Charitable Bequests Using Imputation Bonds
By David Hasib
General Estate Planning Position
Imputation Bonds can be a valuable estate planning tool to convey tax-effective and “confidential” inheritances. Importantly, where the Bond’s beneficiary Nomination feature is used, its investment benefits are “non-estate” assets that by-pass client’s Will and do not form
part of his/her legal estate.
It is often overlooked that maturity of an insurance bond due to the death of its life insured (whether before or after 10 years of commencement) results in the distribution of its proceeds without personal tax or CGT consequences. In other words, they are “Tax-Free” distributions to the:
- Bond owner – if the life insured is not the Bond’s owner, or
- Bond’s nominated beneficiaries – if Bond’s Nomination feature is used, or
- Bond owner’s estate and its recipients – if no Nomination is made.
How Bond Nominations Work
Imputation Bonds can be set up with multiple nominated beneficiaries. They will receive its investment benefits if the Bond matures in the event of its life insured dying prior to the end of the Bond’s selected investment term. (Imputation Bond terms can be up to 99 years.)
Under the Nomination, the Bond’s benefits will be distributed in the proportions specified by the Bond Owner (e.g. 25% to each of four beneficiaries) with survivor-ship rules applying as between beneficiaries. This means, say that if one nominated beneficiary predeceases the others, the deceased’s share under the Nomination will automatically (and equally) be redistributed across the surviving beneficiaries. This survivor-ship outcome removes the need for a Bond owner to modify his or her Nomination if one of the range of nominated beneficiaries dies. Bond owners can also alter their nominated beneficiaries (and the percentage allocations to them) at any time.
Charitable Bequests Using Bond Nominations
Imputation Bond Nominations also have a special facility designed for nominating non-individual entities as beneficiaries – such as family trusts, companies and incorporated associations. This makes them useful for leaving money to charities, philanthropic bodies and other organisations, such as churches, schools, etc. Sadly, charitable bequests often give rise to family squabbles and contested Will claims by disgruntled family members and sometimes estranged or distant relatives. Recent Australian trends show that charitable bequests are frequently overturned by the Courts, or the charity ends up with only a fraction of the intended bequest. In general, charities are reluctant to be in Court battles over bequests with their deceased “benefactor’s” family members. By arranging for an intended charitable bequest using the Imputation Bond’s beneficiary Nomination feature, a benefactor’s wishes can be privately and directly met.
Confidential Charitable Bequests and Avoiding Estate Challenges
The proceeds of a Bond Nomination must legally be distributed directly to its nominated beneficiaries, and these payments are made outside of client’s Will and legal estate. Thus, a Bond Nomination can be a simple and flexible mechanism to establish confidential bequests – perhaps, where only the intended charity and limited other trusted persons need know about your intentions. Besides escaping normal estate administration costs, bequests made via a Bond Nomination are not “testamentary” in nature and as non-estate assets are also not subject to Probate requirements. By contrast, Probate procedures to prove a person’s valid “Last Will and Testament” and to authorise a legal personal representative to act, necessarily puts the Will and the estate’s assets in the “public domain.” This happens due to probate advertising requirements and access to Probate documents, such as the Inventory of Assets of the deceased’s estate. What’s more, as direct payments under a Nomination made pursuant to a life insurance contract, Bond proceeds are not generally available to claimants against the Client’s estate, including for family provision or in testators family maintenance claims. Passing directly (and privately) can also be helpful for “blended families”, to financially provide for children of previous relationships, whilst using a Will to separately provide for a current spouse and children.
Tax Deductibility of the Bequest
Provided the Nominated charities are endorsed Deductible Gift Recipients (which may include Private Ancillary Funds) at the time of payment, the deceased Bond owner’s estate should be entitled to a tax deduction. Deductibility does not apply at the time of making the Nomination, because the actual payment of the bequest can only occur at the future time of the Bond’s maturity, and of course the Bond owner beforehand has discretion to change the Nomination at any time.
Client Retains Control
Prior to the Bond’s maturity, the Bond owner retains full control and can:
- Access the Bond by making full or partial withdrawals or make additional investments using the Bond’s 125% add-on feature;
- Manage (with tax-freedom) how the intended bequest is invested across the Imputation Bond’s many investment options; and cancel the Nomination or flexibly alter its nominated
- Beneficiaries (and percentage allocations to them).
Elderly Client using an Imputation Bond to make two charitable bequests
Sarah, a wealthy widow in her 70’s, wishes to leave $75,000 to the Red Cross and $25,000 to the Salvation Army. Sarah has supported these charities throughout her life and now wants to set things in place by establishing “earmarked” investments that will pass to them upon her death.
As a high taxpayer Sarah wants a tax-effective investment that, whist it is owned and controlled by her before death, doesn’t entail any tax reporting or administration hassles. Following her death, she wants the proceeds to pass tax-effectively with certainty to her Nominated charities. It is important to Sarah to do this confidentially and outside her size-able other estate arrangements under her Will. These separate arrangements provide for her two children – one of whom is estranged, and also for the three children of her late husband’s first marriage. She is concerned to place these charitable bequests beyond possible estate legal challenges.
Set up a $100,000 Imputation Bond and establish Sarah’s charitable bequest arrangements using the Bond’s Nomination Feature.
Outcomes and Benefits
The Bond will, upon Sarah’s death be paid to Sarah’s Nominated charities in the proportions specified in the Nomination.
Until her death, Sarah retains full ownership and control of the Bond, just in case she has a change of mind about her charities or the amount of her intended bequests. This includes her being able to make withdrawals for her own purposes, and Sarah (or her Adviser) managing the Bond’s investment mix.
For Sarah, during the Bond ownership period, there are no annual tax or CGT reporting obligations as the Bonds do not distribute taxable income or taxable gains. For tax purposes, Bond growth is taxed to the Imputation Bond fund – and not Sarah (the Bond owner). For her nominated charities, if Sarah has authorised them to use the Bond’s Information and Reporting Facility, they can monitor the status of their ear-marked bequests. Then, upon Sarah’s death, the charities can claim their entitlements under the Nomination to the Bond’s proceeds – this will then pass directly as Tax-Free distributions to them.
Additionally, for Sarah’s estate, her personal legal representative(s), when finalising the estate’s taxation affairs, should be in a position to claim tax deductions for the payments to the charities, provided they are still Deductible Gift Recipients at that time. Because the Imputation Bond is legally a policy of life insurance, the proceeds of the Sarah’s Nomination made under it are “non-assets” – thus, meeting Sarah’s desire to place her intended charitable bequests beyond legal contest from her estate beneficiaries.
About Imputation Bonds
The Imputation Bond is a new generation insurance bond master fund.
- Tax-effectively invest across investment portfolio choices.
- Improve their after-tax investment performance using a “Tax-Paid” insurance bond with “Set-and- Forget” tax reporting benefits.
- Switch between investment portfolios with tax freedom
No personal tax or CGT applies to interfere when modifying the investment mix of your Client’s Bond.
- Build “Tax-Free” lump sums into your financial plans for strategy-based “life-event”.
- Objectives and other financial and estate planning applications.
- Optionally, establish a Child Beneficiary Bond – its ownership automatically shifts to a Nominated Child at a Vesting Date specified by you.
Director of Chan & Naylor Financial Planning
For further information regarding an Imputation Bond or to assess its viability to your financial circumstances, please contact David Hasib on 1300 99 77 34.
General Advice Disclaimer – The information provided on this article is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. If any products are detailed on this website, you should obtain a Product Disclosure Statement relating to the products and consider its contents before making any decisions.