Planning for Your Beneficiaries

Have you nominated your children as beneficiaries of your super? If so, you may have inadvertently exposed their super inheritance to future legal proceedings.

Consider this scenario. Jane passes away at the age of 68 leaving a remaining super balance of $800,000. Her two sons, Alistair and James, are listed as beneficiaries and are both in their mid-30s. In accordance with Jane’s nomination, the super fund pays a net amount (after deducting taxes) of approximately $350,000 into each son’s respective bank account. Alistair invests his portion in a managed fund.

A year later, Alistair marries and his wife gives birth to their first child soon after. Several years later, however, the marriage breaks down. During legal proceedings, the Family Court specifically orders 40 per cent of Alistair’s managed fund be split with his former wife.

Alistair understandably thinks, “That was an inheritance from my mother. I don’t want my ex-wife to receive 40 per cent of it!”

This example highlights the importance of thinking ahead when making beneficiary nominations within your superfund. Here, the super fund paid Jane’s death benefit directly to Alistair, who in turn invested the proceeds into a managed fund in his own name. However, when his marriage broke down, the managed fund was placed into a pool of assets that the Family Court was able to divide and allocate between him and his former wife. This was despite the managed fund being invested solely in his name using the proceeds of his late mother’s inheritance.

Alternatively, Jane could have nominated her super to be paid directly into her estate rather than nominating her children as beneficiaries. In so doing, the $700,000 would have been held in a trust and invested for the sole benefit of her children.

Establishing a trust of this type typically affords beneficiaries a degree of protection from future legal proceedings, particularly if there is a marriage breakdown or bankruptcy later in life. Trusts can also be designed to restrict the ability to withdraw and sell the assets which protects the inheritance against spendthrift or vulnerable beneficiaries.

It is important to remember, however, that a trust of this type comes at a cost. For starters, expert legal advice needs to be obtained upfront to design and embed the terms of the trust into the person’s Will. Then, once the trust comes to life (following death), annual tax returns will need to be prepared and beneficiaries may require legal advice from time-to-time about the trust’s ongoing operations. However, many would say that these costs are a small price to pay for protecting and managing the tax position of a child’s inheritance.

Trusts designed to manage inheritances are not necessarily limited to super fund proceeds and may comprise other assets that the deceased owned at the time of passing. Term deposits, real estate, shares and cash from insurance policies may, in theory, find their way into the trust and be set aside for the benefit of the children.

Trusts, however, are not for everyone. With the right advice you need to determine if it’s suitable for your individual situation.

Police Bank for many years have chosen Bridges1 as our preferred Financial Planners. For more information about planning for you beneficiaries or any aspect of your financial position, we can arrange a complimentary, obligation free initial consultation near you. Call 131 728 or visit our Financial Planning page.