If you have a family, a family business, and have beneficiaries.. you should consider using Life Insurance as part of your broader succession planning.

What are the benefits?

By using this strategy, you could:

  • provide additional funds to equalize your estate in the event of your death, and
  • ensure your beneficiaries receive sufficient assets to achieve your estate planning objectives.

How does the strategy work with beneficiaries?

Ted, a third generation farmer and widower. He has worked on the family farm his whole life and intends for his son, (beneficiary 1) Stephen, to take ownership when he dies. The farm is worth $1.2 million and the net value is $950,000 (after allowing for CGT that would be payable if the asset was sold).

Ted also has two daughters (beneficiaries Carol and Lauren). Ted would like to share equally in his wealth in the event of his death. But the problem he faces is he doesn’t have any other significant assets he could pass on to them to ensure they are treated fairly.

To achieve his estate planning objectives, Ted decides to seek financial advice. After assessing his goals and financial situation, his adviser recommends he take out $1.9 million in Life insurance. Furthermore, make arrangements so that the benefit is split equally between Carol and Lauren.

By using this strategy, Ted ensures that his beneficiaries Carol and Lauren would receive $950,000 each. Consequently, all three children would receive an asset of equivalent value.

Note: This case study highlights the importance of speaking to a financial adviser about using Life insurance to equalize your estate. Most importantly, a financial adviser can also address a range of potential issues and identify other suitable protection strategies. See Tips and Traps below. The taxation (including CGT) consequences in this example are for illustrative purposes only and may not reflect the actual income tax liability. Similarly, it is recommended that you consult a registered tax agent to confirm the taxation consequences applicable to your personal situation.

Beneficiaries Tips and Traps 1

  • First of all, there are a number of ways to ensure the Life insurance proceeds are received by your intended beneficiaries. Some of these include having the intended beneficiary as the policy owner. Hence, nominating them as a beneficiary of the policy or distributing the money via your Will. Each alternative may have different implications which you should consider before choosing a particular option.
  • There may be some advantages in taking out the Life insurance in a super fund. (see Wealth Protection Strategy 5). However, restrictions do apply to who can be nominated as a beneficiary. Taxation liabilities may also apply to certain eligible persons when a death benefit (including insurance proceeds) is paid. Generally in the form of a lump sum, pension or a combination of both from a super fund.

Beneficiaries Tips and Traps 2

  • Insurance cover purchased through a super fund is owned by the fund trustee, who is responsible for paying benefits. Subject to relevant legislation and fund rules. (see ‘Restrictions on non death benefits’ in the Glossary). When insuring in super it is important be clear on the powers and obligations of the relevant trustee when paying benefits.
  • It may be more cost-effective over the longer term if you pay level premiums, rather than stepped premiums. Step premiums  increase each year with age. (see Wealth Protection Strategy 6).
  • To ensure your wishes are carried out upon your death, you should consider your entire estate planning position. Including which assets will (and won’t) be dealt with by your Will. The best way to do this is to seek professional estate planning advice.

If you want to know more, contact us with your Wealth Protection and Succession Planning inquiry today.

 

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