2016 smsf and estate planning insights

Clime Asset Management

SMSF and Estate Planning Structuring and StrategiesHolistic Wealth Solutions

Integrity TransparencyConviction

Clime Asset Management 2

Introduction

MICHAEL KLOECKNERDirector Private Clients B Com LLB Dip Fin SuperHead of Clime Super

TIMING

QUESTIONS

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DisclaimerThe information contained herein is not intended to be advice and does not take into account your personal circumstances, financial situation and objectives. The information provided herein may not be appropriate to your particular financial circumstances and we encourage you to obtain your own independent advice from your financial advisor before making any investment decision.

Clime Asset Management Pty Limited (Clime), its directors, employees and agents make no representation and give no accuracy, reliability, completeness or suitability of the information contained in this document and do not accept responsibility for any errors, or inaccuracies in, or omissions from this document; and shall not be liable for any loss or damage howsoever arising (including by reason of negligence or otherwise) as a result of any person acting or refraining from acting in reliance on any information contained herein. No reader should rely on this document, as it does not purport to be comprehensive or to render personal advice.


How do I make the most of my super?

Agenda• Clime Group

• What is an SMSF?

• SMSF Structuring

• Estate Planning Strategies

• Clime’s Super Administration and Accounting Service

• How Clime manages money

• Clime Super and Clime Asset Management – Holistic Wealth Solution


Introducing the Clime Group

Clime Investment Management (ASX:CIW)

StocksInValueOnline Stock Valuation & Research

Clime Asset ManagementFunds Management - $620M*

as at Feb 2016

Clime SuperSMSF Administration Service


What is an SMSF?

• A trust: Trustees are individual members or company

• 1 to 4 members

• Investments held and managed by the trustee

• Members must be individual trustees or directors of the trustee company

• Purpose: provide benefits to members on retirement


SMSF StructuringIndividual Trustees Structure

Individual TrusteesBen & Kate Graham

Graham Family Superannuation Fund

MemberBen Graham

MemberKate Graham

Trustees: Ben Graham, Kate Graham

Superannuation Fund: Graham Family Superannuation Fund

Fund Members: Ben Graham, Kate Graham


SMSF StructuringCorporate Trustee Structure

Corporate TrusteeValue Pty Ltd

Directors: Ben & Kate Graham

Graham Family Superannuation Fund

MemberBen Graham

MemberKate Graham

Trustee Value Pty LtdDirectors: Ben Graham, Kate Graham

Superannuation Fund: Graham Family Superannuation Fund

Fund Members: Ben Graham, Kate Graham


SMSF StructuringCorporate Trustee vs Individual Trustees• A company is a legal entity existing in perpetuity

• One trustee instead of two can operate

• Simpler to register assets in one name Value Pty Ltd

• No need to transfer assets on death of a member

• Avoids costs, trauma and probate later

• No need for an outsider if you are a single member SMSF

• Easy to enter and exit members eg. children, divorce, attorneys

• Allows corporate powers of attorney to act in incapacity


Some Responsibilities of Trustees

• Document investment strategy, ensure binding death nominations in

place and a compliant trust deed• Keep it separate – bank a/c, assets in trustee & funds name

• Accept contributions and pay benefits

• Document everything - minutes

• Annual financial statements, regulatory returns, tax returns and audit

• Legislative compliance – SIS Act, Tax Acts, Trust deed, Corporation Acts


The Clime Super ServiceAdministration, strategy, estate planning

• Keeps you compliant e.g.- Contribution tracking- SMSF administration, accounting and tax return ($1320)*- Licenced Audit ($440) – prep and lodgement*

• Manages all the paperwork- Receives the mail and acts on it- Pays ATO, ASIC, Fees

• Online, real-time access to information - No more waiting till year end

• Access to specialist strategic super and estate planning advice

* Base cost with Clime managing investments plus $165 each for pension mode


Estate Planning Starts Now

• Estate – what you want to happen (SMSF and will); INTENTION

• Will – what happens (excludes SMSF unless death nomination)

– lump sum in simple will unless testamentary trust will; ACTUAL

• EPOA – Granting legal capacity (SMSF) NOW

• Funds Management – NOW

- what your long term plan is for sustainably earning 10% per

annum to cater for your old age and surviving spouse

- your spouse is relying on you to

protect him/her in incapacity/death


Reversionary PensionsWhat is a reversionary pension?

Reversionary pensioner takes over the ownership of a pension.

• The reversionary beneficiary must be a tax dependent.

• Will not apply to accumulation account unless a pension started.

• On the death of the reversionary beneficiary – the remaining balance in the reversionary pension will be dealt with in accordance with the BDN of the reversionary beneficiary

• Once the beneficiary commences a reversionary pension on the death of a member, the recipient will have the ability to commute the pension (stop and take a lump sum). This may not be the deceased wishes!

• Minute must be drafted and trust deed must allow a reversionary pension!


Incorporating Super into your Estate Plan

• Super does not form part of a person’s ‘estate’ assets, and can therefore

not be included in a will

• A member can include their super’s death benefit in their estate by

completing binding-death nomination


Death benefit nominations

• The payment of a death benefit is ultimately a matter of trustee discretion

• There are two options most super funds allow that help ensure benefits go

to an intended recipient:

1. A binding death benefit nomination, and

2. Non-binding death benefit nomination


Non-binding death benefit nominations

• This acts as a guide for the trustee as to the preferred benefit recipients

• Ultimately the trustee makes the decision in light of all the relevant

circumstances


Binding death nominations

• Provided the trust deed allows, a valid nomination binds the trustee to

pay death benefits to the preferred recipient

• Binding death nominations must be clearly stated and recipients must be

dependants or legal representatives of the member


What’s the best structure for you?

• When preparing an estate plan it is critical that people consider how their

superannuation benefits will be dealt with if they die

• The importance of this is highlighted by the New South Wales case of

Katz v Grossman


Katz vs Grossman

The facts of this case were as follows:

• Ervin and Evelyn Katz had an individual trustees SMSF. Evelyn died in 2000.

• Ervin had made a non-binding nomination of beneficiary in which he indicated that he

wanted his superannuation benefit to be divided equally between Daniel (son) and

Linda (daughter). When Evelyn died Ervin appointed Linda co-trustee.

• When Ervin died in 2003, Linda appointed her husband Peter as a trustee.

• Linda and Peter refused to follow Ervin’s non-binding nomination and decided to pay

the entire benefit of approximately $1,000,000 to Linda.

• Daniel challenged the appointment of Linda and Peter as trustees of the fund.

• The Court held that both Linda and Peter were validly appointed as trustees.

• As the nomination was non binding, the trustees had the discretion to pay the entire

death benefit to Linda to the exclusion of Daniel.


Katz vs Grossman

It is therefore crucial to consider the appropriateness of binding nominations

in all circumstances, although there may be circumstances in which you wish

the trustee to have discretion.

In this case, if Mr Katz had made a binding nomination, his wishes would

have been carried out, regardless of who took control of the superannuation

fund.


Katz vs Grossman

Another option for Mr Katz would have been to use a corporate trustee

which would have avoided the necessity to retain two individual trustees

following the death of Mrs Katz.

Under this option, Mr Katz could have continued to manage the super fund in

the capacity as a sole director of the trustee company and hence avoid the

requirement to appoint another trustee. On his death, Mr Katz’ executors

would have stepped in and taken control of the fund.


Katz vs Grossman

This case highlights the importance of ensuring:

• Your estate plan transfers control of your superannuation fund (and the

power to pay death benefits) to the right people

• Changes of trustee are properly thought out, documented and retained


Katz vs Grossman - Summary

• Consider a corporate trustee

• Pass super to your spouse/estate via a binding non lapsing nomination


Binding Death NominationsCase #2 – the recent WA case of Ioppolo & Herford vs Conti (24th Oct 2013)

Highlights the importance of making a valid binding death nomination for a SMSF, and displayed the importance of the inter relationship between BDN, trust deed and the will

Mr & Mrs Conti were married but estranged and had a SMSF, (individual trustees)Mrs Conti in 2005 made a will in which she left all her SMSF assets to her 4 children and specifically stated she did not want any to go to her husbandIn 2006 she had made a BDN to her children but it lapsedIn 2010 Mrs Conti died. Mr Conti as sole trustee established a corporate trustee and paid the death benefit of $648,546 to himself


Case #2 (continued)Mrs Conti’s children as executors took legal proceedings against their fatherThe court found against the children and even made them pay all legal costsThe court stated Mr Conti was in his rights to pay the benefits to himself as the trust deed specifically gave him the power in the absence of a valid binding death nomination

Lessons:1. Trust deed – read and understand. May invalidate BDN2. Will has no power over super (unless BDN to the estate and non lapsing/binding)3. Lawyer misunderstood the lack of control of the will4. Surviving member effectively takes control 5. Despite specific wishes there was no legal “bad faith”

Binding Death Nominations


Testamentary Trust Wills

A testamentary trust is established by a will that comes

into effect upon the death of the will maker

Simple Will vs Testamentary Trust Will:

Rather than assets passing to the beneficiary’s name, assets pass to the trustee

who holds them in trust for the benefit of the beneficiary

Main benefits:

1. Tax

2. Asset protection

3. Family Law

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Case Example 1: TAX

• Sally dies with a $1m of investment assets and a home worth $1m. She

has setup a testamentary trust will. Her son John is the sole beneficiary.

• John is a miner who himself earns $250,000 per annum and is at the

highest tax bracket of 49%.

• Income of the trust - $90,000 pa from bank interest and the rent of the

property. If John inherited these funds in his own name his annual tax

would be $44,100.




Case Example 1: TAX (continued)

• If he has inherited assets in a testamentary trust he is able to make

distributions to his wife and grandchildren (who are allowed to receive

income at adult tax rates).

• He distributes $18k to his wife and $18k to each of his 4 grandchildren

and pays NO TAX.




Case Example 2: ASSET PROTECTION

• Jack and Jill save their whole life and own their house, superannuation

and shares totalling $3,000,000.

• They have 2 children: Robert and Rachel.

• Robert, is a property developer with personal guarantees on a number of

large loans with the bank.




Case Example 2: ASSET PROTECTION (continued)

• Rachel has recently separated from her husband and is facing the

possibility of family law proceedings and a custody battle for her children,

but has little assets.

• Jack and Jill pass away and leave their assets to their children through

simple wills.





Robert failed on a property development and is bankrupted. The bank and

creditors take his $1.5m inheritance in the bankruptcy process.

Rachel received the inheritance and pays the amounts towards the family

mortgage, spent the funds on paying out other credit card debts and leaves

the remaining $1m in the bank. The family court orders her to settle on the

net equity of the assets with her husband and he receives $750,000.





And FAMILY LAW

What could have been the alternative?

• Robert could have had his $1.5m in a trust held beneficially for him -

100% protected from creditors in his bankruptcy. He would have lost

nothing.

• Rachel may have loaned money from the trust to pay her mortgage. The

parents could have directed funds to a trust for the children’s education

and a lesser amount may have had to go her husband in the family law

proceedings.



Powers of Attorney

What is POA?

Power of Attorney is a formal document by which one person called the donor

appoints another person to act on his behalf

Types

1. General Power of Attorney

2. Enduring Power of Attorney

3. Corporate Power of Attorney


Powers of Attorney

Type 1: General Power of Attorney

• Gives someone the authority to carry out your instructions on your behalf.

• Usually put in place if it is to be used for a specific intention for a specific

period of time such as travel overseas.

Case example

Peter travels overseas for 6 months of the year and has to sign cheques to

pay bills and wishes to have a local option in place to follow his instructions

on email while he is away to manage his property and shares. He has a

general power of attorney drawn up for his accountant Bill to be able to

conduct his financial affairs whilst he is away.


Powers of Attorney

Type 2: Enduring Power of Attorney

• Allows the attorney to continue in your role beyond losing capacity.

• Everyone should have one!

Case example

David and Mary have a series of investments that fund their retirement and

living expenses. They have enduring attorneys drawn up for their two

daughters if they lose financial capacity. The daughters can, along with a

medical guardianship, pay for the nursing home bond and living costs. They

are able to sign to continue their pension payments and sell the family home

if necessary.


Powers of Attorney

Type 2: Enduring Power of Attorney (continued)

• Statistics show on average people are living longer and we are an ageing

society.

• It is more likely people will suffer longer periods of deteriorating health and

declining intellectual capacities.

• The most common form of intellectual incapacity is dementia, with

Alzheimer’s disease accounting for 50-70% of all cases.


Powers of Attorney

Type 2: Enduring Power of Attorney (continued)

Case example

Joe develops dementia and loses capacity to make financial decisions. His

son does not have an enduring power of attorney. There is a very

inconvenient and costly period while his son appeals to the courts to have

one granted, along with the added time and stress dealing with banks and

institutions.


Powers of Attorney

Type 3: Corporate Power of Attorney

• Allows the role of director to be undertaken by an attorney on someone’s

behalf.

• This is ideally suited for a SMSF with a corporate trustee, in which parents

provide their children with an attorney which allows the fund to operate in

their incapacity or during overseas travel.

• Graham has a corporate power of attorney for his father’s SMSF trustee,

Ray Super Pty Ltd. When his father is deemed incapacitated from

dementia Graham is able to continue the operation of the SMSF to pay a

pension for living expenses and sign financial statements.


Powers of Attorney

In addition to an EPOA, consider…

The Appointment of Enduring Guardian (AEOG) – guardian decides

• As EPOA deal only with assets you need an AEOG to make health and

lifestyle decisions in incapacity

• Specific clauses can meet personal wishes such as

• A power to make ‘End of life decisions’ to allow you to die naturally

• The Advanced Health Care Directive (AHCD) – you decide

• If you have together with AEOG, AHCD takes precedence

• An AHCD is a written statement of a person’s wishes for their future medical

treatment should they become unable to communicate these wishes.


Estate Planning Strategies

Strategy Tip #1

Right of residency or life tenancies are a simple and easy way to ensure your main asset gets passed to your bloodline.Case example:Most homes are owned by a husband and wife as joint tenants.Upon death of one, property automatically reverts to the other. This means the surviving spouse can alter their will or direct their assets to a new spouse or their children.Alternative – sever the joint tenancy to tenants in common, 50% / 50% ensures no stamp duty is payable.Directed through your will, the property is left beneficially to your children with a right of residency to your spouse with legal entitlement to live in the property until their death.


Estate Planning Strategies

Strategy Tip #2

Case example: Re-contribution strategyAlan is 63 years old and his wife Mary passed away leaving him no dependents. He has an adult son who is not a dependent. His super fund has a total balance of $450,000. $300,000 of which is taxable and $150,000 tax free. If Alan passes away and a death benefit is paid to his only son George $49,500 or 16.5% tax would be taken from the benefit

Under advice, Alan withdrawals his entire balance from super and re contributes it the next day as a non concessional contribution, which means it is now tax free. He re commences a pension straight away with this $450,000 and his components are now crystallised meaning his balance would remain tax free. Any death benefit payout would not have any tax at all.


SMSF, Will, Estate planning, Funds management health checksWhat to do?• Review current estate plans – wills, attorneys, trust deeds, BDNs, funds management

• Engage specialists – lawyer (wishes being met), accountant (compliance and advise),

fund manager (plan for incapacity/death)

• Get all wills, attorneys, binding death nominations completed NOW

• Reassess your share portfolio, cash level and other investments

• Take appropriate action and provide a copy to your accountant, financial adviser, family

members. Review regularly.

• Talk through your estate plans with your spouse and children so everyone has a clear

understanding – avoids disputes later!

Clime Super does not complete your will or estate planning…

Clime Super will draw up a professional brief to a specialist estate planning solicitor


Do you, or will the surviving trustee, manage your portfolio to aim for a 10% net return p.a. as Clime does?

1. Capital preservation is the key to maximising returns

2. Share investing - NROE of a company determines the value

- manage actively - price follows value

- assess Australian and International opportunities

3. Fixed Income Investing – ASX listed - filter out risk and price risk/reward

4. Property investing – invest in 8% yield and 11% IRR

5. Asset allocation constantly adjusted to achieve sustainable returns


The importance of capital preservation

You need a 150% return to recoup your $1,000,000

2007$1 Million

-60%

2009$400,000

NOW$640,000

+60%$360,000 Lost


A company’s NROE determines its value

• Profit is distinct from profitability

• Profitability is measured by Return on Equity

• Return on Equity is normalised by adding back franking credits

COMPANY A

Shareholders equity = $10,000

Profit = $2,000

COMPANY B

Shareholders equity = $20,000

Profit = $3,000


$

TimeY0 Y1 Y2 Y3 Y4

D D D DSELL

BUY

ValuePrice

Y5

1. Value growth >6%+MoS

-MoS

2. Buy at >10% discount3. Dividends & Franking4. Sell at >10% premium

Markets continually produce OPPORTUNITY


What are my options with Clime?

YOUExisting SMSF

Other SuperNon-Super Investments

Clime SuperComprehensive

Administration Service

Clime Equity PortfolioClear investment strategy

Proven PerformanceYour personal portfolio

Cash or in-specie24/7 access

Holistic SolutionClime Super

+ Clime Equity Portfolio (DSP)+ Other Investments


Our offer to attendees worth $2000

Complimentary SMSF establishment or restructureClime will, free of charge:

- Establish a new SMSF- Or restructure your individual trustees SMSF to corporate trustee- AND draft an Estate Planning legal brief - When you establish a Discrete Share Portfolio (min. $750 000)

and appoint Clime Super as your administrator ($1320 + $440 base)- Within four weeks from today’s date

Independently of the above offer, we offer you, free of charge –Complimentary Portfolio AssessmentComplimentary SMSF Health CheckComplimentary Estate Planning Heath CheckTO TAKE ADVANTAGE PLEASE HAND IN YOUR FEEDBACK FORM


Contact Clime Group

Michael KloecknerDirector – Private ClientsHead of Clime Super

Direct line: 02 8917 2134Mobile: 0488 188 309Email: [email protected]

Integrity, Transparency, Conviction

2016 smsf and estate planning insights

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