Case Study: John Smith and Megan Smith

An Executive Summary

John Smith & Megan Smith are husband & wife. John is aged 55 while Megan is 50. And it has anticipated that their retirement would be 1st January 2030. John is an electrician by profession and self-employed while Megan is a manager and employed in a company. John & Megan both are not eligible to receive a government pension/allowance. Both have wills with them, where there is no enduring power of attorney. Moreover, they don't have any contingency plans too. They have two (children) non-dependent Rose & Reece, aged 20 & 23 respectively. However, they are flexible and open to considering other ideas.

So importantly, after understanding the background of John and Megan, below are some points which need to be analyzed to secure their future:

  • Minimizing of their tax liabilities now and in retirement.
  • Self-support if possible. (Clients would prefer not to rely on Age Pension support.)
  • Ensuring their wishes should be carried out when they pass away.
  • The fees/costs on investment/super/insurance should be minimized.
  • Protection of the family in case of disablement or death.
  • Not to use their surplus cash flow to pay for insurance premiums as they would like to prioritize to pay-off their mortgages.
  • Consolidating super for ease of management.
  • Their savings should be invested in line with their risk profile.

Now being a financial advisor, I will suggest in general that the assets of the entire family should be invested in such a way where every family member's future gets secured, and safe. It should also be designed in a way where the priorities should be treated first. Initially, some points must be carried out before the estate planning.

I recommend the To-Do list to pursue estate planning. Let's have a glance at the following:

  • Make sure you have current, up-to-date Will.
  • File beneficiary forms.
  • Appoint an Enduring Power of Attorney who can make relevant decisions if you are unable to make decisions yourself.
  • Understand estate taxes.
  • Protect your children's property.
  • Have Guardianship and related instructions in place for your children. Financial arrangements could be made for guardians through insurance.
  • Make Health Care directives.
  • Consider a Trust.
  • Make sure superannuation nominations are up to date and reflect your current wishes.
  • Give copies of your relevant Wills, Power of Attorney, etc. to all the appropriate people
  • (E.g. Solicitor, financial planner, accountant, executor, children, etc.)
  • Estate Planning Black Box – prepare an electronic file that contains information regarding all your bank accounts, superannuation accounts, investment, mortgages, title deeds, Wills, Powers of Attorney.
  • Make sure your family and professional advisers know where this information is located.

Now before moving forward let’s understand first what estate planning is and aim of the same. So, estate planning is a crucial part of the financial planning process while in the occurrence of an individual's death, it helps to ensure that the wishes of the deceased person are carried out. It consists of: 

  • Making surety that assets reach their intended beneficiaries, having a trusted administrator in place.
  • Estate assets ought to be distributed according to a will, where minors are involved, nominate someone who can take care of minors if the worst was to happen.
  • Apart from the will, proper estate planning also requires purchasing enough life insurance, naming transfer on death beneficiaries for retirement and other investment accounts, setting up trusts for heirs, allocating funds for different charitable organizations.

Let’s understand what estate assets & no estate assets are.

Examples of estate assets & what are estate assets (covered by will):

  • Real Property
  • Cash investments
  • Loans made to the trustee of a trust
  • Shares held in a company
  • Personal belongings such as cars & jewellery, interests in assets held as tenants in common, income or capital allocated to you from a trust and so on

Examples of non-estate assets & what are non-estate assets (not covered by will):

  • Unallocated assets owned by a family trust
  • Assets held in trust
  • Superannuation benefits
  • Assets held with other parties as joint tenants, account-based annuities or pensions that have a reversionary
  • Beneficiary or a beneficiary under a valid binding nomination, life Insurance proceeds

Now when we sit down to create a financial plan, the motive is to understand hopes and dreams for the future and providing a road map to get an individual from here to there. The Estate planning process should be carried out in a holistic approach to alleviate problems in the future.

Estate planning seems quite a complicated process but to mitigate future problems & quarrels among those who were associated with the deceased one, it can be broken down into key elements that make it less daunting.

  • Wills
  • Power of attorney
  • Health Care or Medical Directive
  • Beneficiary Designation
  • Guardianship of children
  • A testamentary trust in some circumstances
  • Superannuation nominations

Risk Analysis of John Smith and Megan Smith

John Smith and Megan Smith have planned to use their investment/superannuation funds in Medium Term (2-5 years). They have aggressively invested in properties and now they think that income is required however capital growth is equally important while they stated that only a small proportion of investment funds need to be readily accessible to meet liquidity requirements. Concerning tax Benefits from investments, the most comfortable mix is some variability in investment returns and tax savings. A moderate degree of risk would be acceptable by both (John Smith & Megan Smith) given the potential for increased returns. Now considering John and Megan's assets and liabilities, and after the risk analysis, it seems that John Smith & Megan Smith are a moderate investor seeking better than basic returns, but risk must be lower. Typically, an older investor seeking to protect the wealth should be accumulated, so the preparation should be carried out in a less aggressive growth investment strategy.


Option 1 -Testamentary Trust

John Smith & Megan Smith can place the funds into testamentary trusts reason being they have a will & it is established under a will and operates after the will maker’s death.

A testamentary trust is a discretionary trust giving trustee broad discretion to distribute income and capital to a wide class of beneficiaries.

Both should invest their major part of total estate assets in a testamentary trust because it is obvious that everyone wants that their assets should pass onto their family in a tax-effective way & since it has many benefits like:

  • Taxation saving 

Where beneficiaries under 18 taxed at normal and no penalty rates for minors "accepted trust income”,

As he has three children who are under 18 so this may seem a very good option for him.

  • No CGT on assets being passed by deceased to beneficiaries.

Now again, he owns a home so basically, if he puts the same into testamentary trust this will lead to no CGT on tax after his death.

However, they can nominate their non-dependent children Rose & Reece.

  • Asset protection- beneficiaries don't own assets in the trust.
  • Creditors – Beneficiary’s creditors can’t pursue assets.

After the death of John Smith & Megan Smith, no outsider or creditor can claim into his assets which are already there in a testamentary trust.

  • Beneficiary itself – trustees can ensure beneficiaries can’t squander their inheritance.
  • Versatility with streaming

Direct income to different beneficiaries whose marginal tax rates are lowest.

  • Other

Pre-tax income can be given to tax-exempt entities such as charities.

Hence, it helps in tax planning & Capital Gains Tax Benefits.

Testamentary trusts allow trustees to distribute and split the income of the trust with tax planning in mind.

Moreover, distributions from a testamentary trust to minors will receive the usual full tax-free threshold concessions.

Option 2- Superannuation

Let’s understand first what Superannuation fund is.

In Australia Superannuation is the arrangements by the Government of Australia to stimulate people in Australia to accumulate funds to provide them with an income stream when they retire. In Australia Superannuation is compulsory partly and is further encouraged by tax benefits. The Australian Government has set minimum standards for contributions by employees as well as for the management of superannuation funds. Putting into a Superannuation fund is compulsory for employers to make superannuation contributions for their employees on top of the employees' wages and salaries. Where employer contribution rate is 9.5% since 1 July 2014, and as of 2015, and later it was planned to increase gradually from 2021 to 12% in 2025. People are also motivated to supplement compulsory superannuation contributions with voluntary contributions, including putting their wages or salary income into superannuation contributions it is also recognized as salary sacrifice arrangements.

However, Superannuation is one more scheme where John Smith & Megan Smith can put into:

The benefit of Superannuation:

Tax-free investment in receiving proceeds.

Who Can Receive My Super?

A “dependent” is defined under superannuation law to include:

  • your spouse (John Smith & Megan Smith)
  • your children
  • a person financially dependent on you
  • an interdependent (Rose & Reece)

So, none of the following can receive a payment from your superannuation fund (unless they are financial dependents):

  • Parents and grandparents
  • Grandchildren, brothers, and sisters

How Can My Super Be Paid?

Your superannuation death benefit must be paid as a lump sum unless the recipient is:

  • Your spouse
  • Financial dependent (Rose Reece their non-dependent children)
  • Child under 25*
  • A child over 25 with a special disability

The Death Benefits Recipient Is Selected By:

  • Trustee Discretion
  • Binding nomination to be renewed every 3 years
  • Non-lapsing nomination
  • Hard-wire trust deed
  • Automatic reversionary

Option 3- Term Deposit

John Smith & Megan Smith can put their funds in Term Deposit. Since term deposit offers a guaranteed return on the money invested by the investor; a term deposit offers are a reliable & secured solution. But if anyone wants to make their money work as hard as possible and earn more interest, then they’ll need to shop for the best term deposit rates. It is directly proportional when a person invests the good & adequate amount in term deposit it may lead to higher the interest rate that applies to the deposited funds, & on contrary, the more money is received when investors deposit is maturing.

However, their retirement plan should be designed in approx. 10 years. And as per the case, it seems that they want to accomplish below desires.

  • Pay off their mortgages at retirement and have enough funds to purchase a new car ($50,000) and take a holiday ($30,000)
    1. To restructure their affairs to have $70,000 annual income in retirement
    2. To give the two children $50,000 each to help with the purchase of their first home

Since for this matter (above three) not may require a lot of money, moreover, they don't have any dependent too. So, investing in term deposits may surely help them to acquire such an amount and on the other side, they can secure their future too.

Not there are so many pros of investing in a term deposit

  • The term deposit assured a guaranteed return.

When an investor invests his money in a term deposit account, he/she can be sure that they will get a guaranteed return when the deposit matures. While on the other side investor is also protected against any interest rate drops because his account’s rate is locked in.

  • The interest rates are attractive. 

Term deposits allow investors to earn a much better interest rate on the savings balance than transaction accounts do.

  • There are plenty of choices if we talk about offers made by financial institutions. 

Term deposits are offered by building societies across Australia, banks & credit unions where it gives the ability to compare a wide range of options before choosing an account.

Option-4 Real estate investment trusts

REITs are the right investments to hold when the general stock market is in a decrease. This trust invests in mortgages or directs in equity positions in various properties. REITs yield is usually higher than what you can get from stock dividends & pay dividends to their investors. This is because REITs are not correlated with stock exchanges; they are unlikely to go down with the rest of the market. Since John Smith & Megan Smith has no such liabilities with them, it is just they want a plan for themselves so REITs is also another fruitful investment for them.

Option-5 Dividend-paying stocks

There are so many well-established companies that pay dividends on their stocks which are higher than what we may get on safe investments, such as U.S. Treasury securities & certificates of deposit. Investing in stocks isn't as safe as fixed-income securities, but sometimes they do come with the potential for capital gains but if invested wisely at the point of investing and putting.

Stocks pay a dividend, a reasonable combination of growth and income. Since you might continue to receive income on your stock even if the underlying stock price fluctuates. Nevertheless, a high dividend will enable you to ride out a prolonged decline in the stock market. Dividend-paying stocks often do better than growth stocks in bear markets, since investors tend to shift attention from growth to income. Now, even if you're mostly interested in preserving your investment capital in retirement, having part of your portfolio invested in dividend-paying stocks will provide you with capital appreciation & ongoing income, hence it will help to deal with inflation.

However John Smith & his wife will be free after their retirement, so they can put their knowledge in stock markets since John's wife is working as a manager so she might have some basic idea about financial markets & so, all in all, both can engage themselves in the stock market. It is also a sound investment option for both the two.

Option-6 Peer-to-peer lending

P2P or peer-to-peer lending has been growing steadily. Peer-to-peer lending takes place online and matches investors & borrowers in loans that benefit both. P2P is lending without using a bank as an intermediary. The two largest P2P lending platforms are Prosper & Lending Club. Many P2P investments pay out a higher interest rate than you are likely to get on your stock market investments. However, the risk (and reward) may change considerably based on who you lend money to.

Option- 7 Municipal bonds

Investing in govt. securities are the best way to getting secure oneself from uncertainties. Municipal bonds are debt securities issued by municipal governments, state, & country & by various agencies of the same. The primary benefit is that the interest you earn is tax-free for federal income tax purposes. Such incomes are also being exempt from state and local taxes if the investor lives in the state where the municipal bonds are issued.

Usually, twenty-year municipal bonds currently pay an average of about 0.2 percent higher than what is received on 30-year U.S. Treasury bonds. That's a higher yield with a shorter maturity. But when investor adds in the tax-free benefit, municipal bonds look even better.

Option- 8 Annuities

It is quite important to invest in annuities since John Smith & Megan Smith are going to retire quite soon, however, annuities are investment contracts between an investor and an insurance company. Usually include a guaranteed return at a stated rate, annuities can be either fixed or variable, and the rate of return may hinge on the performance of the stock market. Hence an annuity contract may consist of a provision that will limit downside risk in the event of a market decline.

It's very crucial to pay attention to the fees and commissions annuity charges, which can be very high. There are so many annuities that have complicated features, so take the time to fully understand the product and get a second option before buying one. Also, take a close look at how an annuity will change your tax liability.

Option – 9 U.S. Treasury notes and bonds 

Yields on U.S. Treasury notes and bonds are a fruitful deal higher than what an investor can get on certificates of deposit and money market funds because both notes and bonds are longer-term securities that pay higher interest rates as an outcome. For instance, Treasury notes, which are U.S. government debt securities with maturities between two and 10 years, currently pay almost 2 percent per year while treasury bonds, which have terms of 30 years, are running more than 2.5 percent. U.S. Treasury securities of all maturities and types can be purchased through the U.S. Treasury portal Treasury Direct.

Option – 10 Treasury inflation-protected securities

Treasury inflation-protected securities are also known as TIPS & are another form of U.S. Treasury debt. What separates them from other Treasury securities is that they pay additional principal to compensate for inflation & the interest.

The annual inflation adjustment is based on the variation in the consumer price index. The percentage variation in the value of the security is added to the principal value, rather than being paid out interest, when the TIPS mature, investors are paid the higher value based on the CPI. However, the value of TIPS could also decline if there is deflation.

Due to the inflation adjustment, TIPS pay lesser interest rates than other U.S. Treasury securities with comparable terms, but the inflation adjustment can produce more attractive outcomes, alike other Treasury securities, TIPS can also be purchased and held through Treasury Direct.

Consideration of Assets & Liabilities

It is stated by them there is no Enduring Power of Attorney mentioned in their wills since they don't have their children then they may nominate Rose and Reece as their nominees. While on the other side they have not executed their funeral plan, the casualty may happen at any point in time so for that matter, nominees (non-dependents) may help them and execute the funeral part.

Who is the Power of Attorney?

Legal documents where a person (the ‘donor’ or ‘principal’) appoints someone (the ‘attorney’) to stand in the donor’s shoes and make decisions on the donor’s behalf. Rules for Powers of Attorney vary across jurisdictions.

Roles of enduring (financial) power of attorney:

  • Enables attorney to make financial and legal decisions on the donor’s behalf
  • Available in all jurisdictions
  • Can commence immediately or upon loss of capacity
  • Continues or ‘endures’ notwithstanding donor’s loss of capacity (in contrast to a general power of attorney)
  • The attorney(s) has considerable powers and several duties
  • Enduring (financial) power of attorney
  • Terms can vary to provide for special powers (e.g. to enable the attorney to be paid, or benefits to be bestowed on family members) or authorizations (e.g. attorney to act despite the conflict of interest)
  • Can be revoked or changed as long as the donor has the legal capacity
  • Must be signed by the donor, dated and witnessed
  • Can have multiple attorneys – jointly (decisions jointly made or severally decisions don’t need to be made jointly)
  • Can have alternative attorneys

However, there are some duties of attorneys:

Comprehensive list of duties set out in the Powers of Attorney Act (Vic) 2014 including:

  • acting honestly, diligently and in good faith;
  • exercising reasonable skill and care;
  • not using the position for profit unless authorized;
  • avoid acting where there is or may be a conflict of interest unless authorized

Common law duties also preserved under the act, including:

  • fiduciary duties to avoid conflicts of interest and not make unauthorized profits
  • not to mix property (other than jointly owned property)
  • not to delegate

Anticipated Outcome

There's no single investment that is ideal for a retirement asset. The best strategy is to have many different types of assets in your portfolio to preparing the portfolio for different kinds of market environments & how it places the client in a better position. In the present scenario it seems John & Megan has no dependents, it just they should such an amount where they can spend their future in a comfort zone. They have no children but have two non-dependent kids if they might be there relative's kids. So, considering the entire scenario I will suggest they invest in different avenues this will lead to balancing the risk which may happen.

If John & Megan will put their whole worth in one or two options, this might cause them loss and they may face a difficult time too in their retirement period while putting funds into different investment schemes may give the best outcomes. By putting in different schemes they can earn extra and abnormal income. Since they have two kids and they want to provide 50000$ to both so that the children can use this money in buying the house and fulfill their needs too. Every investor wants to save maximum tax deduction on their total worth. So by putting into the testamentary fund, superannuation fund, term deposit, municipal bonds both can save the big amount from the tax liabilities.

Investing in annuities will also give benefit to John Smith & Megan Smith; however, annuities are investment contracts between an investor and an insurance company. Usually include a guaranteed return at a stated rate, annuities can be either fixed or variable, and the rate of return may hinge on the performance of the stock market. Hence an annuity contract may consist of a provision that will limit downside risk in the event of a market decline.

Closing Advice

Lastly, I will only advice putting the fund into different investment schemes so that it minimizes the risks and losses and on the contrary, it maximizes the wealth and it will also secure the future of John Smith & Megan Smith.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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