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What happens to your family if something happens to you…?

Wealth Protection, Asset Protection & Estate Planning aren’t the most thrilling of topics. Most people would rather stab their own eyeball than think about it. But imagine you did stab your eyeball, and were off work for 6 months… how would your family cope?

Forgive me for being cheeky, but I’m passionate about ensuring people are protected against things that will ‘never happen to them’… but they happen to someone.

Consider a few personal examples:

  • My best friend passed away from lung cancer at the age of 33 (he never smoked a cigarette in his life).
  • My dad had open heart surgery in 2005 to replace a heart valve.
  • I was in a terrible car accident 5 years ago and couldn’t work for 12 months while I recovered and learned how to walk again.
  • Two friends of good friends have had brain tumours and not been able to work for 12 months while they sought treatment and recovered.
  • A good friend of my wife (who used to run marathons in 3hrs 30 mins without the need to train) was in a car accident 6 months ago and is now a quadriplegic.

Put simply, bad things can – and do – happen.

These areas could all be a separate topic by themselves, however they are so interwoven that I’s helpful to discuss them together. Let’s look at each in turn:

Asset Protection

Asset Protection refers to protecting your assets in two ways:

1) in the event of being sued
2) by having adequate diversification and/or not taking on unnecessary risk to achieve your goals.

It is vital that business owners have adequate Asset Protection; but with Australia becoming an increasingly litigious society, individuals (especially property investors) also need to ensure they are adequately protected.

Business owners can do this by operating their business within a structure such as a company or trust. If the business is sued, your personal assets are largely protected (nothing is ever 100% protected, but it provides much greater protection than operating as a sole trader and running your business in your personal name).
Every business owner should seek advice from an experienced Accountant to ensure you have adequate asset protection strategies in place. One thing I commonly see with new financial planning clients who are business owners is one member of the couple might be operating a business, however the family home is held in joint names. This still leaves the home exposed in the event of the business being sued. Another version of this is both husband and wife being directors of the business and also having the family home in joint names; not an ideal asset protection strategy.
Usually it’s best for one member of a couple to be the “risk taker” (be the director of the business) and the other person to be the “risk averter” (and hold the family home in their name).
If you are in this situation it is worthwhile speaking to your solicitor about transferring your Home into the “risk averter” spouse’s name under the “Love and Devotion” rule (which is free of Capital Gains Tax and, in most States, free of stamp duty).

Wealth Protection

Wealth Protection involves having adequate personal risk insurance to financially protect yourself and your family if you get sick or injured and are unable to work, or you die suddenly.
It’s crucial to address what you and your family would want/need if either spouse became sick or injured and unable to work for an extended period of time, was permanently incapacitated, or passed away prematurely. Things to consider include:
  • How is the home mortgage going to be paid off?
  • What impact will the temporary or permanent loss of income have on the family’s ability to cover expenses and have an adequate ongoing lifestyle?
  • What bills would stop as a result of this event? What new bills would start arriving?
  • If you are the main income earner, will your family be able to survive financially if you are no longer around?

Wealth Protection is a critical part of any financial strategy. Unfortunately most people have an aversion to insurance, or simply consider themselves bullet proof. But look around – there are plenty of sobering events to remind us how fragile – and precious – our health and life is.

As assets grow and debts reduce, the need for any Wealth Protection becomes less and less. However if you have debt or dependants, and don’t yet have an empire of assets to cover not working for an extended period, you should implement a wealth protection strategy incorporating appropriate levels of Life/TPD cover, Income Protection and Trauma insurance.

These things of course cost money. In my view it’s important to have the right mix of appropriateness and affordability – so you and your family are covered for what you want/need by an affordable strategy over the required time frame. Most of our clients allocate around 2%-4% of their income toward protecting future income, leaving the remaining 96% to cover the fun and exciting stuff such as their lifestyle now, and wealth-building activities for the future.

Estate Planning

Estate Planning relates to structuring your will and overall affairs so that when you die, your assets are distributed according to your wishes – but importantly, in an asset-protected and tax-effective manner.
Only around 50% of Australians have a will – and most of these are terribly inadequate.
Things to consider in your Will:
  • Who will be your Executor?
  • How do you want your assets distributed?
  • If you have minor children, who will be their guardian?
It is important to consider having a Testamentary Trust in your will to pass assets to beneficiaries in a protected and tax-effective manner. A Testamentary Trust is a provision in a will to pass assets “in Trust” for the beneficiaries rather than directly to the beneficiaries. This protects the assets against people trying to sue the beneficiaries (if they are in business for instance) and against future matrimonial breakdowns (including protecting assets that pass to children who grow up, fall in love and then fall out of love).
Additionally, income can be distributed from a Testamentary Trust to children under 18 at adult marginal tax rates – the first $18,200 current tax free compared to currently “unearned income” for children being taxed at 46.5% tax over $416.
Note that superannuation (including life cover inside of superannuation) does not form part of your will/estate – unless there is a Binding Nomination to pay to the Estate. A Binding Nomination is effectively a “will” for your superannuation and instructs the Trustee of your super fund who to pay death benefit proceeds to e.g. your spouse, children or your Estate (to be distributed as part of your will).
More often than not people make a Binding Nomination to their spouse. However that is like passing assets directly to a spouse in their will (as above) and is not protected from their spouses’ future marriage breakdown or being sued personally. Provided there is a Testamentary Trust provision in the will, it can make a lot more sense to have a Binding Nomination to your Estate and have the superannuation proceeds (including life insurance payout) be distributed to beneficiaries in a protected and tax-effective manner via a Testamentary Trust.

Disclaimer: This is only general advice. It’s important to seek professional advice about your personal situation to ensure whatever you do is appropriate for your individual circumstances.

Book a complimentary meeting with our experts to develop a strategy to achieve your future financial and lifestyle goals: (03) 8888 4000 or growmymoney@thepractice.com.au.

Written by:
Matt Morrison