The goal
We often have clients seeking advice about helping their children and/ or grandchildren with practical financial help when they most need it. And while they themselves, are still alive. Such intergenerational pre-estate financial support is available, is tax efficient, and is effective. Occasions that bring these conversations to the fore, are significant birthdays and particular life events, such as –
- Popular birthdays are 18, 21, 25 and 30; whilst
- Life events include starting a University course, marrying, purchasing a car, or putting a deposit on a home.
The dilemmas
There are a few impediments to just transferring the Cash at the relevant time. They include –
- Cashflow may not be convenient at the time;
- Taxation impacts; and
- Donor’s mortality.
One of the financial challenges facing us as we age, is the uncertainty as to whether the capital we have accumulated will be adequate to fund the lifestyle we anticipate through retirement. We have coined a term, FOYRO – the Fear Of Your Running Out of money. This is in conflict with a personal challenge to assist coming generations that gives rise to another fear for you to consider, FOTMO – the Fear Of Them Missing Out on financial stability.
A solution
A tool that we have introduced successfully to a number of clients in some of these circumstances, is the Insurance Bond. A similar tool, but with additional taxation advantages, that is useful in a number of cases, is the Education Bond.
Some key features of the Investment Bond product (which includes Education Bonds) are –
- They are structured under life Insurance legislation;
- The Benefactor (you) retain control during your lifetime – or until the Bond is matured;
- The Bond capital can be added to annually;
- Earnings on the Bond investments are taxed at a maximum of 30% (can be lower with strategic investing). In any event, that tax is paid from the Bond. It is not added to your personal taxable income to be taxed at your personal tax rate;
- After the Bond has been in force for ten years, any withdrawals from it will be free from tax to the recipient (beneficiary); provided that
- Any contributions made to the Bond do not exceed 125% of the capital contributed in the previous anniversary year;
- Certain elements of the Bond can be changed by the benefactor up to the time of their death, or until the Bond is matured – subject of course to the usual rules of mental competence.
A strong Bond feature that appeals to many clients, is that the capital in the Bond doesn’t form part of their Estate. Because of that, it cannot be disturbed by challenges from disenfranchised beneficiaries/ claimants of the Estate.
Related articles published on our website include –
ContinuumFP assistance is available
The experienced team at ContinuumFP has given strategic investment, estate planning, and intergenerational wealth transfer advice to numerous clients. Many of these have included the use of Investment Bonds and/ or Education Bonds. To arrange a meeting with one of the team to discuss how these can serve your needs –
- Call our office (at 07-34213456), or
- At your convenience, use our linked Make A Booking facility.
(This article was first posted in October 2024.)
