Finnegan Partners Blog Posts

Protecting your child's inheritance

Are you concerned about protecting your child’s inheritance from a future divorce or relationship breakdown? The truth is that you are not alone – many parents share the same concern. 

Tough times

Many young people struggle to save a deposit to buy a home. By contrast, parents may be in better position to give their children a bequest during their lives to help their children when they need it most, typically as they are looking to purchase a property or when they are paying off a mortgage and raising their own children. For those parents wanting to help their children get started on the property ladder, many are taking legal precautions to ensure their child’s inheritance does not end up in the hands of a former spouse/de facto if they split up. The reality is many marriages and relationships  break down so parents must be on the front foot to ensure their hard-earned wealth remains within their family unit.

Tips to protect your wealth 

The following tips can help protect your wealth from your child’s future spouse/partner:-

Ensure your child signs a prenup – a binding financial agreement (BFA), otherwise known as a “prenuptial agreement” is a legal document signed by couples either before or during marriage or living together in a de facto relationship. It sets out the way some or all of a couple’s assets, superannuation, gifts, inheritances and potential debts will be divided in the event that their relationship breaks down. As such it can prevent arguments around the splitting of assets and can also help save time and money when a couple separates. For example, a BFA could provide that any inheritance received during the relationship would remain the property of the person who received it if a couple were to go their separate ways. 

Establish a testamentary trust – for those looking to provide an inheritance to their children after their death, setting up a testamentary trust (TT) is another option to consider. A TT is a trust created by a will that does not come into force until the death of the will maker. Rather than providing an inheritance outright, assets are transferred into a trust and held on behalf of an individual or group of beneficiaries. As such, your child’s inheritance will remain in the legal hands of a trust and therefore be less likely to be claimed by their spouse/partner if their relationship breaks down.

Sign a written loan agreement if helping children buy a home – another option is for parents to give the money under a properly documented loan agreement to ensure that they could be paid back should anything go wrong. Parents can either register the loan as a mortgage or as a caveat against the title of the property. The benefit of this is that the loan must ultimately be repaid and is a liability that reduces the total assets that are available for division in the financial settlement if the couple separates.

Tenants in common – another option is for your child to purchase their property as tenants in common (TIC) with their spouse/partner so the title is held in proportion to their contributions to the purchase cost. This is different to buying a property as joint owners (or ‘joint tenants’) as TIC ownership does not have to be a 50/50 split. Instead the percentages could reflect each party’s contribution to the property. It also means that when one of the owners passes away, their share is subject to their will rather than going directly to the other owner. Although this ownership structure may be beneficial from an asset protection viewpoint, there are other pros and cons that must be considered.

Seek legal advice - if you’re thinking about helping your children out, make sure you seek professional legal advice from an expert who specialises in estate planning or family law to help protect your assets from others. It may come at a higher cost now, but it will be worth it and work out cheaper in the long run if the relationship goes awry.

March 2024 - SMSF Trustees illegally accessing super

The ATO has released findings on how much super from SMSFs has left the system before trustees have met a condition of release.

Super must remain preserved 

One of the main features of superannuation is that you typically can't access your money until you reach age 65 or when you retire after reaching your preservation age (between 55 and 60 depending on your date of birth). You may however be able to access your superannuation earlier in limited circumstances, such as should you become permanently disabled or suffer severe financial hardship.     

Considering superannuation is not generally available during your working life, it means it will be preserved and remain invested in the background in order to help generate a valuable source of funds for you to live on in retirement.  

ATO findings

The ATO’s new data shows that 66% of the illegal early access relates to individuals who are entering the system with the sole intent of raiding their retirement savings.

Across a two-year period, around $637 million of superannuation savings left the system illegally via SMSFs. This can be broken down to an estimated amount of $381 million illegally accessed in 2019/20 and approximately $256 million in 2020/21. 

These large amounts of money do not include the $200 million in prohibited loans taken out in each of these years, however pleasingly over 75% of these loans have been repaid. 

Reminder to SMSF trustees

There are various reasons why individuals illegally access their retirement savings. Lack of knowledge and attitudes towards superannuation are key drivers. Other reasons include being targeted by unscrupulous promoters, or where trustees are dealing with some form of financial stress or other personal issues. Regardless of the reason, superannuation cannot be accessed illegally before retirement. 

As mentioned above, you may be able to access your superannuation if you are suffering from severe financial hardship however strict eligibility requirements apply.  

ATO on the lookout 

In order to prevent such behaviour from occurring, the ATO will continue to focus on the illegal early access of superannuation on an annual basis. The ATO has scaled up its compliance actions and as a result, the number of sanctions it has applied has significantly increased. Consequences of this serious breach of obligations usually involve disqualification as a trustee, taxation of the benefit that was accessed and the imposition of penalties. Unfortunately in the end, often the trustee ends up worse off financially.

In the end, illegal early access to superannuation impacts the integrity of the system, an individual’s retirement income and puts pressure on taxpayer funded pensions. It is therefore crucial that all SMSF trustees are aware of the superannuation rules and their responsibilities. If you require further information or are uncertain about when you can access your superannuation benefits, please contact our office for a chat.

February 2024 - Gifting and the age pension

Many people gift assets to their family or friends to give them a helping hand. However care must be taken to ensure any gifting does not impact your current or future social security entitlements, such as the age pension. 

What are the gifting rules?

For Centrelink purposes, gifting refers to selling or transferring income or assets for less than it’s worth or without receiving anything in return. If you receive adequate compensation, such as payment for an asset to the same value, it is not considered a gift. 

Gifting limits

Although you can gift as much income or assets as you like, Centrelink imposes gifting limits to discourage retirees from giving away their wealth to qualify for more age pension income.

The gifting rules allow you to gift up to $10,000 each financial year or a maximum $30,000 over five financial years without this impacting your entitlement to government benefits.

When applying the gifting rules, they are first measured against the $10,000 per financial year rule (with the same limit applying to both singles and couples), then against the $30,000 limit over a rolling five financial year period.

If you exceed these limits, the excess amount will be treated as a ‘deprived asset’ and will count as an asset under Centrelink’s asset and income tests. When applying for a pension, the asset and income tests are both applied and the test that pays the lower rate of pension will apply. 

Example

Kylie is 68 and receives the age pension. She decides to gift $50,000 to her son to help him buy his first property. Assuming Kylie has not gifted any amounts previously, the first $10,000 falls under the gifting free threshold. The remaining $40,000 will be treated as Kylie’s asset under the asset and income tests for the next five financial years, after which it won’t be counted.

If on the other hand Kylie decides to gift a lower amount of $20,000 to her son in the one go instead, she would still be impacted by the gifting rules. Even though she hasn’t used the entire $30,000 gifting limit over five financial years, $10,000 would be deemed a deprived asset (ie, $20,000 - $10,000) and count towards the asset and income test for five financial years because she gifted more than $10,000 in one financial year.

Timing is key

Centrelink looks retrospectively at any gifting amounts over the last five years. For example, if you gift your holiday house which is worth $1 million at the age of 61 to your kids, when you turn 67 and claim the age pension, that gift will not be assessed. This is because once the five year time period is up, any deprived assets are removed from the assessable assets used to calculate your entitlements.

As can be seen, this highlights a gifting strategy where you can gift large amounts that exceed the allowable gifting limits five years before you qualify for the age pension without the gifting rules applying against any age pension payments in the future. But remember, there are other financial implications of your gift that you should consider, such as missing out on investment income that your asset would have generated and any potential capital gains tax that may be payable if there is a change of ownership in the asset as well as any stamp duty that may apply. The list of considerations above is not exhaustive.

Obtain advice

If you are approaching age pension age and are considering gifting to help your family or friends, you should seek advice to assist with your specific situation as the gifting rules can be complex. Advice should be obtained early from an expert or experts if it extends to a financial planner.

December 2023 - Plain English Guide to Profit and Loss

Here's our Plain English guide to profit and loss and what this report reveals about your finances.

What is profit and loss?

Your profit and loss statement is commonly called your ‘P&L’. It’s also sometimes referred to as your income statement or statement of earnings.

Your P&L is a breakdown of your company’s revenue (money coming into the company as sales and other income) and your expenditure (direct costs, overheads, expenses and other costs).

As a business, you obviously want to turn a profit and make money. Keeping a close eye on your P&L allows you to track your revenues and expenses over a set period, and look for ways to boost your profitability as a business.

How does profit and loss affect your business?

Being in control of your financial management is hugely important for any business. Your P&L is one of the main ways to track and analyse this financial performance.

To manage your P&L effectively, it’s important to focus on:

• Revenue management – to keep your revenue (income) healthy, you need to be proactive about generating sales and monitoring your revenue streams. This helps keep your income steady and stable, while also identifying areas for growth and improvement.
• Expense control – tracking and monitoring your operating expenses helps you spot where spending efficiencies could be made. Whether it’s overhead costs or inventory overspending, your P&L helps you spot unnecessary costs and boost profits.
• Cost analysis – analysing your business costs can help you spot the opportunities for saving money. Whether it’s agreeing a discount for buying in bulk, or switching to a new supplier with cheaper rates, there are plenty of ways to cut costs and be more profitable.
• Monitoring gross margin – reviewing the company’s gross margins helps you assess the profitability of each product or service. By pushing up prices, or cutting your production costs, you can boost those margins to drive up profits.
• Financial reporting – preparing regular profit and loss statements is key to good financial management. Reviewing your P&L helps you assess the overall financial performance of the company and make better-informed decisions.

How can Finnegan Partners help you with managing your P&L?

When you’re in control of your P&L, you have a tighter hold on the reins of your profitability.

As your adviser, we’ll help you run regular P&L reports as part of a monthly or quarterly package of management information. We can help you track, review and analyse your revenue and expenses to spot the best opportunities for boosting the company’s profits.

If you’d like to know more about the impact of profit and loss, we’ll be happy to explain.

Get in touch to chat about managing your P&L by contacting our office.

September 2023 - 5 vital things to set up before you pass away

No-one wants to spend too much time thinking about their own mortality. But the reality is that forward planning removes a lot of the uncertainty for your loved ones in the event of your death. The following guidance may also be useful to help you guide others.

Passing on without any clear legal instructions regarding your finances, assets and estate can leave your nearest and dearest in a very difficult position. It’s far better to make plans well in advance and to have these documents safely stored away, should they be needed.

Here’s our five-point checklist of things to consider as part of your end-of-life planning.

Having a clear outline of your end-of-life wishes and planning

Yes, it may seem morbid to think about your own death. But with your affairs in order, and all the required legal documents in place, you can be confident that your end-of-life wishes will be carried out correctly and that your loved ones and dependents will be provided for.

Here are five vital elements to include in your end-of-life planning:

1. Make sure you have a last will and testament – it’s crucial to create a last will and testament. This legal document will state your wishes regarding the distribution of your finances and assets and will also appoint an executor. This executor will ensure your wishes are carried out accurately and efficiently and will manage your estate plan to deliver on your instructions re charitable donation, gifts and your legacy.
2. Set up power of attorney and health directives – you can choose to grant a trusted individual (or individuals) with the power of attorney (PoA). This PoA allows them to handle your financial matters and make decisions on your behalf. It’s also a good idea to establish health directives, such as a living will or medical power of attorney, to ensure your medical preferences are followed.
3. Create a funeral plan to cover these costs – funerals can be expensive and a financial burden for those you leave behind. You can ease this burden by arranging a funeral plan in advance, and setting up an insurance policy that sets funds aside to cover the costs. Preparing for funeral costs in advance alleviates the financial strain on your family and allows them to grieve without worrying about payment of the funeral.
4. Get your taxes in order – it’s important to organize your tax records and consult with a tax professional to make sure your tax affairs are in order. Setting aside funds to cover any potential tax liabilities is also sensible. This will prevent complications for your loved ones during the settlement of your estate and tax liabilities.
5. Think about digital legacy planning – in a world where so much of our life is lived online, it’s vital to have a digital legacy plan. This comprehensive plan will provide information and guidance regarding your digital assets, including compiling a list of online passwords and account information. It’s a good idea to name a digital executor in your will to manage and transfer your digital presence. This will help with social media accounts, but also software subscriptions or any online accounts you hold.

Talk to us about getting your end-of-life planning in order

When it comes to end-of-life planning, there’s no time like the present. The future can often be uncertain, so it’s good practice to have your will, estate plan, powers of attorney and digital legacy plan set up and safely stored away, should they be required.

As your adviser, we can help you review your financial and tax planning considerations and can put you in touch with the relevant legal advisers to create a comprehensive end-of-life plan.

May 2023 - Why your accountant is the mentor you didn’t know you needed

A business mentor can provide guidance and support, so you make the right decisions and stay focused on the end goal as a business owner. They can also help you move forward in your career by providing advice and feedback on what steps to take to reach the pinnacle of success.

But have you ever thought of your accountant as a mentor?

Why your accountant is the ideal mentor

Having someone who understands your business journey is incredibly important. You might see an accountant as someone who files your tax returns. But, in fact, we’re experienced business owners, with access to a significant network of other business professionals.

An accountant can be the mentor you didn’t know you needed. No-one knows your business better than us, so we’re perfectly placed to offer you advice, guide your business journey and help you push your skills and capabilities as a business owner.

As a mentor, an accountant will:

• Expand your knowledge as an entrepreneur – as business owners, we have the knowledge and experience to help you move your business forward. And we can work with you to expand your leadership skills, business thinking and entrepreneurial ideas.
• Be a shoulder to lean on – we'll offer 1-2-1 mentoring sessions where we can listen to your unique worries and concerns as a business owner. Having someone on the same page to listen and empathise is vital for your business and your own mental health.
• Guide the important elements of your business – we’ll help you manage and improve your business strategy, planning and decision-making skills. We’ll also provide the management information systems you need to guide your finances and planning.
• Keep your finances on track – we'll show you how to maximise profits, reduce costs, and make better financial decisions. We’ll also help you plan your own personal wealth and tax strategies, so you can achieve your own entrepreneurial goals and lifestyle.
• Introduce you to a broader business network – we work with hundreds of other business owners across a range of industries. This means we can link you up with other entrepreneurs and founders, so you have a network of other like-minded individuals to connect with. This can be vital when brainstorming and benchmarking, or if you need to talk to someone who understands the specific pain points you’re experiencing.

Having someone to guide your business journey can be invaluable. A business owner must grow and evolve along with their business, and having regular mentoring catch-ups is the ideal way to progress, offload your concerns and look for new inspiration.

If you want to grow as an entrepreneur, please come and talk to us about our mentoring services and how we can guide your business future.