on you or in an interdependency relationship with you. If you do not have a dependant you should elect for your super to be paid to your legal personal representative and prepare a Will which outlines your wishes.
Legal personal representative
A legal personal representative (LPR) is the person responsible for ensuring that various tasks are carried out on your behalf when you die. You can nominate an LPR by naming the person as the executor of your Will. Your Will should outline the proportions and the people you wish your estate, including your super, to go to.
Types of nominations
There are two types of nominations you can make once you decide which super dependants, or LPR, you wish to nominate:
- Non-binding death benefit nomination
A non-binding death nomination is an expression of your wishes and the trustee will consider who you’ve nominated but they’ll ultimately make the final decision about who receives your super and any associated life insurance.
- Binding death benefit nomination
A binding nomination means the trustee is bound by your nomination. They must pay your super benefits to your nominated dependants in the proportions you set out or pay it to your estate if you nominated an LPR. Binding nominations need to be signed and witnessed by two witnesses who are not named as beneficiaries. Also, they expire after three years unless you re-affirm your nomination.
If you’re not sure of the best way to nominate your super beneficiaries, or to discuss your situation in further detail, please contact the Sherlock Wealth team here.