A solution for smooth wealth transfer between the generations

A solution for smooth wealth transfer between the generations
A solution for smooth wealth transfer between the generations

GUEST OBSERVER

Insurance bonds offer the simplicity of creating lasting inheritances and inter-generational wealth transfers.

As you can structure insurance bonds with vesting dates out to a child’s 25th birthday, it can be a simple and cost-effective way to create lasting inheritances as well as use them to achieve inter-generational wealth transfers.

An insurance bond can play an important role in arranging an estate’s affairs with certainty, and importantly you can use the bond either outside, or in conjunction with normal Will and legal estate arrangements.

For instance, with an automatically investing bond:

• Parents in blended family situations and in second marriages might make financial provision outside of their Will for the children of a previous marriage or relationship; and

• Grandparents might use them to prevent potential conflicts and inequities between classes of beneficiaries (e.g. children vs. grandchildren) that might be difficult to handle under their Will.

Also important is that prior to its vesting, the bond owner retains full ownership and control just in case there is a change of mind about the child, or a change in the bond owner’s financial situation. This includes being able to make full or partial withdrawals for the owner’s personal use.

An insurance bond can be used in estate planning to achieve similar inter-generational wealth transfer objectives instead of creating a testamentary trust under a Will.

Importantly, this can be done with the bond directly vesting in favour of the Nominated Child irrespective of the death of the person who has established the bond such as a parent or grandparent.

An insurance bond is subject to the Life Act. If a parent or grandparent dies during the bond’s accumulation stage, then their personal legal representative must hold the bond in trust for the Nominated Child until the vesting age, or until the child’s prior death.

Over the period the bond is held in trust under the Life Act - similar to how a testamentary trust typically works – the bond can only be operated for the maintenance or benefit of the Nominated Child.

To achieve similar outcomes using a testamentary trust not only requires creating the trust under your Will, but also appointing a willing and “investment-competent” trustee to act, and sometimes for many years.

Setting up a trust can also be impracticable for smaller dollar bequests, and trust structures also entail annual administration and tax reporting costs and can be inflexible to access and costly to unwind.

Investment bonds are a low maintenance investment with tax and cost-effectiveness, and operates in a “Set-and-Forget” tax environment (nil tax return requirements unless withdrawal made in first 10 years).

Richard Atkinson is head of IFA product at Austock.

Tags: 
Tax Reporting Wealth Transfer

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