As reported in the media at the end of January, Cate Blanchett and her husband recently bought a waterfront investment property for nearly $2 million, apparently as an investment for their three sons.
This is indicative of the trend of parents wanting to help their children get a start in life, particularly since the Australian property market is so hard to break into. The desire to help is further intensified if there are grandchildren on the way. A 2012 survey of Australians aged 50 and over revealed that parents give $22 billion a year to their adult children to help them get established, buy property and tide them over during tough times.” This is all well and good, but what are some of the issues that these benevolent parents should consider?
Gift, loan or other?
One way to help adult children buy a home is providing them with money to help with a deposit. The gift may be given directly or contributed to a First Home Saver Account, a tax-effective way to save for a home. The problem with gifting is that the money is not protected in the event your child is married or in a relationship, and your child and partner then separate or divorce. In the event of a relationship breakdown, the gift becomes part of the joint assets of the relationship. Another issue with gifting is where parents intend to receive the age pension within the next five years. Any asset or amount over or above $10,000 gifted by a single person or couple in a single financial year or above $30,000 over a five year rolling period impacts on parents’ pension entitlements for five years.
A better way to provide support and to protect parents’ interests is through a written loan agreement. Even though children may view this as an expression of distrust, a written agreement would give all parties certainty about what has been agreed and what is expected of everyone. It would show the family that they are serious about repaying the loan. A loan agreement would ensure that the parents’ rights are protected in the event a child’s relationship with his or her spouse or partner broke down. It would also be helpful in preventing sibling jealousy with respect to parents’ assets and future inheritances.
Another option is for parents to provide guarantor support for their children by providing either the parents’ home or term deposits as security. Financial institutions offer a variety of options. The Commonwealth Bank has a facility called Guarantor Support, which would enable a child – through parental support – to borrow more funds than they could otherwise or purchase the property that they want rather than having to settle for a cheaper alternative.
Finally, parents could consider buying the property jointly with their children, but this would mean the parents would have their names on the title deeds. For both guarantor support and joint ownership of property, parents need to be aware that they are fully liable for their child’s loan obligations.
As further protection, parents who gift or lend money can insist that their child and spouse or partner enter into a binding financial agreement to ensure that the gift or loan is repaid if the relationship fails. These agreements can be made either before or during a marriage or de facto relationship.
Parents should always obtain specialist legal and taxation advice when setting up a loan for their children.
That said, here are some options to consider:
• Should the loan be on interest free or commercial terms? Generally speaking, the more commercial the terms of the loan, the more likely the courts will be to view the loan as neither an asset of a relationship between a child and spouse/partner nor a financial resource of the child. The child should make repayments of the loan principal or pay interest at least annually.
• If interest is charged, will it be fixed or variable or pegged to a bank interest rate?
• Should the loan be open ended or does it need to be repaid within a certain time frame?
• Should parents request security over the debt, even through the agreement is classed as a personal debt?
On the last point, one practical form of security is a caveat over the property. A caveat simply provides notice that a person claims a particular unregistered interest in the property, but it is not as powerful as a mortgage, which creates official rights over the property. In a bankruptcy context, failing to take security over the child’s assets may mean that other creditors get paid before the parent.
The importance of life insurance
Regardless of the way parents decide to financially help their children purchase a home, life insurance on the lives of children and even their partners should be considered. If illness, injury, or even death were to happen to an adult child who had just purchased home, it would be quite likely that the child – even one with a spouse or partner – would have trouble meeting mortgage repayments and could possibly even lose the home. The consequences would be compounded by the fact that the parents have provided funding, one way or another, with a potential impact on their retirement plans.
However, given that the child has just spent all his or her savings on the home purchase and associated costs, life insurance affordability would be an issue. Given this minimal cash flow, parents can also assist in this area, particularly as this would protect both themselves and their children. With lump sum covers (term life, TPD and trauma cover), the easiest way to do this is to set up a non-super (ordinary) life policy owned by the parents on the life of the child. This ownership structure would satisfy CGT exemptions under section 118-300 ITAA97 for term life (as the parents would be the original beneficial owners of the policy) and section 118-37 ITAA97 for TPD and trauma. These exemptions would also apply for cover over the life of the child’s spouse or de facto partner, so all lump-sum insurance proceeds would be tax free to the parents.
The good news is that given the age of the children, insurance premiums should be relatively low. The level of cover should at least be the amount of the loan or gift, so that the parents would not have a shortfall if an insurable event occurs. Income protection for the child should also be considered. This must be owned by the child to ensure that a tax deduction can be claimed, but of course the parents could also help out financially. Once the loan is repaid, the parents have the option of transferring the insurance cover to their adult children, so they could assume premium payments.
Summary
Most parents naturally want to help their children get started in life, and often provide a gift or a loan to help with a home deposit. The benefit of a properly documented loan is that it protects family finances in the event of an adult child’s relationship breakdown.
Life insurance on the adult children should be considered in order to protect the asset and parental financial support. The initial premiums can be paid by the parents and are relatively affordable given the age of the lives insured.
Source: CommInsure
You can afford Life Insurance!
/in Financial Advice General Info, Personal Risk Financial Advice /by Fil-BattistiUnderstanding their finances are one of the main reasons Australians fail to protect themselves and their families. Here is how you can afford the premiums:
INSURANCE THROUGH SUPER
Did you know that you can pay your insurance premiums through your super? This may assist you with paying insurance premiums when you have a low disposable income.
OTHER WAYS TO PAY FOR COVER
You can make contributions to your super fund and gain tax benefits:
• If you’re eligible to salary sacrifice to super, you can have premiums paid from pre-tax dollars. And because your super fund may be able to claim a tax deduction for the premiums, you may not need to pay tax on the contributions.
• If you’re self-employed, making a personal contribution to super from after-tax income to cover premiums lets you claim a personal tax deduction.
YOU COULD ALSO:
• Take advantage of tax offsets of up to $540 by making a super contribution to your low-income spouse.
• Make personal contributions to super, and if eligible, qualify for a Government co-contribution of up to $500.
BE AWARE:
• A benefit payment under superannuation is paid to the fund trustee.
The trustee will only pay benefits to you or your beneficiaries if you meet a superannuation condition of release.
• Tax on death benefits is determined by who receives the benefits. You may need to ensure a binding death nomination is in place so that benefits are paid to those intended.
• Paying premiums from superannuation may erode your retirement funds so think about topping up your superannuation fund when you are able.
To take the first step to getting the right cover for you- call Fil today
Source IAIA
Shift to Shares
/in Financial Advice General Info /by Fil-BattistiThe Reserve Bank of Australia has reduced the official interest rate several times and it is now as low as it was in 2008 at the height of the GFC when businesses such as Lehman Brothers were collapsing. Mortgage holders have been rejoicing, hoping that the banks will pass on some of the interest rate cuts.
Meanwhile, investors with significant cash or term deposit holdings have been experiencing lower returns.
CASH AND TERM DEPOSITS
With the interest rates so low, six month term deposit rate are now sitting at less than 4 per cent. This has fallen significantly from the high of 2008 when they were around 9 per cent. This means that people who are relying on cash or term deposits to provide income or returns have not had as much discretionary income as they would have liked. The predictions are that interest rates will continue to fall, and if this happens, returns from cash and term deposits are going to continue to fall as well.
PROPERTY
Over the last couple of decades, property was a significant way to generate great returns, but after the GFC confidence fell and there were a lot of forced sales. Over the last 10 years, property has only returned 5.5 per cent*. One of the major deterrents right now is that with the taxes and levies on purchasing a property, the cost of buying is around 6 per cent of the purchase price*. Some experts are predicting property growth to slow even more going forward, saying that the late 90s boom was a once in a lifetime high.
SHARES
Over the last five years the share market has been pretty low, it is down a third from their highs in 2007, but when you look at the ten year return rate of shares it has returned 8.7 per cent, which looks pretty good.*
SO WHAT SHOULD YOU DO?
The key is to look at diversifying across cash, shares and property. You need to understand the historical information, your appetite for risk and where you are in the investment cycle. By balancing long and short term investments with your objectives you will be on the path to success.
We would love to talk to you about the different options to find one that suits your needs.
Source : IOOF
* http://www.news.com.au/money/investing/shares-still-beat-property-and-cash-analysis-finds/story-e6frfmdr-1226545416014
Helping children buy a home while protecting parent’s interests
/in Home Loan Advice, Mortgage Financial Advice, Personal Risk Financial Advice /by Fil-BattistiThis is indicative of the trend of parents wanting to help their children get a start in life, particularly since the Australian property market is so hard to break into. The desire to help is further intensified if there are grandchildren on the way. A 2012 survey of Australians aged 50 and over revealed that parents give $22 billion a year to their adult children to help them get established, buy property and tide them over during tough times.” This is all well and good, but what are some of the issues that these benevolent parents should consider?
Gift, loan or other?
One way to help adult children buy a home is providing them with money to help with a deposit. The gift may be given directly or contributed to a First Home Saver Account, a tax-effective way to save for a home. The problem with gifting is that the money is not protected in the event your child is married or in a relationship, and your child and partner then separate or divorce. In the event of a relationship breakdown, the gift becomes part of the joint assets of the relationship. Another issue with gifting is where parents intend to receive the age pension within the next five years. Any asset or amount over or above $10,000 gifted by a single person or couple in a single financial year or above $30,000 over a five year rolling period impacts on parents’ pension entitlements for five years.
A better way to provide support and to protect parents’ interests is through a written loan agreement. Even though children may view this as an expression of distrust, a written agreement would give all parties certainty about what has been agreed and what is expected of everyone. It would show the family that they are serious about repaying the loan. A loan agreement would ensure that the parents’ rights are protected in the event a child’s relationship with his or her spouse or partner broke down. It would also be helpful in preventing sibling jealousy with respect to parents’ assets and future inheritances.
Another option is for parents to provide guarantor support for their children by providing either the parents’ home or term deposits as security. Financial institutions offer a variety of options. The Commonwealth Bank has a facility called Guarantor Support, which would enable a child – through parental support – to borrow more funds than they could otherwise or purchase the property that they want rather than having to settle for a cheaper alternative.
Finally, parents could consider buying the property jointly with their children, but this would mean the parents would have their names on the title deeds. For both guarantor support and joint ownership of property, parents need to be aware that they are fully liable for their child’s loan obligations.
As further protection, parents who gift or lend money can insist that their child and spouse or partner enter into a binding financial agreement to ensure that the gift or loan is repaid if the relationship fails. These agreements can be made either before or during a marriage or de facto relationship.
Parents should always obtain specialist legal and taxation advice when setting up a loan for their children.
That said, here are some options to consider:
• Should the loan be on interest free or commercial terms? Generally speaking, the more commercial the terms of the loan, the more likely the courts will be to view the loan as neither an asset of a relationship between a child and spouse/partner nor a financial resource of the child. The child should make repayments of the loan principal or pay interest at least annually.
• If interest is charged, will it be fixed or variable or pegged to a bank interest rate?
• Should the loan be open ended or does it need to be repaid within a certain time frame?
• Should parents request security over the debt, even through the agreement is classed as a personal debt?
On the last point, one practical form of security is a caveat over the property. A caveat simply provides notice that a person claims a particular unregistered interest in the property, but it is not as powerful as a mortgage, which creates official rights over the property. In a bankruptcy context, failing to take security over the child’s assets may mean that other creditors get paid before the parent.
The importance of life insurance
Regardless of the way parents decide to financially help their children purchase a home, life insurance on the lives of children and even their partners should be considered. If illness, injury, or even death were to happen to an adult child who had just purchased home, it would be quite likely that the child – even one with a spouse or partner – would have trouble meeting mortgage repayments and could possibly even lose the home. The consequences would be compounded by the fact that the parents have provided funding, one way or another, with a potential impact on their retirement plans.
However, given that the child has just spent all his or her savings on the home purchase and associated costs, life insurance affordability would be an issue. Given this minimal cash flow, parents can also assist in this area, particularly as this would protect both themselves and their children. With lump sum covers (term life, TPD and trauma cover), the easiest way to do this is to set up a non-super (ordinary) life policy owned by the parents on the life of the child. This ownership structure would satisfy CGT exemptions under section 118-300 ITAA97 for term life (as the parents would be the original beneficial owners of the policy) and section 118-37 ITAA97 for TPD and trauma. These exemptions would also apply for cover over the life of the child’s spouse or de facto partner, so all lump-sum insurance proceeds would be tax free to the parents.
The good news is that given the age of the children, insurance premiums should be relatively low. The level of cover should at least be the amount of the loan or gift, so that the parents would not have a shortfall if an insurable event occurs. Income protection for the child should also be considered. This must be owned by the child to ensure that a tax deduction can be claimed, but of course the parents could also help out financially. Once the loan is repaid, the parents have the option of transferring the insurance cover to their adult children, so they could assume premium payments.
Summary
Most parents naturally want to help their children get started in life, and often provide a gift or a loan to help with a home deposit. The benefit of a properly documented loan is that it protects family finances in the event of an adult child’s relationship breakdown.
Life insurance on the adult children should be considered in order to protect the asset and parental financial support. The initial premiums can be paid by the parents and are relatively affordable given the age of the lives insured.
Source: CommInsure
Importance of Insurance
/in Personal Risk Financial Advice /by Fil-BattistiLevel vs stepped premiums
The choice of stepped or level premiums can have a large impact on the affordability of insurance over your lifetime. While stepped premiums are usually lower in the early years, level premiums can be more cost- effective, so it’s easier to hold insurance over a longer period.
Case study
Rob, non-smoker, takes out $1 million of life cover at age 35.
*based on Asteron Life Complete life cover at 20 September 2013, white-collar professional, indexation rate of 3%
While the stepped premium is cheaper initially at $600 pa compared with level premiums of $900 pa, by age 65 the level premium is only $8,016 whereas the stepped premium is a whopping $27,250. Over 29 years, Rob can save $111,910 by choosing level over stepped premiums.
Insurance in super
Insurance in super is another strategy we can use to address affordability and cash flow concerns.
The cost of insurance through super may be more affordable compared to policies held outside super. The fund may be able to offer group rates, the fund can claim a tax deduction for the cost of insurance and this tax saving is generally passed to the member in the form of a reduced premium. Premiums can be funded from concessionally taxed super contributions. For these reasons, insuring in super can be more tax-effective than insuring outside super.
Summary
Cancelling insurance may be trading long-term security for short-term savings. A risk of dropping insurance is that it may be unavailable or more expensive if taken up again later.
The best defense against financial disaster is to stay covered so talk to us today to find out your best option.
Source I Asteron Life
Time to reflect
/in Financial Advice General Info /by Fil-BattistiIn particular, this time of the year presents a great opportunity to meet with us to review your financial strategies and goals.
Many people use the Christmas/ New Year period to reflect on the year that has just passed, often in a blur and to begin thinking about the year(s) ahead. In particular, this time of year presents a great opportunity for you to review your financial strategies and goals in preparation for 2014 and beyond.
THE IMPORTANCE OF REVIEWS
Reviews should take place on a regular basis, where you have the opportunity to make informed decisions and factor any changes into your financial plan.
Below is a simple guide to tidy up your finances for the year ahead.
1. HAVE YOUR KEY FINANCIAL GOALS CHANGED?
Our lives are not constant and our goals change slightly (or greatly) from year to year. Also, major life events such as serious illness, the birth of a child, inheritance, marriage and the death of a parent or spouse can all result in significant changes to our wealth management goals.
2. PRIORITISE YOUR GOALS
It is important to rank and prioritise goals and decide in what timeframe you want to achieve them. Being realistic about your timeframe is essential to ensuring that your goals will be achieved.
3. SHORT, MEDIUM OR LONG TERM?
Most industry experts agree that a short-term goal is one that can be achieved within a year or so. Medium- term goals typically require two to five years, and long-term goals usually take longer than five years.
For example, reducing credit card debt is likely to be a short-term goal, whereas saving for a home deposit would often be a medium-term goal. Depending on your age, providing for retirement is a long-term goal.
4. IF YOUR FINANCIAL GOALS HAVE CHANGED, HOW WILL THIS AFFECT YOUR FINANCIAL STRATEGY?
This is where the advice of a financial adviser is critical. An adviser has the tools and knowledge to create projections that take into account changes to your goals and changes to your timeframes for achieving them. These projections will help you to see where your plans for savings, investment contributions or assets may need updating.
5. BE SAVVY
Make sure that your investments and level of protection support your level of risk and your goals. An adviser can develop a tailored analysis that best suits your individual needs and provide ongoing portfolio advice.
Reflecting and thinking about your financial position, as well as setting a clear path, is critical to making sure you can reach your goals. You don’t have to wait until the first day of January to review your financial situation. Contact us today so that you can get the help you need to achieve your “New Year” resolutions.
Source I Zurich