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Where there's a will, there's a lawsuit

Glenn Freeman  |  22 Jul 2016Text size  Decrease  Increase  |  

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As the country approaches the start of the biggest intergenerational wealth transfer in its history, imputation bonds can play a highly beneficial role within a secure estate plan.


Estate planning is commonly overlooked by many Australians, who often believe their financial affairs are adequately prepared when they aren't.

The importance of having a secure estate plan is highlighted by our skewed demographics. Some 25 per cent of the Australian population are part of the "baby boomer" demographic, accounting for around 55 per cent of the nation's private wealth, according to Richard Atkinson, head of IFA product and relationships, Austock Life.

The oldest of this demographic will begin passing their wealth onto the next generation in 2020, marking the start of Australia's largest ever intergenerational wealth transfer.

"I don't think many people are fully aware of what their actual estate planning needs might be," Atkinson says.

"A lot of people have a will, but aren't aware of the limitations of what a will can do. This level of preparedness is particularly poor in terms intergenerational wealth transfer."

Testamentary trusts are one option, but for estates involving relatively small amounts of money, they are inefficient.

"People are also not necessarily aware of who can challenge a will ... or of the fact that ultimately, if there is some challenge to their estate they will not necessarily be in control of who gets their inheritance," Atkinson says.

He refers to a recent conversation he had with a lawyer who often deals with family law matters: "Where there's a will, there's a lawsuit."

A product called an imputation bond offers one potential solution. This combines the tax-effective structure of an insurance bond with the investment menu of a master trust.

Atkinson explains there is no term life insurance product attached to these bonds, and believes they are one of the most tax-effective and flexible investment structures.

If held for a minimum period of 10 years, the total amount in the bond is tax-free.

"From a flexibility point of view, the beauty of it is that a person can own them, but also an estate, and they allow for predated transfers to children," Atkinson says.

A sub-product, a ChildBuilder Bond, is a popular way for parents or grandparents to direct an inheritance to children or grandchildren.

They are particularly popular in blended families, where wills can often be challenged by ex-wives or ex-husbands, or children from previous partnerships.

"It's a non-estate asset, so it can't be challenged if, for instance, there's an ex-husband who the grandparents don't like, so they can't get their hands on the money."

Operating just like a normal standalone bond would, the investor can use the bond and structure a will around it for later bequests.

"For people who want to leave money to a charity, or to an old friend who has cared for them, bonds can take care of that without the risk of a legal challenge disrupting their plans," Atkinson says.

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Glenn Freeman is Morningstar's senior editor

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